EU utilities need new business model to gain customer trust

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Trust in energy utilities across Europe has degraded and reached an all-time low due to intermittent renewables that undermine grid stability and higher energy bills, according to GlobalData.

"The traditional utility business model is dying and the end may come more quickly than we think," said Jonathan Lane, GlobalData's head of consulting for power and utilities. "Whilst there are some fixed costs in the traditional model, such as depreciation, networks and nuclear generation costs, consumers evaluate the product they receive based on the price per kilowatt hour."

In liberalized markets, utilities compete for business and generate margins based on the price per kilowatt hour. This focus on largely variable pricing is in contrast to other sectors such as telecommunications and water where the input costs and consumer prices are largely fixed.

"As energy markets migrate more towards fixed-cost structures, energy utilities need to migrate towards fixed-cost pricing models," Lane said. "The scale and low cost of mobile handset and smart phone production means that Mobile Network Operators (MNOs) are able to provide devices for free as part of service contracts. This is now happening in energy as solar PV prices collapse as the technology scales."

The Solar Energy Industries Association reports that PV module prices fell to $4 per watt in H1 2012 from $8 per watt in 2009. If electricity prices continue to rise at 10 percent a year, GlobalData contends it will be no time before energy utilities are able to offer service contracts with free hardware, in a model already deployed in the telecommunications sector.

"All of these changes are accelerating more quickly than one could have imagined only a year ago and energy utilities need to catch up quick or see their business models collapse around their ears. Indeed, for many consumers energy utilities would not be the provider of choice for a telco-style service contract with free hardware," Lane said. "Energy utilities need to make these choices now before someone steps in and makes them on their behalf."

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