Are Digital-First Energy Retailers Ahead of the Curve: Part 2

In the first part of this blog series, I explored how digital-first companies use software to create platforms, and how some of the forces behind their success are now applicable to the energy industry. The power and utility industry share at least two of the four characteristics listed in Part 1 of this blog series:

1. Software platforms create ecosystems: The grid provides the physical network infrastructure while software extends its reach into ancillary ecosystems behind the meter. This characteristic was exploited by early electric companies to dominate the market. Access to electrons was tightly controlled by the distribution grid operator, which brings together generators and customers. The sheer amount of capital needed to deploy a distribution grid means that competition in this space quickly dried out as the industry expanded. Of course, now it is common knowledge that such an atmosphere created monopolies, which were later taken over by governments and are tightly regulated.
   
2. Software has zero marginal costs: Solar, wind, and specifically distributed energy resources, offer close to zero marginal cost electricity. The lack or marginal costs for software is something new in the electricity market. It is the main driver of disruption seen in the industry today. In the past, central generation was dominated by few large players with similar operational costs (mostly related to the fuels they consumed). These costs, along with regulated transmission and distribution related costs, represented the majority of the electricity price paid by the end consumer, leaving little room for competition at the retail level. Solar and wind changed that by creating significant differences in generation costs, something that smart retailers are starting to exploit.

How Do Energy Retailers Become Tech Companies?

Retailers need to master characteristic three from the first blog in this series: Achieve zero transaction costs. Several companies are working on it. Octopus Energy and OVO Energy are two examples based in the UK. When they decided to enter the electricity market, they created their own tools based on learning from other industries like digital media or fintech for customer acquisition and management needs instead of relying on traditional utility vendors. Creating their own tools helped them keep their transaction costs low. It enabled them to streamline processes, focus on self-service customer solutions, inform trading, and more. Meanwhile, traditional retailers have to compete with complex systems that are costly to maintain and upgrade.

Both Octopus and OVO Energy benefit from characteristic four: Software offers infinite leverage. Using their investments in low cost transaction platforms (called Kraken and Kaluza), these companies are expanding operations into new markets. In 2020, Octopus Energy expanded to the US in Texas, and to Germany and Japan. It licensed its Kraken platform to Origin Energy in Australia, and to E.ON, Good Energy, and Nectr in Europe. OVO Energy expanded to France and Spain and licensed its platform, Kaluza, to Eni in Italy. By entering new markets, these companies tap into the economies of scale afforded by their platforms.

Will We See Global Digital-First Energy Retailers?