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Coming Soon: The Amazon of Energy

Gerard Reid's picture

Gerard Reid is founding partner of Alexa Capital in London. He has over two decades’ experience in equity research and fund management in the energy area. He is also a monthly columnist for the...

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  • Mar 16, 2018
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The energy sector has not yet been conquered by a platform giant like Amazon, Spotify or Facebook, writes financial energy specialist Gerard Reid. But according to Reid there are reasons why this will happen soon. The only question is, who is going to be there first? Courtesy Carbon and Energy blog. 

What platforms like Amazon, WhatsApp, Spotify and Facebook have taught us over the last few years is that size matters. Once such a business reaches a certain scale, it produces customer benefits that cannot be matched by smaller platforms. This is often described as “network effects”.

These businesses then have almost monopoly power. Their access to huge amounts of data about their customers and their value chain enables them to continuously improve the user experience and/or extract more revenue from those users which, in turn, increases their market penetration and competitive advantage.

To date, we have not seen any platform businesses in energy, but my view is that we will see them soon. All that is needed is two things: a trusted customer-facing platform and a back-office platform that combines the purchasing and trading of energy together with the management of customer demand.

The utilities who currently hold the customer relationship see them more as a ‘number’, or a metering point than a customer

One of the arguments against platforms in energy is that electricity generation and distribution are highly capital intensive. However, upon closer examination, that argument does not hold up. The internet and the wider telecommunications area are also highly capital intensive. Like electricity, telecommunications requires lots of wires as well as other hardware such as servers, routers and mobile towers. In addition, there is not one company that controls all that hardware.

What there are, are companies like Google and Facebook which use that equipment to deliver services to their customers. They may have some hardware but that is not their core competence. What they do is control the customer relationship. And this may be the real opportunity for a platform business in energy as the utilities who currently hold the customer relationship see them more as a ‘number’, or a metering point than a customer.

State monopolies

Given that utilities are so bad at dealing with customers this begs the question of why we have not seen Amazon or other such platform companies offer energy to their customers. There are a few reasons for this, starting with regulation which has hindered the standardization and commoditization of energy.

In many cases, these firms are not allowed to enter the market as there are state monopolies in place or regulations which prevent competition. Even where there is competition, as in most of Europe, cumbersome regulations are often stacked in favour of the incumbents.

The other issue is the financial strength that has been traditionally necessary to guarantee delivery of energy to the customer. This plays to the strengths of energy companies which tend to have strong balance sheets, power generation assets and trading relationships with key fossil fuel suppliers.

I am convinced that it is only a matter of time before global household names such as BMW, Daimler, Amazon or Google begin making the necessary acquisitions to enable them to offer such energy services to their customers

The good news is that these obstacles will soon be a thing of the past. With regards to the lack of competition amongst suppliers of energy, we are seeing the increasing liberalization of energy markets across the world as well as increasing pressure from regulators and legislators.

The other big change is renewable generation, most of which is not owned by the utilities, which in turn is creating more competition in the power market. Add to that the growing use of wholesale power markets for trading electricity, not to mention the possibilities of blockchain, which will make it easier and more transparent to buy and sell electricity. This in turn makes it possible for a whole range of new players to enter the world of electricity as well as enabling a new range of business models.

Global platform

What does this all mean if you want to build a platform business in energy? You need two parts; one, a trusted brand name and cost-effective platform with an ability to treat the electricity user as a customer. The second part is the back-office platform that links the purchasing, trading and management of decentralised generation assets together with the low-cost management of customer demand.

Such a platform is known as a virtual power business and it enables not only generators to optimize their assets but also end customers to lower their energy bills. Bring the two together and you have the chance to build a global platform in electricity. And I am convinced that it is only a matter of time before global household names such as BMW, Daimler, Amazon or Google begin making the necessary acquisitions to enable them to offer such energy services to their customers.

Editor’s Note

This article was first published on Energy and Carbon, a blog hosted by Gerard Reid and energy journalist and advisor Gerard Wynn. It is republished here with permission.

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Bob Meinetz's picture
Bob Meinetz on Mar 16, 2018

Gerard, you reveal a misunderstanding of fundamental economic principles here. In your characterization of Amazon, WhatsApp, Spotify and Facebook, you write

These businesses then have almost monopoly power. Their access to huge amounts of data about their customers…increases their market penetration and competitive advantage.

For a business with monopoly power, market penetration is absolute – there is, by definition, no competition at all. The rest of your article seems to be built upon the contradiction we can increase competition by getting rid of it.

?

Jarmo Mikkonen's picture
Jarmo Mikkonen on Mar 16, 2018

Energy sector regulated for a reason: Security of supply. Societies come to stop with power outages, economic activity stops. People would die if the grids collapsed.

If Facebook, Amazon (Whatsapp is owned by Facebook), Netflix or Google went offline, it would be a major annoyance. But the only thing that would really suffer would be the share prices of these companies.

Their access to huge amounts of data about their customers and their value chain enables them to continuously improve the user experience and/or extract more revenue from those users which, in turn, increases their market penetration and competitive advantage.

Electricity is homogenous, basically a commodity. User experience is limited to a) having no blackout or voltage disturbances b) getting it as cheaply as possible. Generators already sell directly to customers. How would a middleman in between lower the prices?

Leo Klisch's picture
Leo Klisch on Mar 17, 2018

This article may be an over simplification but it’s a place to start.
The only two “commodities” that can be transported at the speed of light is internet data and electrical power. That does give it some unique properties.
The ATT’s and Verizon’s that distribute the content from millions of different producers and customers, are not unlike the transmission and distribution system for
electrical energy sector. Data speed is not the main issue but very constant voltage and frequency. Amazon and it’s independent sellers that choose to sell on amazon, pay internet providers -ATT- to provide secure communication between sellers and buyers. The independent sellers allow Amazon to be the “middle man” because they could never develop the platform to leverage the same marketing advantage of Amazon. Though it would be a slow process depending on the regulation and the money to be made, I think it possible for millions of generators ,large and small, to sell to millions of customers through an independent transmission and distribution system payed for by the buyer and sellers that depend on it. Just as the internet providers
do to pay for their infrastructure maintenance and improvement. No doubt similar issues such as net neutrality would arise in the power sector also.

Bob Meinetz's picture
Bob Meinetz on Mar 17, 2018

wind, if you don’t think Amazon, as an energy monopoly, could very easily – and will:

1) Make data speed an issue, doubling the price for “premium” electricity
2) Manipulate “the regulation” to serve its shareholders at public expense, wielding the vast leverage only a monopoly stakeholder providing a critical service could

you might consider familiarizing yourself with some history on antitrust. This Pulitzer Prize-winner is highly recommended.

A new phenomenon unmentioned in The Prize: the perverse modern movement which seeks liability from corporate Boards of Directors which don’t exploit the public, when it’s possible, on behalf of shareholders. In a nutshell: if you don’t exploit the public you can now get sued.

Jarmo Mikkonen's picture
Jarmo Mikkonen on Mar 18, 2018

I thinks the comparison between internet service providers and the grid is accurate. The rest….not so much. Grids and electricity generation have economies of scale which cost-wise means that the most cost-effective solution is a natural monopoly.

Furthermore, electricity is cheap. If you sell a 1000 kWh at the current Nordpool spot price, it earns you 37 euros. A 5 kW solar panel system generates over 4000 kWh annually in Finland, in the most in summer when spot prices are the lowest. In Arizona you might get close to 8000 kWh…

Of course, it is possible to pay more than the market price. But the additional cost will always be covered by someone, there is no free lunches system-wise.

So, the business does not earn much to those small generators. Very much less to the middleman.

Think about Germany with over a million solar panel systems. There’s 42 GW of capacity that generates about 40 TWh of electricity. It sounds like a lot but its market value in 2017 was about 1.3 billion euros. How much would a middleman get??

Amazon.de website sold about 12 billion worth of stuff in 2017.

Roger Arnold's picture
Roger Arnold on Mar 18, 2018

This article makes little sense to me. It seems to be extrapolated from trends and analogies from other business domains that have little applicability to energy. Just what are all these services supposed to be that some new “Amazon of Energy” is going to be delivering through a superior user interface?

As Reid points out, network benefits — in the technical sense of the term as economists use it — have much to do with the de-facto monopoly positions that platform-based businesses like Google and Amazon are able to enjoy, once they’ve managed to grow large enough. But what network benefits apply to energy supply?

Despite all the free market ideological trendiness that drove the push for deregulation of the power sector, the physical nature of electricity and the need for power grids still make the utility business a natural monopoly. The contrivances required to impose a pseudo free-market structure of competing suppliers have created a mess. There’s more regulatory complexity, not less, and inefficient use of resources.

Yes, new technologies are coming along and changing the picture. Rooftop solar has created a new market for energy storage that utility companies should be looking to serve. There are plenty of opportunities for things like smart management of electric vehicle charging and thermal energy storage. But customers first need to buy the EVs and systems that the “smart platforms” are proposing to manage. Is this hypothetical “Amazon of Energy” going to be in the business of financing home remodeling for energy efficiency? Or what?

Maybe I just lack imagination, but I want to see more than trendy buzzwords being tossed around before I’m impressed.

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