Opinion Paper

Smart Energy: New Values

from the Energy Networks
of the Future

Success Factors for New and Established Providers

2011 / 02

We make ICT strategies work

 Smart Energy: New Values from the Energy Networks of the Future

Table of Contents
1 Executive Summary............................................................................................. 3
2 Future Energy – an Industry in transformation .................................................... 4
3 Information products as a part of smart energy................................................... 6
4 Management of the smart energy ecosystem ..................................................... 8
5 Conclusion and recommendations .................................................................... 10
6 The authors ....................................................................................................... 11
7 The company..................................................................................................... 12

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 Smart Energy: New Values from the Energy Networks of the Future

1 Executive Summary

Today’s energy market is getting ready for big changes. Renewable energy, cross-border
regulation, and the integration of completely new uses, such as electric cars, are the drivers
in this development. The old fashioned centrally controlled electricity networks are changing
into decentralized, intelligent smart power grids. This change is not limited to the core area of
the industry, the energy supply industry, but will have a particularly strong impact on the
interface with the customer. Clients will demand more transparency, control and freedom of
choice in an increasingly competitive market. Value added services based on the information
provided by the smart power grids will be a key factor enabling energy providers to maintain
and develop their customer bases.

The smart power grids of the future will be characterized by rapidly growing volumes of
information. A variety of business models which emphasize information products, so called
“data centric business models” can be envisaged. These business models offer a
differentiating value add, open up new, independent sales potential, or even allow for
additional income based on third party offerings. An analysis of such business models allows
the allocation of a financial value to the information available in smart power grids. This can
in turn provide the foundation for strategic decisions concerning the development of
communication and information technologies along the power grid provider’s value chain.

These new business models are not just an opportunity for the established market players,
but are also open to new entrants. This will lead to the development of a value added
network which can be called the “smart energy ecosystem”. As we have learned from other
industries, the complete control of such a network is not vital. It is much more important to
hold key positions and to supplement one’s own competences through the selection of the
right partners. The IT infrastructure will play such a key role because it enables the
collection and processing of the data in the intelligent power grids.

The positions of the market players in the value added networks of the future will depend on
each company’s overall business strategy, their culture, their existing infrastructure, and their
own competencies. The development of the company’s current position towards data-centric
business models and effective partner strategies is a task which must be started today, as
only this will ensure that required investments are made in the right areas.

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 Smart Energy: New Values from the Energy Networks of the Future

2 Future Energy – an Industry in transformation

There is a fundamental transformation looming ahead in the energy market. Centralized

power generation and strictly hierarchical power distribution networks will be superseded by
intelligent, decentralized power generation and smart power grids. Once this transformation,
a topic much discussed under the name of “smart energy”, has been completed the energy
sector will be characterized by a large number of smaller new providers and a start-up
culture replacing the existing exclusive group of heavyweight market players.

The development of electricity networks towards smart grids is now being driven by the ever
greater use of renewable energy sources. The increasingly decentralized production of
electricity and the additional demand for intelligent load management systems within the
networks are the most important factors generating pressure for change. On top of this there
are regulatory issues concerning market liberalization and energy conservation. These
drivers will dominate the transition to the smart grid in the medium term.

In the long term however, it will be technical developments at the interface to the customer
which will drive the transformation of the energy market. Transparency concerning the type
and volume of power consumption as well as the ability to actively control demand is a
customer priority. With the trend initiated by Apple towards “apps” for every imaginable
purpose - from the gimmick of a virtual vuvuzela, the submission of insurance claims, or the
app store for the future electric Audi A2 - it is only a matter of time until energy-related apps
appear on the market.

It is almost impossible to predict today what will be made possible by such new apps in the
energy sector. The key added value of apps for the customer will be the networking of all the
devices connected to the power grid and their control, independent of the user’s location.
Smart meters and smart homes are already the subject of frequent discussion. There is also
a chance that greater transparency will improve the energy industry’s image in the
customers’ eyes, as power will no longer be regarded as a commodity but as something
much more valuable.

A major element providing the basis for these apps will be information gathered in the future
along the energy sector’s value chain - power generation, transmission, distribution,
metering, and sales. As increasingly intelligent components are put into use, information will
be created or received and processed at all stages of the value chain. This will give rise to
an “information value chain” running in parallel to the service provision.

The use of the collected data for purposes going beyond the straightforward control of the
grid will lead to completely new tasks and applications, such as data aggregation or the
presentation and processing of data for customers. As a result a broad range of new
business models will spring up at the interface with the customer, attracting new market
players – start-ups as well as established companies from the IT and Internet world such as
Google or Microsoft. This process has already started.

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 Smart Energy: New Values from the Energy Networks of the Future

This means that the existing market players in the energy sector are facing daunting
challenges. On the one hand, they must adapt their business models and networks to stay in
line with current influencing factors such as intelligent load management and regulatory
frameworks. This is forcing them to make investment decisions with far-reaching
consequences right now, in an atmosphere of considerable insecurity with respect to
markets and technologies. On the other hand, they must also consider long-term aspects
which will demand the development of completely new competencies.

Smart energy value added services close to the customers, such as energy apps enabling
efficient utilization of resources, should play a key role in investment decision-making. Such
value added services will create tangible competitive advantage in an increasingly
competitive market. New business models for these value added services will not develop
their full impact until complex value networks with a large number of market players have
been developed. Investment decisions made today must take both the information-based
value added services of the future and partnering strategies into consideration.

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 Smart Energy: New Values from the Energy Networks of the Future

3 Information products as a part of smart energy

As we have already seen, the energy industry is facing a far-reaching transformation. Sales
companies in particular will benefit from the significant competitive advantages offered by
value added services in order to retain and win customers, and as an additional source of
income. At present it is difficult to say when these new added value services will become
established, what their scope will be, and when new revenues will be generated. Yet the
investment decisions related to smart energy technologies must be made now. The question
arises as to what types, quantity and quality of information should be collected and
processed. For example: the frequency with which a smart meter is read must be
determined. Frequent reading of the meters will generate enormous quantities of data, and
high costs. However, less frequent readings may make it impossible to take advantage of
many value added services because the data generated is not detailed enough..

Thus, for the necessary investment decisions to be made today the future value of the
information generated must be estimated. Experience with data-centric business models
from other industries can be taken as analogies to calculate this value. There are basically
three forms of information product: as differentiating added value for an existing product, as
a marketable service with its own turnover, or as a platform product for the generation of
third-party revenues such as advertising income.

One company which rigorously utilizes data-centric business models by analyzing user data
is Google. The search engine operator’s spell check program is based on the evaluation of
millions of typing errors made during the entry of key words on the Google Web site,
enabling the company to develop what is presumably the best spell checker in the world at
low cost. The quality of the Google service lures millions of users to the web site every day,
bringing in billions in advertising revenues every year. Since Google already has substantial
experience in working with data-centric business models, it is no surprise that the company
has recognized the potential inherent in smart energy. The product Google PowerMeter
offers customers a gauge showing their energy consumption data on the Internet, provided
that the utility company supports the function. The precise nature of the business model
Google is pursuing is still not clear, but it seems certain that they are aiming to secure a
leading position in the energy markets of the future.

The success of regulatory authorities in liberalizing the electricity market will increase
competition between the various electricity providers. All of the competitors have reliable
electrical power at their disposal, and there is practically no difference in quality between the
companies’ products, so differentiation is only possible in terms of price and the range of
value added services being offered. Value added services can build on the increased
availability of information in the intelligent energy grids of the future. One simple example is
the real-time display of electricity consumption data for consumers on a web portal. This
service can be further refined by offering comparisons with the consumption values of
‘similar’ households or by giving tips for the conservation of energy. Since this service could
help the electricity providers to retain customers or even to acquire new ones, it will be an
important competitive factor.

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 Smart Energy: New Values from the Energy Networks of the Future

The successful development and provisioning of information services by either the energy
provider or a third party will open up new sources of income. One possible model in this case
is a company which, for a monthly fee, gives tips on conserving energy and monitors the
savings after implementation. More complicated fee models could be envisaged as well,
such as one in which the monthly fee – which is linked to the savings made – does not
actually become due until an agreed level of energy saving has been reached. Even more
complex would be models in which a service based on electricity is sold and no longer the
power itself. One example here would be the provision of an energy-efficient refrigerator and
payment of a monthly fee by the consumer for the refrigeration service, but no longer directly
for electricity and refrigerator. All of these models make use of the detailed consumption
information and improved energy consumption models made available by means of the new,
intelligent power grids.

Business models in which the additional income is generated from third parties, and not from
the consumers or the utility company, can also be envisaged. A simple case would be
advertising income from a web site providing power consumption information. These models
are particularly interesting because the consumption data leads to insights into the habits of
the consumers: for example whether the members of a household leave their home during
the day or whether the washing machine and stove are primarily used in the mornings can
be assessed to a certain extent from the power consumption data. A big priority must be
given to the observance of data protection aspects when implementing such scenarios. But,
under the assumption that the framework conditions relating to the anonymity of data, user
consent, and high levels of data security are set, it is easy to imagine that new opportunities
and new markets will arise here. An eye must be kept on both technological developments
and social discourse on this subject.

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 Smart Energy: New Values from the Energy Networks of the Future

4 Management of the smart energy ecosystem

The new business models can certainly be used by market incumbents, but they will also
attract new players who have the necessary competence in the processing, utilization, and
preparation of data. In addition, there will be new market participants who will utilize two-
sided markets for their business models. Two-sided markets are characterized by the
inclusion of third parties. These may be advertisers or external solution providers from other
industries such as automotive.

The new energy market will develop into an increasingly complex network of relationships
with interlacing flows of revenues. The value chain dominated in the past by the traditional
utilities will turn into a value network as illustrated in Figure 1 schematically using the most
important market players and their relationships to one another..

Regulation/
Service
Service Regulierung/
Suppliers
Lieferanten Government
Providers
Provider Behörden
Agencies

Energie-
Utility
Customers
Sonstige
Other
Companies
Endkunde Stakeholders
versorger Stakeholder

Third Parties/
Alternativer
Alternative NeueMarket
New Markt- Dritte/ Wer-
Advertising
Sales
Vertrieb Players
teilnehmer bekunden
Customers

Direct
Direkte Influence
Einflussnahme Existing Relationship
Existierende Beziehung
Indirect
Indirekte Influence
Einflussnahme Rise/Creation of New Relationship

Figure 1: Example of a Value Network for Smart Energy. The customer is at the center of the network.
The dominant market players must succeed in orchestrating the network to the benefit of the customer.

In view of the increasing complexity of the smart energy ecosystem, its active management
will be vital to the survival of all market players.

The basis of such active management will be a tailored partnering strategy which determines
the company’s own position and ambitions, identifies suitable, complementary market
players, and defines the rules governing the way the partners deal with one another. In
alignment they will be able to put together attractive offers and complement each other’s
competence areas at low risk. Partnering means zeroing in on specific areas of value
creation – as a rule those outside of the company’s own competence – and having these
performed by third parties or in cooperation with other parties to create an attractive market
offer.

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Experience from other industries indicates that the complete control of the ecosystem is not
decisive; instead, one must hold the key positions enabling the overall design of the system
and the access to smart energy’s most lucrative opportunities. In view of the great
importance of information and the sharing thereof, an IT infrastructure which can collect,
aggregate, and provide data to the partners will play a key role.

IT platforms can be designed as proprietary or open systems. Generally speaking: the more
open a platform is designed, the more application developers eager to come up with
innovations will join in. And the broader the base of the platform, the more scaling effects
can be realized by both utilities and application developers. So a third-party’s application,
once developed, can run on many different networks. The analysis of consumption data is
then also improved due to the increased volume of data available.

The overriding principle for the development of a partner strategy is that it must fit the
company and its overall business strategy. The right decisions about partners cannot be
made without a vision of one’s own strengths and one’s own role in the smart energy
ecosystem. A sales company, for example, will place greater value on all applications with
close contact to the customers. A proprietary consumption data gauge could be such a key
position in this case. An open approach would tend to be more appropriate for the operator
of measurement points.

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5 Conclusion and recommendations

Today’s power supply market is on the threshold of massive upheavals. It is far from clear
what new business models will ultimately prevail for sales companies and what the energy
supply market will really look like. Yet important investment decisions must be made today.
We recommend a strategic approach so that such decisions can be taken on a solid
foundation.

Evaluate the information along the future energy value chain. New business models
related to smart energy can be utilized to assign a value to information. A scenario-based
approach of this kind will – despite the great uncertainty concerning the shape of the future
energy markets – permit investment decisions to be made today.

Prepare to utilize new business models in intelligent energy networks. As competition

for the customers increases and scaling effects in sales start paying off, you should be
prepared to utilize the new data-centric business models. So take advantage of the current
period of uncertainty to get ready.

Choose selected key positions in the value added networks of the future to use as the
pillars of your operation. It is neither necessary nor even possible to control the complete
smart energy ecosystem. But you can occupy key positions. Pay especially close attention to
the IT infrastructure.

Place your trust in partners who meaningfully complement your own competencies. If
they occupy key positions in the energy value chain, partners can complement your
competencies and help to minimize your risk. So you should be drafting and implementing a
partner strategy for the future value added networks today.

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 Smart Energy: New Values from the Energy Networks of the Future

6 The authors

André Seltitz is a Senior Consultant in the Competence Practice Information Technology at

Detecon International GmbH and specializes in IT-focused business strategies. He has had
more than five years of ICT experience in the industry itself and in consulting work. In his
current projects, he has been concerned with market changes in the sectors M2M
communications and IPTV.

Dr. Felix Kalkum is a Business Analyst in the Competence Practice Information Technology
at Detecon in Bonn. After receiving a degree in physics and mathematics at the University of
Bonn, he earned his doctorate in applied optical physics in Bonn. His work at Detecon
focuses on the analysis of future technology-driven business models, especially on the
energy markets.

You can reach Dr. Felix Kalkum by calling +49 228 700 1973 or by sending an e-mail to
Felix.Kalkum@detecon.com

Dr. Volker Rieger is a Partner at Detecon and head of the Competence Group “Technology
Portfolio Strategies”. He has had fifteen years of professional experience on the ICT markets
and concentrates his consulting work on innovative business and technology strategies. His
clients include national and international technology and service providers in the sectors ICT
and energy.

You can reach Dr. Volker Rieger by calling +49 228 700 1920 or by sending an e-mail to
Volker.Rieger@detecon.com

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7 The company

We make ICT strategies work

Detecon is a consulting company which unites classic management consulting with a high
level of technology expertise.

Our company history is proof: Detecon International is the product of the merger of the
management and IT consulting company Diebold, founded in 1954, and the
telecommunications consultancy Detecon, founded in 1977. Our services focus on
consulting and implementation solutions which are derived from the use of information and
communications technology (ICT). Our clients in virtually every industry from all around the
world benefit from our holistic know-how in issues of strategy and organizational design and
the use of state-of-the-art technologies.

Detecon’s expertise bundles the knowledge from the successful conclusion of management
and ICT consulting projects in more than 160 countries. We are represented globally by
subsidiaries, affiliates, and project offices. Detecon is a subsidiary of T-Systems
International, the business account brand at Deutsche Telekom, so we profit as consultants
from an infrastructure spanning the globe and which is maintained by a major international
player.

Know-how and Do-how

The rapid development of information and telecommunications technologies has an

increasingly decisive influence on the strategies of companies as well as on the processes
within an organization. The adaptations which consequently become necessary affect
business models and corporate structures, not only technological applications.

Our services for ICT management encompass classic strategy and organization consulting
as well as the planning and implementation of highly complex, technological ICT
architectures and applications. We are independent of manufacturers and obligated solely to
our clients’ success.

Detecon International GmbH

Oberkasselerstr. 2
53227 Bonn
Phone: +49 228 700 0
E-mail: info@detecon.com
Internet: www.detecon.com

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