Unicorns or unprofitable
Almost exactly a year to the day since the Shell bought First Utility, another massive global player has invested in the UK energy retail space. Ovo energy has become a Unicorn (a company valued at a billion) after Mitsubishi Corporation invested £200m in a minority stake of the company. Both these transactions, on the face of it, go against the grain of the current economic thinking in the market.
The Standard Market Thinking
In the last year, ten suppliers went bust and the merger of npower and SSE Retail failed. At the start of 2019 Ofgem implemented a Conservative manifesto promise of a price cap on standard tariffs. They were forced to raise the price cap only months after it was implemented and many industry analysts state that the industry is immensely challenging.
So why invest?
The investment of Shell and Mitsubishi seem at odds with prevailing negative trends in the energy retail market but there may be some deeper logic to these moves. As discussed in the blog about disruption, the energy market is facing challenges arising from changes in technology. Fundamentally, we still need to heat our homes and power our appliances therefore we still need to purchase electricity and gas. However as seen in other industries such as retailing and telecoms, we are now more demanding than ever, and our expectations are different. The role of the old-fashioned retailer is fast becoming irrelevant in a world where we expect to become prosumers or demand more complex services.
This, I believe, is why large companies such as Shell and Mitsubishi are looking at companies such as First Utility and Ovo. Both First Utility and Ovo describe themselves as technology companies and are developing different business models in the energy world as opposed to mono directional sellers of commodity. Developing new ways to engage residential customers to give them new services that service their increasingly smart and electrified world at home and transport means the value they can derive will come from the data and understanding of the customer’s use of energy.
- Consume or produce via solar
- Manage demand to capitalise on grid balancing
- Electric mobility solutions
- Smart home solutions such as security products or insurance
Food for thought
A recent study suggested there is a start-up per week being set up looking at utilising blockchain in the energy industry. One thing is certain, investments are still going into the energy utility space however it is focussing on technology. Given the parallels in other industries, it looks like the age of the energy utility as we know it is over but the dawn of something far cleverer is at hand. The investments by Shell and Mitsubishi are the signs of the heating up of this race to develop retail energy market of the future.