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The old utility business model is coming to an end. Here's how Europe can build a new one.

In case you missed it, the European Union just made another dramatic commitment to limiting its carbon emissions and combating climate change. EU leaders agreed last month to a new 40-27-27 standard — a 40 percent cut in carbon pollution, a 27 percent market share for renewables, and a 27 percent increase in energy efficiency, all due no later than the year 2030.

Utilities will need to deploy more renewables and sell less energy to comply, which could drive energy prices up across the continent. Contrast that situation with a new PwC report on energy prices in the U.K., which highlighted just how much utilities need to decrease consumer energy bills in order to meet goals for affordability.

Together, these stories perfectly capture the double bind that many European utilities are in. Regulators are asking them to sell what amounts to a more expensive version of their product (renewable energy, rather than energy from fossil fuels) — and, simultaneously, less of that product. Doing either would naturally push prices higher. But in one of the most expensive energy markets on earth, that's not really an option. So European utilities are feeling pressure to cut deeper into their margins, which are already worn thin by greater competition in the marketplace. Add to that the rise of distributed generation — and, down the line, cheap energy storage — and the problems magnify. Within a decade, dissatisfied consumers may be able to sever their relationship with utilities entirely. The U.K. just saw its largest rooftop solar deployment yet, and similar trends are playing out all around the world. All of this puts European utilities in a tough spot. To thrive in a deregulating market that's about to experience a solar renaissance, they need to build new, rock-solid relationships with their customers. And to stay profitable in an era when renewables and Russian turmoil are driving energy prices up, European utilities need a strategy to draw more value out of every one of those relationships — without selling customers more energy. It can be done. But it means pivoting away from commodity provision, and toward a business model that's centered squarely on the energy services that consumers want.

The key to winning customers' hearts

When it comes to customer engagement, any strategy should begin by acknowledging that the average European consumer interacts with their utility for just nine minutes a year. That's an incredibly small window of opportunity. And as companies like Amazon and Netflix have proven, the key to breaking through isn't sending wave after wave of broad communications to consumers and hoping something sticks. It's about delivering a message that's perfectly, personally targeted — the right thing for the right consumer, sent through the right channel at just the right time. A British utility customer with high winter energy usage, low income, and an expressed interest in replacing their boiler, for example, shouldn't be on the receiving end of a refrigerator rebate marketing campaign. They should be getting a highly personalized offer from their utility for a new, more efficient boiler — something that's really worth some of those nine minutes. With the arrival of smart grid technology and sophisticated data analytics, that level of customer engagement is finally within reach. And over time, it can build trust. Utilities that reposition themselves as energy advisers — companies that help consumers save energy and money — see a sustained lift in customer sentiment.

metrics chart 1.1 Building trust can cut customer churn and deliver real, lasting business value. Moreover, a utility's reputation for delivering great experiences can make a it a magnet for high-value customers, who are receptive to a broader set of energy services.

 

The real, quantifiable business case for delivering world-class customer experiences

By boosting customer acquisition and building brand loyalty, utilities can ward off the threat of a so-called death spiral, where consumers flock to distributed generation and energy storage, and leave utilities with huge stranded costs and no way to make money. But creating great customer experiences is about more than risk management. It’s also about strengthening the bottom line. In a new study, our analysts systematically identified the full cost savings and revenue potential of customer engagement for European utilities. (We also did the analysis for American utilities.) Our key finding was this: every household that European retailers engage can create an extra €15-€40 in incremental, annually recurring revenue. Put another way, that’s equivalent to a 20 to 55 percent increase in the value of the customer relationship.

stacked bar chart These data reflect our experience as the customer engagement platform of choice for more than 95 utilities worldwide. Alongside our industry partners, we've found that building loyalty, increasing low-cost digital engagement, improving marketing programs, and optimizing DSM can dramatically lower utilities' cost to serve and increase their cross-sell. They feel the impact in a stronger bottom line, and in a business model that can evolve with disruptive technologies like solar and storage.

value table 1.1

Here's the upshot

European utilities are under tremendous pressure to deliver more value to customers while simultaneously reducing cost to serve. The drivers behind that pressure — market deregulation, advances in technology, and new energy standards — are set to increase. Utilities that double down on the old way of doing business will keep feeling the squeeze, until something gives way. There’s a better way forward. By pivoting around the customer, European utilities can steadily evolve their business — delivering less energy and more services, and redefining themselves as trusted energy advisers. That’s what consumers want. It's what regulators need. And for utilities, it’s a surefire path to stronger returns in the years ahead.

 

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