I recently wrote about the likelihood and preconditions for an uber-style model in electricity. While I don’t think the industry is ready for this complete disruption yet, when these kinds of business models do hit the world’s energy sectors, will they first transform mature or emerging markets?

Three pre-conditions for disruption
To briefly recap, in the blog I discussed what I believe to be the three pre-conditions of new, disruptive models in electricity:

  1. A tradeable market for capacity
  2. Innovations in the management, allocation and pricing of this spare capacity
  3. The introduction of new methods of competition in a market which tends to be protected in some way and thus takes the incumbents by surprise.

While I concluded it is still too early for full disruption in electricity supply, I did warn utilities to think carefully about how the current push towards capacity-based charging – that is, charging customers for access to capacity rather than how much electricity they consume, based on kW rather than kWh – may create the conditions for a whole new market to emerge.

As might be expected, this blog hit on the zeitgeist surrounding the potential of the new types of business models currently transforming the world’s transport, accommodation and other industries. I’ve received many requests to take the topic further and to assess whether the pre-conditions for this kind of disruption already exist in some energy markets globally, and, if so, where – in emerging or developed economies.

Electrification is the focus for emerging markets

In my view, there are three fundamental differences between unreformed (mainly emerging) electricity markets and developed electricity markets, which together will impact the likelihood of these pre-conditions emerging:

  1. The percentage of customers connected to the grid
  2. The cost reflectivity of tariff arrangements
  3. The cost/tariff responsiveness of the customer base. 

Each is important for different reasons.

The percentage of customers connected to the grid is the most important factor. This determines the primary focus of both government and customers and, in consequence, the status and priority of cost reflectivity as well. 

In many unreformed markets, high numbers of the population do not have access to electricity.  For example, in Sub-Saharan Africa around 700 million people live without power, while Indonesia still has around 70 million without power. In India around 240 million people do not have access to electricity.  In this environment, the priority of both the government and customers is always going to be bringing power to the people. Electrification brings huge social and economic benefits to a community – 100 MW of electricity can yield more than US$1b in GDP.  As governments embark upon electrification programs, it’s these broader benefits that are the priority, rather than charging newly connected customers a full commercial rate of return on the generation, networks and retail cost stack, especially as these countries tend to already have low non cost-reflective power prices in place. 

But the third factor, customer responsiveness, is also very important.  We are embarking on the age of the prosumer. Today’s empowered, educated customer is starting to demand a say in how their electricity is made and delivered and to expect the ability to vary, limit and monitor usage.  This is a trend that has hit the utilities sector rapidly. Twenty years ago, customers were as interested in how their electricity is supplied as they are in how their wastewater is managed today – it was one of those essential, but invisible, services.

Markets most ready for disruption

When we apply these factors to the pre-conditions identified for new, disruptive models of electricity markets, some conclusions can be drawn about the most fertile, and more challenging, countries for this type of disruption. These findings rest on a premise – which is open to debate and I welcome discourse about this in the comments section below:

That the preconditions of tradeable, cost-reflective capacity aided by technological innovation can best be channelled through markets which have higher electrification ratios, a market or cost-based pricing model for generation, cost-reflective regulated network tariffs, and a contestable retail market, where retail prices to households have risen by more than the consumer price index for the last ten years (as a proxy or a driver of customer engagement). 

Of the European markets, the Netherlands stands out as a strong contender, with a high electrification ratio, the existence of capacity-based network charges and contestable retail markets providing a unique opportunity for change. 

Estonia, Finland and France appear next in line to provide similar opportunities if capacity-based network charging is rolled out to the mass market, particularly given strong rises in retail electricity prices in these countries over the past ten years. 

In the UK, the current model of availability-based network charging may provide a framework that could be adapted by network companies to create rights to, not obligations from, reserved capacity. 

In the Asia Pacific region, Australia provides a combination of high electrification and past retail price rises, while at the same time network companies are pushing hard for the introduction of capacity based network charging. 

The US, with its many intra-region markets, remains a country to be watched, with high electrification rates, cost reflectivity in network and retail tariffs and sufficient scale at the regional level for innovation to take hold. 

Which of these will go first?

Market should be ready for surprises

Implicit in this assessment is that unreformed electricity markets are simply not in a position to host the kind of disruptive change. I accept that this is a generality and there will always be exceptions if any one precondition overwhelms the others. For example, a very engaged customer base may drive change in a country, even though tariffs are not cost-reflective and prices have remained low.  Where prices remain well below the cost of supply, and assuming quality is constant, however, it is hard to see how customers would rank choice over price if it meant moving away from uniformly low tariffs. 

Disruptive trends do take industries by surprise and at rapid speed. Their inherent unpredictability makes it difficult to forecast where they will next appear –we simply have to wait and see.  A framework for assessment however provides a view, not so much about where innovative outbreaks will definitely occur, but whether the conditions that foster them are present or not.  By monitoring the growth of cost-reflective, mobile phone type models for energy capacity that allow customers to buy a right to availability, and watching how developing technology enables the trading of these rights, we may just be able to slow things down enough to see the emergence of new business models for the utilities sector.

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