Since early s.XIX humanity has faced continuous paradigm changes through the so-called “industrial” revolutions. Changes that are less time-spaced and less durable. A reality that threatens the traditional businesses by the continuous technological advances.
At the end of the s.XVIII the first industrial revolution mechanized the manufacture. The second industrial revolution, also known as technological revolution, introduced mass production thanks to the extensive use of machinery, the introduction of electricity and electrical communications, and a reduction of distances due to the greater coverage of the railway. The third has swept us away like a hurricane. The digital revolution with the introduction of the use of digital equipment to control and automate the manufacturing processes.
However, whether we are aware or not, we are already entering the fourth industrial revolution, the one that introduces digital technologies throughout the value chain. And it promises to be faster and more incisive than the previous ones.
Just as today’s industry is based on automation and simplification of processes thanks to digital technology, the industry we are going to is focusing on will be introducing the concept of artificial intelligence.
In our day to day we already read about the capacity of connectivity and digital communication, Internet of Things (IoT) at domestic and industrial level, Big data, Blockchain etc … and its effects on society are aimed at interoperability, decentralization, orientation to personalized service, and the redefinition of industry and services as we know it.
What does this paradigm shift mean?
Power markets as we know them are, with their virtues and defects, the result of a hierarchical and centralized model. Where the flow goes from generation to consumption through transportation and distribution.
In the same way, prices have the same premise and therefore, day by day we have to adjust our total demand and generation forecasts for a system operator to adjust the infrastructure and a government entity to regulate the flow of capital. A clearly centralized process that requires the validation of Central Operators.
It is important to reflect on the possible effects that this revolution could have on the sector in which we are. The speed of the changes to come could create great difficulties for those who are not able to change at the same pace. Companies should transform themselves by digitizing the way their businesses operate.
The traditional model of ‘I give a service and you consume’ is also evolving. Customers will look to energy companies as a “partner,” rather than just a lower-priced energy service provider. And as the energy markets open up, competition will only intensify.
What we are seeing already in other areas, will be a reality in the energy market. Real-time and highly personalized services such as UBER, Airbnb, internet services (response times, the possibility of skipping the intermediaries and the possibility of personalizing the offers surprise us day after day).
The energy sector, with interconnectivity, storage capacity devices and self-consumption, faces very important challenges:
- Structural Challenges. From a hierarchical and centralized reality, we will probably move on to distributed generation. The flow of energy will not come only from traditional sources. Any home with storage and generation capacity can become a supplier. The characteristic of our network will modify the current relationship of dependence with the great traditional sources of generation. The competition of large traditional power utilities will multiply.
- Market Challenges. Structural change will lead to a change in the way in which we consume and generate. All this will undoubtedly lead to the revision of the current pricing system. Today the € / MWh price for Spain is defined by a daily balance of all supply and all demand in a centralized manner by the Market Operator. However, the distributed generation could lead us (in the most extremely case) to a real-time price for each point of supply. Why does the price of electricity in an industrial estate in Barcelona have to be the same as the one paid by a domestic user in Puerto Llano (Ciudad Real) (as it is right now)? Prices could be even linked to new variables (electric vehicle park, car parks, population …)
- Legislative challenges. This new revolution leads to decentralization and therefore goes beyond borders. How do fees and charges apply? What prevents us from buying in the German wholesale market without having to bear the burden of its regulated costs? Customers / suppliers will no longer be subject to a geographical reality. Governments and regulators should establish new regulatory frameworks (such as UBER in the field of transport)
- New business areas. Current services of electricity companies will be redefined, resembling increasingly “responsive” and highly personalized services such as the ones made by telecommunications companies. Supplier-client communication will be the basis for the survival of existing marketers. These can only survive by understanding very well and managing in real time the consumption patterns of their portfolio to further optimize their margins in wholesale markets.
- Complexity in services. The appearance of new competitors and more personalized services will lead to add more complexity in retail services, as we have seen in telecom. The need to implement technology in the development of smart grids will lead to possible mergers of telecommunications companies with energy companies. The customer-marketing relationship will change and Social Media will become relevant in that relationship. More platforms and Marketplaces will appear to compare services. Blockchain technology could open the door to a peer-to-peer energy trade where one could choose who buys energy and at what price.
How to prepare my business, are we on time?
The biggest mistake is to think that it will not happen. It’s already happening!
We can see everywhere that the digitization is already in our day to day. The best example we have in telecommunications and internet with its ability to customize services. If your company has not yet defined a plan, a route, a goal, it is time to do so. Power companies should define where their digital future is and what their customer and offer will be. Waiting for that to happen can mean a clear loss of competitiveness or even losing the opportunity to adapt to changes. Competition can come from other countries and other sectors, so it is not worth just looking at what your current competitors are doing.
Digitization does not mean investing only in technology, but in a change of mentality that must lead to reconsider the meaning of a service. Information management is going to be the key to it. Not just the volume of data that they can obtain as the use of the right tools to give value to it. Making the change to a more “real-time” environment.
How long do we have?
If the third industrial revolution has come to an end 10 years after its inception, it is not unreasonable to think that this new revolution could be a reality in 5 to 7 years (That leads us to 2022-2024).
- A few years ago, the online purchase was a revolution and leading companies like Amazon have been reducing their delivery times from several days to only 2 hours. He even tried to reduce this barrier with the arrival of the drones.
- Airbnb is a Marketplace for publishing, discovering and booking private housing and has meant a revolution in hotel services.
- Uber has developed a private transport network that connects passengers with drivers of vehicles, which offer a transport service to individuals. A service that goes beyond the existing borders and that has forced the regulators of each country to review the regulations.
Digitization is leading to a higher level of interconnection and the rise of collaborative economy and collaborative consumption. Users will decide the role they want to take at any moment (seller or buyer) in a system that will allow them to do so. The movement of the collaborative consumption supposes a cultural and economic change in the habits of consumption. Changes marked by the migration from a stage of individualized consumerism towards new models, powered by the social media and the type peer-to-peer platforms.
We are seeing examples of drastic changes in traditional sectors caused by the advent of technological evolution. Even today we are not able to judge where the changes in the power sector will go, but to ignore what will happen would be a mistake and not doing anything to adapt would be even worse. Is your company prepared to face these kinds of challenges?
Alejandro de Roca | Operations Director