Many industries have shown us: once learned, something has an increasingly short half-life. There was a time when energy experts in utility companies could explain to us how electricity gets into the socket. No matter where you worked in this value chain, your role and the interfaces were easy to explain. The technologies were established and developed through incremental improvements of efficiency percentage points or through cost advantages of economies of scale. The supply areas were regulated and, in some cases, demarcated. The companies were invested along the entire value chain and were referred to as integrated companies. To ensure an optimal energy supply, knowledge of the entire value chain was both necessary and possible.
Meanwhile, other industries were already undergoing significant changes, driven by technology, regulation, and competition:
- Today, an encyclopedia is something for people who want to decorate their library or spend a social evening playing games (a given again after the COVID-19 pandemic). In any case, it's no longer needed to fill in any gaps in knowledge.
- Today, a postal company can no longer survive on small letter shipments; instead, they have become globally networked logistics companies.
- Chemical companies are transforming from producers of basic materials to specialists in medicine and products for the agricultural industry.
- Oil and gas companies are specializing and transforming into high-performance chemistry.
- Anyone who wants to sell a car today has to be at the forefront of mobile energy storage and connected driving.
- Today, financial service providers are no longer the broadly positioned bank or savings bank around the corner; specialists are separating specific services from the bank's offerings and offering them directly to customers, such as payment service providers or today's stock exchange platforms for zero-cost transactions.
- This list could be extended indefinitely.
On the one hand, new technologies are disruptive, but on the other, they also enable new businesses. Traditional companies can develop and apply these technologies themselves, displacing their own traditional products, or others can do it for them. Regulation intervenes in business as soon as monopolistic structures emerge. We see this in many infrastructure industries. The monopolized knowledge of the entire value chain is deliberately broken to give other, new market participants a fair chance to enter the market. This creates increasing competition, and agile, specialized companies are entering the market, usually with innovative products.
Overall, this development not only led to entirely new participants in the market, but also led to a focus, specialization, and, in the case of champions, internationalization among all companies undergoing these changes.
Eckhardt Rümmler
How severely is the energy industry affected by these changes and how are companies responding?
Here, too, regulation, technology, and competition are the biggest drivers. Let's first look at regulation. It used to be common practice, even desirable, to have all stages of the value chain in one hand. Today, the goal of market regulation in the energy sector is to make monopolized information accessible either to all market participants or to no one at all. Collaboration between different stages of the value chain must be prevented if it results in particular advantages that a third party cannot obtain. There are particularly severe restrictions between the grids and power generation, and between the grids and sales. So-called "legal unbundling" means that effective "firewalls" have to be erected between these parts of the company to prevent synergies from arising and, among other things, no exchange of information at all. And for good reason. Non-discriminatory access should ensure that all electricity and gas grids are available to everyone with every possible technology. This creates competition and prevents monopolistic structures.
Past technologies in the energy industry were characterized by high barriers to market entry. Who can build a central power plant for several billion euros and then master this complex technology? Most of our current technologies in the liberalized sector are smaller and less complex. Wind turbines, solar systems, battery storage, but also the end-customer sector with generally available customer billing systems and smart home applications are good examples. New, agile, and specialized competitors have entered the market in recent years. But companies' technical and leadership skills are also being challenged. The multitude of current business models, fueled by new technologies, makes it difficult for top managers to assess the full breadth and depth of the energy industry and make the right decisions. The major megatrends of digitalization, decentralization, and decarbonization, with the associated innovations, are reinforcing this trend.
This brings us to the topic of competition. Many of today's and developing energy technologies are becoming less complex – or are already commonplace in other industries. On the one hand, smaller, innovative newcomers are emerging on the market, while on the other hand, large companies from other sectors are interested in the exciting topics in the energy industry (e.g., gas and oil companies are investing in renewable energies, internet companies are digitizing electricity distribution, insurance companies are seeking investments in energy projects, etc.).
The integrated company's business model is clearly broken. The multitude of individual technologies and business models is almost impossible to keep track of. New competitors are very well positioned in their respective (sometimes quite large) niches. A company can no longer be excellent in all areas of the energy industry to survive in the competition.
Most of our current technologies in the liberalized sector are smaller and less complex. Wind turbines, solar power systems, battery storage, but also the end-customer sector with generally available customer billing systems and smart home applications are good examples.
Eckhardt Rümmler
What strategic responses do energy companies give to this development?
The answer to this question is not entirely clear, as there are a multitude of different energy companies, each of which feels the pressure from regulation, technology, and competition to varying degrees. The question of ownership and its expectations also plays a key role in determining the answers. State-owned utilities and large municipal utilities have made local proximity to customers the core of their brand and have evolved from this. It is hardly surprising that many have adapted their strategies under the motto "Focus, Specialization, Internationalization."
Let’s look at some typical examples:
- From all-rounder to specialist
One of the most striking examples is the Danish company Oersted. The company was active in the gas and power business and has completely transformed itself into the world's largest provider and operator of offshore wind turbines. The specialist is now a technology leader and operates the world's largest turbine fleet. Fittingly, the company changed its name in 2017, from DONG (Danish Oil and Natural Gas) to Oersted.
- Focus as a way out of complexity
Another example is the French company Engie. The company has 160.000 employees. The company has undergone numerous transformations and mergers. Last year, Jean-Pierre Clamadieu, Chairman of the Board of Directors, initiated a radical refocusing of the company with the words: "Over time, energy has become too complicated." It "has become difficult to make clear decisions about resource allocation." The diverse business portfolio is therefore being focused. Businesses with approximately 74.000 employees will be removed from the group of holdings. The remaining businesses will now have new space to grow.
- Focus and internationalization
Iberdrola is positioning itself less short-term, radically, but very effectively due to its consistent direction for over 10 years. The company's growth is primarily driven by two business areas: renewable energies and regulated business as a stabilizer. And this is not only in the Iberian Peninsula, but also in North and Central America. Today, Iberdrola's market capitalization is roughly the same as that of Engie, RWE, and EON combined. Who would have thought that 10 years ago?
- Champion in the battle for customers
EON has undergone a significant transformation over the past 10 years, divesting important core businesses. Today, EON specializes in the end-customer business, both for its products (electricity, gas) and for the lines to customers, the distribution networks. With over 50 million customers and Europe's largest distribution network, EON has specialized in a portion of the entire value chain and is doing so very successfully in many European countries.
- Competitive and CO2-free electricity generation
The Finnish company Fortum has its sights set on a completely different part of the value chain, and thus its focus. Fortum has sold all of its regulated power grids and is focusing on CO2-free power generation. Power generation from nuclear power, hydropower, and renewable energies is a key focus. Gas-fired power plants can play a role in bridging and system stabilization. The proceeds from the sales of the no longer central business units enabled Fortum to implement its strategy and accelerate its internationalization through major acquisitions.
In recent years, some of the integrated utility companies in Europe have become true champions with a focus on specific parts of the value chain. Competition and innovation, technology and new business models are now easier to manage. Risks and opportunities can be better weighed. Expertise is strengthened. It doesn't matter that some companies can no longer be asked how electricity gets to the socket.
Eckhardt Rümmler is an independent member of the supervisory board of Verbund and has extensive experience in the energy industry. As Chief Operating Officer and Chief Sustainability Officer at Uniper, he played a key role in shaping its strategic positioning. Prior to that, he worked for many years in leading strategic and operational roles for companies such as E.ON, PreussenElektra, and STEAG.
