Widening The Lens - Deloitte

Widening the lensBig-picture thinking on disruptive innovation in theretail power sector

Deloitte’s Global Power and Utilities team helps clients across power generation, transmission,and distribution and water companies anticipate and respond to complex market challenges andtheir resulting opportunities by offering an unparalleled range of services, innovation, and criticalthinking. For more information, contact the authors, one of our Deloitte partners across the globeidentified at the end of this report, or read more about our services on Deloitte.com.

Big-picture thinking on disruptive innovation in the retail power sectorContentsExecutive summary 2Introduction 3Innovate or die 4Integrate to outperform 12Conclusion 16Endnotes 171

Widening the lensExecutive summaryDISRUPTION IN THE retail power sector isn’tIn order to survive amid a multitude of newanything new, but its pace and consequencesmarket entrants and new business models from ex-appear to be increasing. Nonetheless, manyisting competitors, retail power companies shouldretail power providers are not responding to the ex-consider broadening their innovation programs. Toistential threats with the urgency one might expect.that end, this report outlines three levels of innova-While the call to innovate faster and more effectivelytion ambition and defines 10 key types of innovation.is getting louder by the minute, Deloitte’s experi-It also details common blind spots in the retailence with retail power providers around the worldpower sector as identified by our specialists. Fur-suggests that the vast majority of innovation is stillthermore, it explains how retail power companiesfocused on core operations. In other words, it’scan avoid these blind spots or, alternatively, seizegenerally about making established products andthe opportunities they present, by taking a moreservices better, rather than expanding from existingcomprehensive approach to innovation. By high-business into “new-to-the-company” business or in-lighting inspiring examples from around the globe,venting brand-new products or services for marketsthis report aims to show how some companies arethat don’t exist yet. This narrow approach to inno-disrupting the retail power sector by innovatingvation can cause retail power companies to overlookacross the business. This generally implies goingboth risks and opportunities—essentially creatingbeyond core optimization to create transforma-“blind spots” in terms of how they may be disrupted,tional breakthroughs by integrating several types ofor, conversely, in terms of how they may grow byinnovation together.disrupting traditional ways of doing business.2

Big-picture thinking on disruptive innovation in the retail power sectorIntroductionSOME WOULD SAY that working in the retailmodels. As a result, a whole new breed of companypower sector today is like getting caught inhas emerged that more closely resembles an onlinea wind storm. No matter which directionconsumer retailer rather than a traditional retailyou turn, something is flying at you. While regula-power provider.tory constructs vary, utilities around the world areThough disruption seems to be widely perceivedgenerally being disrupted by government policy,as the biggest issue of the day, innovation may carryeconomics, changing customer habits and expec-even more weight. Innovation underpins disruption,tations, and of course, by technology. The latter inand disruption provides opportunities for growth.particular is upending business as usual by loweringWithout the capabilities to re-envision every aspectcompetitive barriers to entry. Especially withinof how business is done and to act upon those in-the wider expanses of deregulated markets, manysights, companies can neither respond to disruptionnew entrants are using digitization and disruptiveeffectively nor create new opportunities by dis-technologies to challenge established businessrupting the existing state of affairs.3

Widening the lensInnovate or dieWHILE THE IMPERATIVE to innovate is asor to improve the customer experience—but theyold as business itself, the term has ambig-have yet to make innovation a strategic priorityuous connotations. “Innovate” is a fuzzyand to act upon it in a consistent or integrated way.word that is often long on enthusiasm but short onWhile some startups and a handful of progressivesubstance. To make innovation more meaningfulincumbents are shaking up the sector with ground-for business, Doblin, a Deloitte business, offers thebreaking ideas, many traditional retail powerfollowing definition: Innovation is the creation of acompanies generally have some way to go in em-1new, viable business offering. Simple enough, butbracing innovation as a means of growing revenuesmore to the point:and transforming their businesses.Innovation (as separate from invention) isInnovation ambitionthe creation of a new (to our market or theDoblin’s Innovation Ambition Matrix (figure 1)world), viable (creating value for both ourcustomers and ourselves) business offeringprovides a framework for understanding where a(ideally going beyond products to platforms,company stands in terms of its commitment to in-business models, and stakeholder experi-novation. Within the matrix, innovation can occupyences).one of three “ambition levels,” which define itspurpose or result: Core innovations optimize existing products forGranted, it’s a lot easier to say innovation thanexisting customersto do it, no matter how one defines it. But, in theretail power sector, where disruption is well under Adjacent or incremental innovations ex-way, some companies may be running out of timepand existing business into new-to-the-companyto develop the capabilities to do innovation well.businessBased on interviews with several of our power and Transformational or new innovations areutilities specialists across five different geographies,breakthroughs and inventions for markets thattraditional retail power companies have generallydon’t yet exist.begun to innovate in select areas—such as usingDoblin research suggests that the most suc-digital technologies to reduce administrative costscessful innovators manage their innovation effortsDoblin research suggests thatthe most successful innovatorsmanage their innovation effortsand investments as a portfolio ofactivities that is balanced acrossthe three ambition levels.4and investments as a portfolio ofactivities that is balanced acrossthe three ambition levels.2 Untilrecently, this research found thatcompanieswithwell-balancedin-novation portfolios spent an averageof 70 percent of their investmentson innovation at the Core level, 20percent at the Adjacent level, and 10percent at the Transformational level.3

Big-picture thinking on disruptive innovation in the retail power sectorFIGURE 1Innovation ambition levelsTRANSFORMATIONALADJACENTADJACENTExpanding from existingbusiness into “new-to-thecompany” businessCOREEXISTINGWHERE TO PLAY (MARKETS CUSTOMERS)NEWDeveloping breakthroughsand inventing things for marketsthat don’t yet existOptimizing existing productsfor existing customersEXISTINGINCREMENTALNEWHOW TO WIN (PRODUCTS ASSETS)Source: Geoff Tuff and Bansi Nagji, “Managing your innovation portfolio,” Harvard Business Review, May 8, ion-portfolio.Deloitte Insights deloitte.com/insightsIn their 2018 book Detonate: Why and Howhas likely shifted to 50 percent Core, 30 percentCorporations Must Blow Up Best Practices (andAdjacent, and 20 percent Transformational.bring a beginner’s mind) to Survive, authors GeoffDespite the call to think differently about in-Tuff, a senior leader in Deloitte Consulting LLP’snovation, companies generally are not respondingInnovation and Applied Design practices, andin kind to the existential threats they are facing.Steven Goldbach, chief strategy officer for DeloitteTypically, Deloitte’s experience with retail powerLLP, contend this “golden ratio” has shifted evenproviders suggests that the vast majority of innova-further away from the Core level (i.e., optimizingtion is still focused on the Core. In other words, it’sexisting products for existing customers).4 In aabout making existing products and services betterworld where disruption can upend entire sectors,for existing customers.the authors maintain the ideal investment ratioCore ambitions can generally be achievedby focusing on one or two types of innovation.5

Widening the lensThe blind sideIn contrast, achieving Adjacent and Transformational ambitions typically requires companiesBased on a focus group comprising of 40 Deloitteto focus on several types of innovation at once. Atpresent, most retail power companies tend to focuspower and utilities specialists from around the world,on Core ambitions, which means they don’t typi-we identified five “blind spots”: rapid development ofcally weave in all of the types of innovation that theybattery storage, ecosystem convergence, new marketshould. This focused approach can cause them toentrants, regulatory environment, and cyberthreats.overlook both risks and opportunities.INNOVATION IN ACTION: AGGREGATION OF RESIDENTIAL DISTRIBUTED ENERGY RESOURCESNew business models are emerging that aggregate customer-sited generation (i.e., rooftop solarpanels) and energy storage (i.e., electric vehicle batteries or residential systems) to provide a rangeof services to utilities, grid operators, and electricity customers. Powered by artificial intelligence,blockchain, and predictive analytics, aggregation can offer greater flexibility for utilities and greatervalue for residential and business customers. OVO in the United Kingdom offers an example ofbusiness model innovation based on aggregation.Through collaboration with Nissan, OVO is tying together its customer proposition for electricvehicles, home storage, and energy supply. At present, the company is trialing an offering forresidential consumers with solar panels that combine VNet, OVO’s intelligent energy technology, withthe capabilities of the innovative Nissan XStorage Home system.5 Through the technology, intelligentalgorithms manage the network of batteries so that they store energy when demand on the grid islow and more likely greener, and then release it when needed to help balance the grid.The company has also announced its intention to launch a vehicle-to-grid (V2G) offering for privatecustomers buying the new Nissan LEAF, which could allow them to sell energy back to the gridat peak times.6 Even without the V2G component, OVO provides electric vehicle owners with aninnovative home energy plan that combines fixed electricity prices for two years; the ability tocharge one’s vehicle with 100 percent renewable energy; free membership in a large, public chargingnetwork; and an off-peak charging tariff that makes electric vehicle charging even more economical.7By tapping into several trends at once, these offerings span six types of innovation. Or, put anotherway, they involve implementing new configuration models and enhancing the experience forstakeholders as much as they do creating new offerings.For further explanation of the ten types of innovation, refer to figures 7 and 8 on pages 12 and 13.FIGURE 2Innovation types used by OVO Energy6 essProjectProductperformance tEXPERIENCESource: OVO Energy website, https://www.ovoenergy.com/, accessed December 13, 2018.Deloitte Insights deloitte.com/insights6