Since the 1880s, people have gotten used to electricity. And it’s been evolving ever since. It’s getting cleaner, and it’s certainly more reliable. Since no one wants to go back to gas lights and burning whale oil, it means that we must continue to push forward. Luckily, we have technology to help us, and that’ll be the foundation of the next energy business model: Retail 2.0.
By creating a new retail business model out of the local energy market, you can address the current demands and create the disruption that both Silicon Valley and industry insiders have failed. In my previous posts, I’ve discussed why now is the right time to transform the energy market and why the traditional market can’t cut it.
Today, let’s talk about what we can create.
What Energy Customers Are Demanding
What are people always demanding? Energy that is affordable, abundant, reliable, clean, and LOCAL (a new requirement previously unknown to the market). It’s a bit more complicated than that, though. Energy customers want their energy in abundance to avoid blackouts. After all, no one wants to deal with energy that’s going to run out nor goes in and out (no more Zoom for you). Clean energy is also highly desirable. People want to sit within their homes and businesses and know that they’re not contributing to the smog nor anything else that may damage the outside world now and in the future. Customers also want it to be affordable. Most of the world is going to order the $1.29 Bean Burrito from Taco Bell vs. the Royal Kaluga Huso Hybrid Caviar at $210 / ounce. Unlike food that can be differentiated in sight, smell, taste, touch, and sound (love me some crunchy tortilla chips dipped in queso), energy cannot. In fact, the source of your electricity is almost impossible to discern whether it comes from the local coal-fired power plant, the wind farm many miles away, or your neighbor’s rooftop solar…UNTIL NOW.
Understanding customer demands is the first step to becoming more customer-focused. This is where current retailers are failing. Current retailers are more focused on where they’re going to get the volatile commodity and turning a profit than they are keeping customers happy.
This brings us to why there’s such a high churn rate.
The churn rate, also known as the rate of attrition or customer churn, is the rate at which customers stop doing business with an entity. It is most commonly expressed as the percentage of service subscribers who discontinue their subscriptions within a given time period.Investopedia
It’s the same in any industry. Restaurants that give bad service also have a high churn rate. Why? People aren’t going to stick with something that’s not good.
The good news for customers is that the energy ecosystem is evolving. It’s becoming more customer-centric. This new ecosystem uses technology in the form of AI-enabled energy resources at the local level. Smart devices and platforms that can digest the information ensure that customers can be offered reliable, affordable, abundant, clean, and local energy. Access to this new capability via technology is a huge enabler that is required to truly disrupt the current energy industry dominance and poor service track record.
Why the Retail Energy Market Hasn’t Experienced a Disruption
There has been a disconnect amongst 3 parties: Customers, Incumbents, and Technologists. First, customers are waking up and realizing that they have a choice. “The internet is 24×7 – carbon free energy should be too – Google”. Customers are starting to ask for not only abundant, affordable, and reliable, they are also asking for renewable and local.
Second, existing incumbents are being held back by the innovator’s dilemma. This starts with culture. Since jumping head first into this industry a decade ago, I have found that most energy retailers have a disdain for their customers. I have head retailers call their customers “ratepayers”, a derogatory term from the monopoly days when the business model for a utility was to add new features (more costs) to the grid and increase the rate it charged the users of the grid. The existing incumbents lack the consumer-minded and focused culture required to shift the attitude.
Third, Silicon Valley and other technology hubs that could disrupt the industry (as they have done in every other one) do not understand energy. Electricity is the most volatile commodity in the world that is physical and must be delivered. This is not as simple as it seems. I have written about this before
Besides the 3 parties, there is a great transformation hitting the energy markets: Decentralization.
Decentralize to Win
The energy grid was designed to generate power centrally (remember those amazing coal-fired power plants with the huge smokestacks?) and distributed it out to the various nodes (you and me). Today, renewables and microgrids are generating power at the nodes. These nodes many times generate excess power and want to push it back into the grid. This is creating problems at the grid level and at the customer level. It’s leading to a struggle to adapt to the decentralization. Utilities, regulators, and retailers alike are flailing in their attempt to adapt.
The generation of power at the nodes creates an amazing opportunity for a new retailer to help customers generate, store, buy, sell, and use energy, clean energy, all at the local level. Retail 2.0 needs to be established to overcome these obstacles and thrive in the decentralization of the existing energy model.
How to Create a Retail 2.0 Team Capable of a Low Churn Rate
It’s not enough to create a Retail 2.0 team. You need to create one that is capable of a low churn rate. Otherwise, you’re no better than the companies operating within the existing model. While you need a low cost to serve your customers (something that plagues almost all incumbents, a good software platform can provide this) and a low customer acquisition cost (which is really hard to do in a commodity world without a good strategy…see more below), the low churn rate shows that you are (1) customer first, (2) provide real value (affordable, abundant, reliable, clean, and local), and (3) help your customers use less energy (the negawatt!). Your focus should be on: Keeping the customer happy, building the right team, and choosing the right technology.
Additionally, you have to be independent of existing brands. It will ensure you can test the model, focus on new customer acquisition strategies, and ensure that the existing channels aren’t tainting your new model. If there’s conflict from a brand or platform, you could end up failing like the others including the smart-minded ones in Silicon Valley.
Where to Focus a New Retailer
There’s power in numbers, and don’t let anyone tell you differently. A Power Purchase Agreement (PPA) allows you to purchase clean power in bulk. However, that doesn’t mean you just start purchasing at random. Be calculating. Don’t engage in a turf war. Instead, focus on the macro aspects that are out there. There are already large energy consumers dying for a better way and trying to it themselves due to the model being broken.
With this grid edge opportunity, you have to look at where there is the greatest demand. Many cities and counties around the country have 100% clean initiatives. There are also many more committing to be clean by 2035. The opportunities are there — it’s your job to find them and connect to them.
Local energy markets (LEMs) are already being approved. I have written before on LEMs so please read away and get informed so that this narrative makes sense. Vermont paved the way, and other states quickly followed, including Texas, California, Colorado, and many more.
What does this mean? People have choices. If you’re going to be a part of the market, you want to be in one of these states that have established regulatory approval for LEMs.
Pick the Right State
So, within those states, focus on where there’s higher solar penetration since there is abundant renewable generation as well as grid issues Explore the residential PV watt per customer. California, Arizona, New Jersey, Oregon, and others have high penetration levels of solar.
You may also want to follow a few other “friendly market” indicators:
- Smart meter deployment is greater than 90%.
- The state allows third-party rooftop solar.
- There are aggressive RPS/CES requirements.
- There’s no imposition of fixed residential infrastructure charges.
- There are positive policies on environmental community energy projects.
Essentially, you have to do some research to succeed. It’s like any other business, but you have to look for the indicators that they’re already heading in the right direction for clean and reliable energy.
Choosing a Tech Platform Capable of Supporting the Energy Market
There are already a few existing tech platforms albeit early that you can repurpose and utilize to support the energy market. The key is to ensure the platform is robust enough to incorporate AI to process data more effectively as well as handle individual customer needs (which is why existing antiquated platforms cannot keep up).
LO3 Energy and Innowatts (FULL DISCLOSURE: I am an investor in both of them) are both capable of producing desirable aspects of the platform. There are many other rising stars as well across the power value chain.
Stage 1: Anchor Tenant to Enable Hyperlocal Energy Market Model
To build Retail 2.0, you need an anchor tenant. While you may figure out how to game the viral coefficient and reduce your customer acquisition cost to very low like what we have seen in other verticals at launch (i.e. see Lemonade and Robinhood), this is a hope not a strategy. I believe it is much easier to start with a commercial and/or industrial customer that already has a significant power usage and need to reduce. Otherwise, you have nothing to offer. You can have more than one anchor tenant, too. It ensures that you can use the provided asset to offer down to smaller sites.
The Importance of a Large Anchor Tenant
The large anchor tenant is your bread and butter. Without it, you’re dealing with breadcrumbs – and that’s not going to cut it. Your tenant needs to have: sites with renewable energy assets and the willingness to make resources available to smaller sites (through excess production)
Once you have a tenant (or tenants) in place (if you can’t, fail fast, right?), you can start to create an energy community. What’s in it for the anchor tenant? Besides getting rid of their excess production and reduce their costs even further by monetizing it, they will be able to be live on 24×7 renewable and local energy. Plus, they will have access to micro-hedging for their physical power futures.
The Benefits of This Model
The benefits of this hyperlocal energy market model are straightforward:
- You can aggregate loads into substantial sizes for bidding efficiency.
- Costs for service are minimized.
- A site can become a provider of ancillary services to the grid without an aggregator.
- You are moving customers and suppliers to the most efficient end-game: local energy markets (see previous note on this).
Throughout many campuses, industrial parks, and microgrids, this is an arrangement that is already tried and true. It’s all about changing it up for the average energy customer – and ensuring that the energy is clean, local, and affordable.