Disruptive Forces Demand New Strategies for Utilities

Are utilities prepared for what is coming, do they have a viable strategy in a changing marketplace? On the one hand there is the smart home but on the other are the disruptive activities of technology companies like Amazon and Google and other stakeholders like Enel, Engie, and Shell Energy. Collectively, the changes in the industry go deeper, wider, and portend a much different energy landscape over the horizon.

On the surface, Amazon and Google compete fiercely for smart home dominance. In just a few years, both have carved out leading positions with devices like voice-activated speakers, smart thermostats, connected doorbells—the stuff that excites consumers. Many other companies vie for smart home share, of course, but for now these two dominate. So, it is worthwhile considering the moves Amazon and Google make and ponder their long-term strategies.

On a simple, evolving-business level, a few of their steps appear to be bland, which may reasonably be expected of any company seeking to exploit a large opportunity in the home. Such steps include the following:

• Amazon’s purchase of mesh router startup Eero, giving Amazon an edge in improving in-home networking
  

• Amazon's investment of $61 million in smart thermostat maker ecobee to fill in an important gap in its portfolio of gadgets
  

• Google’s partnership with utilities in a bid to boost adoption of their connected home devices—the company has partnership deals with utilities in Illinois, California and Texas as well as with energy providers in the UK and the Netherlands
  

Apple, too, with its strong cash position and its HomePod device, could become a more important force in the market. The company did just hire ex-Microsoft executive Sam Jadallah to overhaul its smart home business.

Will Consumers Open Their Smart Homes to the Trojan Horse?

Some, like investment adviser Jon Markman, have recently suggested that Amazon and Google are using their smart home device strategies as Trojan horses in a plot to not just enter the retail electricity supply business but to create the operating system of living. Markman points out one of the keys to the strategy is how Amazon and Google can use their algorithms to predict energy-use models in ways that unlock value. In other words, it is about the data, and the two tech companies are clear leaders in how to mine large datasets for gainful purposes.

However, there are reasons to question whether entering the retail electric space is what Amazon and Google seriously have in mind. Instead, the two tech giants are more likely to find an asset-driven business model more appealing, as highlighted by the following: 

• Margins in retail electricity are razor-thin
  

• Operating an electricity business is not a trivial activity, and these technology firms have little to no experience doing so
  

• Only 16 US states are open to retail electric competition, so the opportunity would be limited under current regulations
  

A more attractive focus for Google and Amazon is on enabling assets like onsite generation through distributed energy resources such as solar PV, solar plus storage, or even microgrids. Focusing on assets for the residential smart home market and bundling related services with higher margins could prove to be a winning strategy.

Innovative Utilities Hedge Their Bets 

Not all utilities are in the dark about what is coming, of course. More innovative utilities, like Green Mountain Power in Vermont, already understand this competitive threat and are actively setting up customer-focused programs to thwart it. Or they are partnering with high tech companies, knowing that their retail electric sales are protected by regulation. The message here seems clear: adapt to the disruption so that what comes over the horizon is less shocking.