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Blog January 13, 2016

New models needed in the energy sector

In recent years, we have heard and read about major changes in various industries and their revenue models. More and more industries and companies have been forced to consider their future strategies seriously from a new perspective, partly due to digitalization and its sub-phenomena, and partly due to other market forces. A few traditional industries, including the energy sector, have so far been spared the worst turmoil, but are now also beginning to face mounting pressure.

Finland is a small country with a large number of enterprises providing the same energy services – it has almost one hundred electricity vendors and distribution network operators. The sector is heavily regulated and has a rising number of obligations. Customers are becoming more demanding and self-service channels are becoming more diverse. As a result, competition is intensifying and margins are, inevitably, being squeezed.

In the midst of change

Over the next five years, the sector will see a series of substantial changes: the reforms required by the Finnish Electricity Market Act; the Supplier Centric Model; NordREG – the Nordic retail market; NBS – Nordic Balance Settlement; the reform of information exchange; Datahub – a centralized measurement data warehouse for information exchange; energy efficiency requirements and demand response; the huge investments of grid companies in a weather-proof grid; an increase in micro-generation, electric cars, and self-services; and business process outsourcing (e.g. customer service, invoicing, accounts payable and receivable, financial processes). Current corporate structures mean that implementing such changes is highly challenging or even impossible for many operators in financial terms.

How can they survive this transformation intact? Almost all companies have their own customized, basic service systems and integrations. Unfortunately, the latest system projects are largely being implemented on the basis of a similar model. Systems like this cannot form the basis of competitive advantage, since they only guarantee statutory basic services such as measurement, invoicing, customer reporting, and financial administration.

The era of customization is over

To gain a competitive edge, energy sector operators need to come up with interesting products and services, and be able to supply them cost-effectively. To this end, they need to migrate to IT systems that support their business processes, in which integrations and the related service processes are standardized and customization plays a minor role. This would facilitate the procurement process and make projects more manageable, while enabling the acquisition of service processes when it is accepted that information systems can be controlled by service providers. This new way of thinking would also enable smaller operators to implement future changes at a reasonable cost.

Cost-effective operations in line with this way of thinking can only be set up through collaboration between power companies and suppliers. Companies need to ensure that they have sufficient in-house expertise for acquiring service processes. When choosing a supplier, they should check that potential suppliers have enough industry knowledge and “speak the same language” as the customer. It is also a good idea to ask all suppliers to share their views on changes in the sector and what they can do to speed up such changes. Power companies should also compare the supplier’s scenario with their own, in order to ensure that they have the same vision of priority areas in the sector’s long-term development.

Whether we like it or not, change has arrived in the energy sector too. The decisions made by organizations in the coming years will show how well they manage in adapting their businesses to the new environment.

Tero Saksman

The author is Managing Director of Enfo Zender Oy. He has extensive knowledge of the energy sector and strongly believes that those who reform their traditional models will be most successful. He is also an advocate of digital solutions.