E Y GLOBAL SHARED SERVICES

POWER & UTILITIES

IN GERMANY:

CHANGING

BUSINESS MODEL “FOCUSING ON THE CHANGING SCENARIO FROM TRADITIONAL TO DIGITAL

AGE”

DENO THANKACHAN 10/7/2015

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Contents

1. Introduction………………………………………………………………………………………………………. 2

1.1. Business model……………………………………………………………………………………………… 2

1.2. The renewable energy business model…………………………………………………………. 3

1.3. The customer side renewable energy business model………………………………….. 3

2. Business model innovation………………………………………………………………………………… 4

3. St. Gallen business model navigator………………………………………………………………….. 5

4. The Johnson, Christensen & Kagermann business model framework………………. 6

5. Business model in Power & utility sector………………………………………………………….. 7

5.1. Energy generation manager…………………………………………………………………………. 7

5.2. Distribution & Storage manager…………………………………………………………………… 7

5.3. Energy efficient partners……………………………………………………………………………… 7

6. Smart meters……………………………………………………………………………………………………. 8

7. Competitive metering market in EU………………………………………………………………….. 10

8. Scenario……………………………………………………………………………………………………………. 11

8.1. Scenario: Germany……………………………………………………………………………………….. 11

8.2. Scenario: UK………………………………………………………………………………………………….. 11

8.3. Indian scenario compared with Germany…………………………………………………….. 12

9. Installation statistics…………………………………………………………………………………………. 13

10. Market comparison between Germany & UK…………………………………………………… 14

11. Major smart meter manufacturers……………………………………………………………………. 15

12. Major Distribution System Operators (DSO) in Germany……………………………….. 15

13. Conclusion………………………………………………………………………………………………………. 16

14. References………………………………………………………………………………………………………. 17

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Index of figures

Figure 1: St. Gallen business model navigator…………………………………………………………….. 5

Figure 2: The Johnson, Christensen & Kagermann business model framework…………… 6

Figure 3: Virtual power plant………………………………………………………………………………………. 7

Figure 4: Competitive metering market- Europe………………………………………………………… 10

Figure 5: Domestic smart meter installed in across UK (Domestic)…………………………….. 12

Figure 6: Utilities involved in Germany……………………………………………………………………….. 14

Index of tables

Table 1: Smart metering market comparison……………………………………………………………… 13

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1. Introduction

Energy is one of the most fundamental parts of our universe. It powers our home, vehicles,

machineries etc. There are various forms of energy which includes electricity, geothermal energy,

fossil fuels and renewable energy. We will see the importance of business model & its application in

the power & utility sector. Let’s focus on electricity & renewable energy. About 80% of the world’s

electric supply is based on nuclear & fossil fuels.in this new modern era where digitalization plays an

important part, renewable energy is decentralized in nature. In this article we will see the difference

between traditional & modern power & utilities functions. Business model is used to understand the

difference & future possibilities in this vast sector. This article gives a better understanding about a

business model considering power & utilities as the example.

Today’s electric utilities face many challenges. Main issues are our traditional goals of safety, efficiency

and reliability, the modern utility must address global environmental issues such as climate change

and a growing desire by customers to have greater control over their energy use & the changing

business model very importantly. Meeting our customers’ demands to turn these challenges into

opportunities requires transformation of the traditional electric utility business model. Delivering safe

and reliable electricity will always form the bedrock of what we do, but the modern utility must

change its vision and adapt to changing circumstances in order for our employees to provide energy

sustainably for our customers, communities and shareholders

1.1 Business model

Business model is a plan implemented by a company to generate revenue and make a profit from

operations. The model includes the components and functions of the business, as well as the revenues

it generates and the expenses it incurs. The business model dates back to the earliest days of business;

it describes the way in which a company makes money. It can be simple or complex. For example, a

restaurant's business model is to make money by cooking and serving food to hungry customers. A

website's business model might not be so clear, as there are many ways in which these types of

companies can generate revenue. For example, some make money by providing a free service and

then selling advertising to other companies, while others might sell a product or service directly to

online customers. In general, Business model is a management tool helping managers to design,

implement, operate, change and control their business.

Business model generally consists of four dimensions: value proposition; customer interface;

infrastructure; revenue model. A business model describes the rationale of how organizations create,

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delivers and capture value. Value proposition is the product & services offered to the end-users or

customers. Customer interface points out the overall interaction with the customer. Infrastructure can

be the activities and assets required to create the value proposition. Revenue model summarizes the

revenue & costs associated with selling of the value proposition.

1.2 The renewable energy business model

It is currently most widespread in Germany. The customer owns and controls a renewable energy

system, while the utility provides grid connection and is obliged to purchase the electricity. The

costs for these services can be passed on to the consumer. The utility remains yielding and just

complies with the regulation. In the utilities business model for renewable energy, an increasing

share of renewable energies is a threat to utilities, because utilities lose market share and

revenues. Two business models are discussed below which comprises the explanations with the

help of power & utility sector: Customer-side Renewable Energy business model & Utility side

renewable energy business model (1MW to some hundred MW).

1.3 The customer side renewable energy business model

In the customer side renewable energy business model, the size of the systems usually ranges

between a few kilowatts and about 1 MW. Value proposition in this model is simple consulting

service to a full service package including financing, ownership & operation of assets. Customer

relationship to the end customer is the interface. Revenue is generated from regulated feed-in

tariffs for electricity or tax or investment credits.

In Utility side renewable energy business model, the size of the systems usually ranges between a

1 MW and some hundred MW. Bulk generation of electricity that is fed into grid is the value

proposition in this model which is distributed to the end customers in the later stage. Customer

interface in this model refers to the power purchase agreements on a business to business level.

Revenue model is same as of the other model. Generally, Utilities focus on large scale utility-side

project rather than on customer side project. Business model provides a much opportunity for

improvement & innovation in the business.

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2. Business Model Innovation

The concept of business model innovation is valuable in times of change and transformation in the

business scenario. The change must go beyond introducing and including new products and services,

could be gaining new end users or customers, or implementing new business strategies. The

innovation part serves its purpose when several elements of a business model are radically changed to

deliver value in a new way of arranging things in business. According to Alexander Osterwalder, a

Swiss business theorist” Business model is a conceptual tool that contains a set of elements & their

relationships and allows expressing the business logic of a specific firm. It is a description of value, a

company offers to one or several segments of customers and architecture of firm and its network of

partners for creating, marketing and delivering this value and relationship capital, to generate

profitable & sustainable revenue stream”. It consists of various elements:

� Customer segment

� Value proposition

� Channels

� Customer relationship

� Revenue stream

� Key resources

� Key activities

� Key partnerships

� Cost structure

Value proposition is the collection of products and services a business offers to meet the customer’s

need. According to Osterwalder, (2004), a company's value proposition is what distinguishes itself

from its competitors. The value propositions can be Quantitative (price and efficiency) or Qualitative

(overall customer experience and outcome). For defining the business and its activities, the model

should identify to which customers the business supports. The various segments can be mass market,

niche market, segmented diversified or multi-sided market. The channels which the business uses

should be fast, efficient & cost-effective. Key resources are the resources needed to create value for

the end users or customers. In order to survive in the business, it should identify various forms of

relationships to be maintained with the end users or customers. Revenue stream refers to the way in

which a company makes income from various customer segments.

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3. St. Gallen business model navigator

Companies with excellent technological products especially in Europe continuously introduce

innovations to their products and processes. They sometimes fail to position their capabilities of

innovative strengths. The companies of this category have failed to adapt to their business models to

the changing environment. In future, competition will take place between business models, and not

just between products and technologies. New business models are often based on early weak signals:

Trendsetters, new customer requirement & regulations. New entrants to the industry discuss new

alliances at great length; disruptive technology developments are results of many years of research.

St. Gallen business model navigator consists of

four dimensions:

� The Who

� The What

� The How

� The Value

Who: The business model serves a certain

customer segment. Thus, we should find out

who the customer is.

What: The second dimension describes what is offered to the target customer or what the customer

values. This commonly referred to as the customer value. It refers to company's products and services

that are of value to the customer

How: A firm has to find out several ways and activities to build & distribute values to the customer.

Value: The fourth dimension explains the business model relating to the revenue model. In short, it

explains the cost structure and the revenue mechanisms, and points out how to make money in the

business

Figure 1: St. Gallen business model navigator

Source: www.bmi-lab.ch

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4. The Johnson, Christensen & Kagermann Business

Model Framework

Mark Johnson, Clayton Christensen, and Henning Kagermann have put forward a business model

framework in the Harvard Business Review in 2008 and it comprises of four inter-locking elements.

The first element of the framework is Customer Value Proposition (CVP), it creates value for the

customer by solving a fundamental problem for him.

Second element is the Profit Formula that defines how the company creates value for itself by

providing value to the customer. It specifies the revenue model, the cost structure and how quickly

resources need to be used to support target volume.

The third element is Key Resources, which create value for the customer such as people, technology,

facilities, brand, etc. It is required to deliver the value proposition to the customer.

The fourth and final element is Key Processes

which allows operational and managerial

processes in the company to deliver value and

successfully repeat and scale it such as design,

development, sourcing, manufacturing,

marketing, hiring and training, by which a

company delivers on the customer value

proposition. The internal sector consists of the

profit formula, key resources, and key processes;

the customer value proposition is the link to the

outside world.

Figure 2: The Johnson, Christensen &

Kagermann business model framework

Source: http://tbmdb.blogspot.in/2010/03/seizing-white-

space-2010.html

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5. Business Models in Power & Utility Sector

The electricity industry value chain comprises of Generation; trading;

transmission; distribution & sales. Electric utility are electric power companies

that engages in the generation, transmission & distribution of electricity for

sale, generally in regulated market.

5.1 Energy generation manager

This model is based on the approach to support customers in their efforts to generate their own

energy supply. The major opportunities for utilities in this model is planning; building; installing &

operating the physical assets. In the current scenario, the market of renewable and distributed energy

has lots of growth potential. The revenue model is to lease or sell technology & equipment to

customers, and make contract with customers including technical & financial planning, realization or

maintenance/operation of decentralized power stations.

5.2 Distribution & storage manager

This model is based on smart grid & ICT (Information & Communications Technology). The idea is to

control & balancing of distribution and consumption of energy within network. This approach is about

Virtual Power Plants (VPP).

A virtual power plant is a link-up of small, distributed power stations, like

wind farms, Combined Heat & Power (CHP) units, photovoltaic systems, small

hydropower plants and biogas units, but also of loads that can be switched

off, in order to form an integrated network. The plants are controlled from

one central control room. The analysis of data overtime will allow utilities

to predict usage & balance loads in order to reduce overall investment in

power generation. The revenue generation is that the utilities will have fixed contracts with each

centralized unit which pays monthly fee for management role.

5.3 Energy efficient partners

This model focuses on to manage efficiency in end user demand for energy. It leads to a reduction in

sales, volume, sales revenue, or market share of the electric utility, mainly the sale of electricity.

Source: www.rwe.com

Figure 3: Virtual power

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6. Smart Meters (Focus on Germany)

Smart meters are systems that can measure energy consumption and providing further information

regarding control of the same thereby reducing the cost and energy. According to European

Commission, 45 million smart meters (out of 200 million smart meters) are already installed in Finland,

Italy & Spain, together representing about 23% of the installation in European Union (45 million smart

meters).

Due to European Union’s Third Energy Market Package, most of the EU States have, or are about to

install smart metering systems. Smart metering is been identified as the important tool for saving

energy and as per EU Smart metering policy, which requires that 80% of the European consumers be

equipped with smart meters by 2020, rollout of smart metering is in move. The status of roll-out of

smart meters in EU states varies greatly; with some countries (Italy, Sweden & Finland) having fully

rolled-out, some in the planning stage & some still believe it’s not a viable solution. Commission report

expects roll-out of about 200 million smart meters for electricity and 45 million smart meters for gas in

the EU states by 2020, which involves a

potential investment of €45 billion. It is

expected that about 72% of the European

customers will have a smart meter for

electricity and 40% for gas by 2020. The

expected cost of installing a smart meter in

EU is ranging between €200 and €250. It is

believed that half of energy meters in

Europe will be smart. Smart meters provide

savings of €160 for gas and €309 for

electricity per metering point. It is all due

to EU smart metering policy which requires

80% households to be installed with smart

meters by 2020.

Germany was Europe's largest consumer of electricity (512.9 terawatt-hours) in 2002 and in 2013,

reaching Germany's electricity production to 631.4 TWh. Germany’s power market is competitive with

900 energy companies operating in electricity market, but still 80% generation of electricity is

controlled by four companies: RWE AG, E.ON Energy AG, Energie Baden-Württemberg

Aktiengesellschaft (EnBW) and Vattenfall Europe AG. Germany has been one of the top investors in

Europe for smart grid technology, along with the UK, France and Italy. Germany’s federal ministry of

economics published a report which supports a full rollout of smart meters, in support to the EU’s aim

to replace at least 80% of electricity meters with smart meters by 2020. Smart meters will create a

value addition for consumers & energy systems. The New German Energy Industry Act (EnWG) in July

2005 paved the way of competition in the metering market. But Germany is adopting a selective roll

out strategy. The Federal Network Agency is working with the market participants to provide strong

standards and legal certainty regarding smart meter implementation.

According to the Renewable Energy Sources Act- RES Act 2014, (Sec 74) Electricity suppliers must

inform by electronic means, their regular transmission without delay of the quantity of electricity,

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supplied to final consumers and present the final invoice for the preceding year. In Germany, the

initiative put forwarded by European Commission is not mandatory. The legal framework is yet to be

analysed and concreted decision is yet to be taken. Still studies are favouring towards installing of

smart meters in Germany in order to save energy & electricity.

In UK, the Government established a central change programme to deliver the rollout of smart meters.

The first phase was managed by Ofgem (Office of Gas and Energy Market) E-serve, government

regulator for the electricity and downstream natural gas markets in Great Britain, on behalf of

Department of Energy and Climate Change (DECC) which was completed in March 2011. From 2011,

DECC has been managing the implementation of the programme. It is expecting a roll out of 53 million

electricity & Gas meters to the consumers in the country by the end of 2020. Data and

Communications Company (DCC) is responsible for linking smart meters to the consumers.

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7. Competitive Metering Market in EU

Figure 4: Competitive metering markets- Europe

Source: http://ses.jrc.ec.europa.eu/smart-metering-deployment-european-union

Figure 4 above gives a comparison which was carried out by European Commission of the electricity and gas smart metering roll-out plans in the EU Member States

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8. Scenario

8.1 Scenario: Germany

Cost- Benefit Analysis (CBA) does not recommend a large scale rollout of smart meters. The current

approach is encouraged under Section 21c Para 1 of German Energy Act (EnWg), which says that the

Smart Measurement systems should be implemented

• In new & renovated buildings

• In Facilities in accordance with National Renewable Energy Sources Act & Combined Heat and

Power Act

• By consumers having an annual consumption of more than 6000 kWh

• For customers with new energy generators with a capacity of 7 kW or more

A suitable legal basis is yet to be provided for the smart meters to develop to full potential. Consumers

must be engaged in saving the energy & electricity. Grid-operators should have a decentralised

generation system in order to control the feed. For rest of the cases, it is recommended to use

intelligent meters. DSO is the owner the responsible part & owner for the smart metering

implementation. The Smart Meter Gateway Administrator (SMGA) is responsible for granting third-

party access to metering data & the role is assigned to the meter operator. Under the current legal

framework, the implementation of smart meters is applies to only those who all are mentioned under

the new Renewable Energy Sources Act.

In the current scenario, uncertain legal and regulatory framework slows down the implementation.

The focus is on pilot projects & small-scale trials. The Federal Ministry of Economy issued funding

programme focusing on smart measuring systems.

8.2 Scenario United Kingdom

UK is carried out different Cost Benefit Analysis for Great Britain & Northern Ireland for the roll out of

smart meters. The Great Britain energy suppliers will be responsible for installation and to be

completed by 2020 for both electricity and gas. The Cost Benefit Analysis focuses on energy savings.

The smart meter activity in UK is competitive and the supplier is the owner and responsible party for

installation. Gas and electricity suppliers are supposed to take effort and steps to complete the roll out

of smart metering systems to the costumers by 2020. Data Communications Company (DCC) provides

suitable communication platform over which data can be transmitted.

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8.3 Indian scenario compared with Germany

Germany is showing the world how to move out from coal and nuclear to renewables. The two economies are entirely different and are incomparable. Germany’s per capita income is eight times India’s. India’s electricity consumption per capita is 131 kwH per annum, against 1,731 kwH in the case of Germany. India’s investment interest in solar has risen sharply, but unlike Germany most of it is in large scale or ‘utility solar’. The need of energy in India is immense but there has not been notable digitalization occurring in the system or any commitment towards the “emission reduction” in the near future. But there have been initiatives by both countries to rely on renewable resources like wind, solar etc. Renewables, principally wind and biomass (10 per cent each), produce close to 30 per cent of Germany’s electricity (solar is at 7 per cent), whereas in India renewables produce over 10 per cent of total electricity, two-thirds of it coming from wind.

It is shown that if Germany with so much of industrial & household requirements can stay up the game, and then there is much chance for India to use the resources for building better energy consumption, of course considering the climatic conditions in the country.

Source: www.thehindubusiness line.com

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9. Installations Statistics

In UK, as per Statistical Release: Experimental National Statistics, 2014 by Department of Energy &

Climate Change, UK:

• 97,300 smart meters (60,200 electricity meters and 37,100 gas meters) were installed in

domestic properties in Q2 2014.

Figure 5: Domestic Smart Meters installed in across UK (Domestic)

Source: http://www.statista.com/statistics/418792/smart-meter-quarterly-

installation-figures-uk/

The figure above shows the number of domestic smart meters installed in domestic properties across the United Kingdom (UK), from the third quarter of 2012 to the first quarter of 2015. As of 31 March 2015 an estimated total of 1.05 million smart meters had been installed in the UK.

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10. Market Comparison between Germany & UK

Table 1: Smart metering market Comparison

GERMANY UNITED KINGDOM

ATTITUDE TOWARDS

THE EU SMART

METERING POLICY

Pragmatic approach to the plan Enthusiastic with the nationwide smart meter installation

DRIVERS Relying on market forces (Price, Demand & Availability)

Presence of National Policy

ROLL OUT OF

METERING

• Selective roll-out of SM by 2020

• Not mandatory to follow the plan put forward by European Commission, but a Balanced approach to the energy strategy

• Wide-scale (80% or more) roll-out of SM by 2020

ACT INVOLVED Act involved is German Energy Act, 2005 (Source:

http://www.germanenergyblog.de/?page_i

d=513 )

Energy Act, 2008 (Source:

https://www.gov.uk/government/uploads/sy

stem/uploads/attachment_data/file/87894/

ND17Jan_SMIP.pdf )

TASK OF REGULATING Federal Network Agency (Bundesnetzagentur) (Source: German Energy Law)

DEPARTMENT OF ECONOMICS & CLIMATE CHANGE, UK

PLAN

PILOT PROJECT

Roll out 53 million smart electricity and gas meters to all domestic properties and smart or advanced meters to smaller non-domestic sites in Great Britain by the end of 2020

ROLL OUT PERIOD

START DATE

2014 2012

ROLL OUT PERIOD END

DATE

NA 2020

RESPONSIBLE PARTY

OF IMPLEMENTATION

& OWNERSHIP

Meter Operator/DSO(Distribution System Operators)

• E.ON SE • EnBW • RWE • Vattenfall

Suppliers

• British Gas

• E.ON UK (Subidiary of E.ON SE)

• EDF Energy (Subsidiary of Électricité de France/EDF SA)

• SSE

• Scottish Power

RESPONSBLE PARTY OF

ACCESS TO METERING

DATA

Meter Operator/DSO(Distribution System Operators)

Central Hub (Data and Communications Company)

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11. Major Smart Meter Manufacturers

• Siemens (Germany)

• ABB (Switzerland)

• Schneider electrics (France)

• Itron (USA)

• Elster Group (USA)

• General Electric (USA)

• Landis + Gyr (Switzerland)

12. Major Distribution System Operators (DSO) in

Germany

• E.ON • EnBW • RWE • Vattenfall

Major utilities involved in Germany: E.ON, Vattenfall, EnbW, RWE, Stadtwerke München, Mainova,

HEAG Südhessische Energie, STAWAG Stadtwerke Aachen, Stadtwerke Karlsruhe & Hamburg Energie

Figure 6: Utilities involved in Germany

Source: Wikipedia

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13. Conclusion

In the present scenario, companies need the right tools to support and improve their effectiveness

when making major strategic moves, allocating scarce resources, and managing risk As a result, they

are pushing toward more efficient digital strategies based on analysing customer experiences,

integrating their value or needs, and analysing the two way-information flows. The power & utility

sector is changing towards the digitalization. The use of smart meters is the sign of those changing. In

Germany, the use of renewable sources is boosting up comparing to other countries.

Business models have become the new basis of competition, replacing product features and benefits

and giving more importance to the value proposition as well as customers. The business model

answers following aspects in a business: Target market and how do we reach and relate; scope of our

offering; what value promises; advantages & factors ensuring profitability. Business model execution

focuses on designing a culture and processes so that the organization consistently delivers on its value

promises. Business model innovation helps in changes to an existing business model.

However, one thing is certain. Digitalization & use of clear business model is creating new

opportunities for companies willing to adapt. For other companies, who has a mind-set of "business as

usual" is in a destabilizing stage.

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14. References

1. http://www.investopedia.com/terms/b/businessmodel.asp#ixzz3nx9MJs2L

2. https://en.wikipedia.org/wiki/Business_Model_Canvas

3. http://www.designingbuildings.co.uk/wiki/Business_models_in_construction

4. https://hbr.org/2008/12/reinventing-your-business-model

5. www.rwe.com/web/cms/en/237450/...generation/virtual-power-plant/

6. https://en.wikipedia.org/wiki/Electricity_distribution_companies_by_country#United_

Kingdom

7. Act on the development of Renewable energy sources-Renewable Energy Sources Act-

RES Act 2014

8. http://www.prnewswire.com/news-releases/smart-metering-in-europe--11th-edition-

300013694.html

9. https://www.ofgem.gov.uk/gas/retail-market/metering/transition-smart-meters

10. http://www.escansa.es/usmartconsumer/documentos/USmartConsumer_Landscape_

2014_Final_pr.pdf

11. http://ses.jrc.ec.europa.eu/smart-metering-deployment-european-union

12. http://ses.jrc.ec.europa.eu/smart-metering-deployment-european-union

13. http://www.smartenergygb.org/get-a-smart-meter/energy-suppliers

http://www.escansa.es/usmartconsumer/documentos/USmartConsumer_Landscape_

2014_Final_pr.pdf

14. St. Gallen Business Model Navigator

15. http://www.im.ethz.ch/education/HS13/MIS13/Business_Model_Navigator.pdf

16. http://www.thehindubusinessline.com/specials/clean-tech/in-solar-small-can-be-

beautiful/article7757844.ece