Utilities must join smart energy revolution or be left behind
Utilities are facing a two-pronged attack on their business models, both from companies such as Google and Apple, and also from emerging technology energy firms, according to Thilo Schneider of Pinsent Masons. He said while utilities have been slow to respond to changes within their industry, making clever acquisitions could help them compete, as their large customer base and established supply chain and delivery infrastructure could make them more attractive as investors than their venture capital and private equity rivals. Such joint ventures or partnerships would benefit utilities by giving them access to the technological innovations developed by start-ups.

Utilities find themselves under increasing pressure from technology pioneers such as Google, Amazon, Apple and Tesla, who are introducing their technology into the home and increasingly offering smart energy solutions. Other emerging technology companies are also coming up with innovative and disruptive technologies in the smart energy sector in competition to what utilities are offering.

This is part of our series analysing the challenges and opportunities ahead for companies embracing smart energy technologies. For more, sign up to receive an exclusive Pinsent Masons research paper on smart energy technology, supply, storage and investment.

This may not quite be the utilities' 'iPhone moment', but presents a serious and fundamental challenge to their business as the success of the pioneering Apple smartphone was to the mobile telecoms business 10 years ago.

Utilities are responding by trying to diversify away from their traditional sources of revenue of generating and distributing power towards delivering smart energy solutions and energy services. However, utilities have traditionally been at a disadvantage compared to technology companies when it comes to innovating.

Utilities tend to be large multinationals that can have very complex and sometimes slow decision-making processes. This stands in contrast to technology companies that have in the past moved quickly to develop solutions where a gap in the market arises.

You just have to look at the way that Google came into the smart home market with Nest. It did this very quickly, very efficiently, before any of the utilities did, taking advantage of the fact that it understood how it could make the most of data and give consumers greater control of their energy usage.

However, there are clear opportunities for utilities to develop new technologies in partnership with smaller, more flexible technology companies through joint ventures, minority stake investments and even full acquisitions.

However, some of utility companies are not set up to make investments or acquisitions in the technology space in the way that the large tech companies are. In addition, they face competition from venture capital and private equity houses who are bidding for the same emerging tech businesses. The challenge for utilities is therefore to come up with efficient ways of identifying technologies and executing on the acquisition of, or investment in, technology companies so they can be competitive in the market.

As a result, we see utility companies setting up their own venture capital divisions to efficiently assess the viability of tech start-ups as a potential investment or acquisition target.

Often, venture capital divisions will make initial small stake investments into small technology start-ups and use that investment to assess the technology that the start-up has developed and see how it can fit in into its overall corporate technology strategy. From there, it can decide whether to increase its shareholding to a majority stake or make an outright acquisition, or indeed exit the investment at a later stage and realise the value that it has generated through it.

The challenge for corporates is to devise a clear strategy of how they want to use their venture capital divisions. They need to work out whether they want to use it as a stage to make investments with a view to making profits, or to use it as a platform to test technology and to later build up the stake and make a full-on acquisition.

Beyond making investments or acquisitions, partnering with technology companies can benefit utilities by helping them to better understand how to use data in a way that consumers can engage with or in a way that can help them develop new products.

There are advantages too for the tech community. They have new ideas but as small companies they lack a way to reach a significant number of people quickly. This is exactly what utilities have – large existing client bases, supply chains and delivery infrastructure that can help a good idea get fast, wide-ranging implementation. This can make a utility a more attractive investor proposition than a VC or private equity house.

Through the joint venture or partnership with the utility company, the tech start-up can test its equipment or ideas in a live environment and take advantage of the utility company's existing connections and infrastructure.

The way that small, flexible businesses like start-ups work is very different to that of long-established, more traditional utilities. There will be culture clashes, but that is just a risk that utilities will have to take to get the benefit of start-ups' ideas and innovation.

The fact that technology moves so quickly is also a risk. Not all technologies get through Gartner's 'trough of disillusionment', so utilities are taking a risk when investing in an emerging company and an innovative product.

However, that is a normal business risk which is not unique to the smart energy sector. When companies are looking at investing in new technologies they are always taking the risk that the technology will not be adopted in the market, that it will not be successful, that they will not beat the competition, and that the technology will not be useable by people going forward.

Finally, the pioneers of the technology companies are looking at the home in a holistic way. They are not looking at smart energy in isolation – they are looking at security and technology in the kitchen amongst other examples, and their technology will be aimed at bringing all these elements together.

The question is how utilities respond to this challenge. It will be interesting to see whether the energy companies respond stick to smart energy solutions or branch out to other technologies relevant to the home.

Thilo Schneider is an expert in corporate transactions in the technology sector at Pinsent Masons, the law firm behind Out-Law.com.