Between bankruptcies and acquisitions, the European supply sector is experiencing unprecedented concentration in 2022. In the face of regulatory uncertainty and market volatility, one could almost sound the death knell for the independent energy suppliers that have multiplied in recent years. The global energy crisis has exposed the vulnerabilities of alternative suppliers and the deficiencies of the retail market.

Are we going to return to a model where a few horizontally integrated mega-corporations compete for the market? Are we heading towards something else? What direction will the retail market take in the coming years? This is what this article aims to explore.

 

 Return to the oligopoly?

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Before 2015, the retail market in France was dominated by historical players (EDF, Engie), a few foreign utilities (ENI, E.ON, etc.), and, notably, Direct Energie (which was later acquired by Total in 2018). The first alternative suppliers, whom we will call suppliers 1.0, often sought to develop or purchase production plants to ensure a 'non-market' supply, which was considered more secure.

Current independent suppliers, referred to as suppliers 2.0, have built their businesses on a 'start-up' development model. They are well-versed in digital acquisition and user experience. Their offerings are relatively undifferentiated, and they primarily compete on price (discounts compared to regulated tariffs) with innovations in the structure of their offers (green offers based on guarantees of origin, special offers linked to smart meters, etc.).

 

They operate little to no production capacity and mainly source their electricity from the market (in addition to ARENH and, in a few specific cases, renewable PPAs). However, despite their exposure to electricity markets, they generally have limited skills in trading and portfolio management.

 

The extreme volatility of markets in 2021 and 2022 has severely impacted many 2.0 suppliers in Europe, particularly the less capitalized ones. This situation may suggest a resurgence of historical players, who have a broad portfolio of assets that allows them to 'smooth' their risks and significant lines of credit. With these advantages, they could acquire their struggling competitors and regain market shares lost in recent years at a lower cost.

 

However, it seems unlikely that this trend will continue in the long term. The electricity system is undergoing an energy transition and facing unprecedented challenges. Some of the production assets of traditional players are set to disappear, while others may see their revenues erode with the transformation of the electricity system. When considering the new assets (renewables, storage, etc.), the sector is fragmented, and it is unlikely that these new capacities will concentrate in the hands of a few historical players due to their decentralization.

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Demand will also undergo profound changes in the coming years driven by three trends:

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1. Electrification of heat: The phase-out of natural gas and oil heating (accelerated by the recent crisis) is leading to the emergence of new volumes of temperature-sensitive consumption in winter and sometimes in summer (reversible heat pumps). These volumes can also be modulated in well-insulated homes.

2. Electromobility: The new usage of charging electric vehicles (EVs) is 'flexible.' It has the ability to respond to market prices and cannot be predicted as a fixed consumption.

3. Self-consumption and individual batteries: Solar self-consumption completely changes the consumption profile and makes it more erratic. If solar production is combined with a battery (stationary or EV in Vehicle-to-Home mode), the notion of a profile disappears entirely. Without control and monitoring from the supplier, the volumes of electricity drawn from the grid become almost unpredictable.

Forecasting and managing a portfolio of consumers with an EV, solar panels, and a heat pump is no longer comparable to current supply activities. In this future environment, suppliers 1.0 have little to no advantages over challengers.

 

​ What will the supplier 3.0 look like?

 

Owning or operating power plants as an energy supplier is interesting, as it allows access to hedging instruments that do not exist on the markets (exotic options) or are illiquid (long maturity, profiles, etc.). Vertical integration allows for better risk coverage of a supply portfolio. However, the development of decentralized production and flexibility sources is transforming the notion of vertical integration.

 

If your clients own production or flexibility assets and you operate them on their behalf, you can achieve risk management gains similar to those of traditional vertical integration. By remotely controlling the charge and discharge of a set of batteries, you will have an asset capable of smoothing the sub-daily shape of your portfolio based on spot prices or reducing your imbalances. Therefore, we can expect that suppliers able to value this type of capacity will have an advantage over those who do not.

 

However, managing decentralized assets is very different from managing traditional production assets. If you find it challenging to manage the load curves reported by smart meters (like Linky), you are not yet out of the woods: if it becomes vital for suppliers to monitor and control flexible usages, they will need to acquire data (consumption, but also production and state of charge for batteries) from these various usages, which multiplies the volume of required data.

 

Connecting to and robustly controlling each asset is not an easy task either. Moreover, one must be able to utilize these data exchanges in their portfolio management operations in an optimized and automated manner. Supplier 3.0 will therefore need to have a technology infrastructure incomparably more complex than that of its predecessors.

With decentralized assets, the consumption drawn from the electrical grid decreases. This is not a problem in itself, but forecasting this residual consumption will be, and it will pose a significant risk for energy suppliers. It indeed becomes difficult to reason in terms of aggregated profiles as is currently done. Imagine that your clients are solar self-consumers equipped with batteries: they will only consume when the solar energy stored in their battery is depleted. The supplier 3.0 will, of course, control the battery so that it discharges solar energy during hours when market prices are highest. However, this optimization has its limits.

In winter, when electricity use is high and solar production is low, consumers will draw significantly more from the grid, and the batteries will quickly run dry. There is thus a risk of very sharp price spikes that correlate well with the moments when consumers draw from the grid. Setting a price in advance for a supply portfolio will become increasingly risky, and this risk can only be smoothed over a limited number of MWh.

 

This leads to a different approach to hedging. Purchasing forward energy blocks will be an ineffective protection because the statistical distribution of drawn consumption will become increasingly volatile. To secure their margins, the supplier must be able to simulate these risks and adopt an insurance-like approach, collecting risk premiums and transferring some of these risks to other actors through more complex instruments than existing forwards/futures. The final price offered to the consumer will consist more of risk premiums than of energy.

 

The accelerated diffusion of new equipment and the increasing appetite of industries/manufacturers for recurring revenues can modify the very nature of electricity supply. Indeed, no one knows the control and operation parameters of an electric vehicle (EV) battery better than the manufacturer of that vehicle (especially if one wants to continue benefiting from the battery’s warranty). They also have direct access to the customer at the moment they question the impact of the EV on their electricity consumption (i.e., at the time of purchasing the EV). Therefore, the manufacturer has an interest in supplying the electricity used by the EV and optimizing its use themselves. They could even take the process further and sell to end consumers not kWh but kilometers (each kilometer could include the cost of electricity as well as the leasing cost of the vehicle, insurance, etc.).

 

The same reasoning can be applied to heat pump sellers, who would no longer sell equipment but heat, with occupants of a dwelling paying X euros per month for a temperature of X°C.

These companies are no longer energy suppliers because they no longer directly sell energy but the use of that energy, packaged with other services. They are generally not interested in supplying the “residual” energy that is not used in their preferred equipment.

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Suppliers 3.0: Need for a New Operating System

 

Few suppliers 1.0 or 2.0 have the capacity to develop internally the technological and financial infrastructure necessary to transform into suppliers 3.0. Only a handful of suppliers in Europe seem to have the potential to transform and take advantage of market upheavals in the coming years. Supplier 2.0s are generally limited by a lack of funds (their capital often being absorbed by customer acquisition) and skills (qualified profiles in electricity, weather, big data, and machine learning are costly and difficult to retain). Supplier 1.0s are limited by their inertia, due to their size and the existence of historical systems and investments that represent fixed costs.

 

It also seems unlikely that every new entrant will be able to duplicate this complex infrastructure. After all, and this is corroborated by several unfortunate experiences, becoming a supplier 2.0 is already not feasible for everyone. When adding the technological complexities necessary for the development of supplier 3.0 activities, this becomes an almost insurmountable gap. How can we reconcile this need for significant technological infrastructure with the development of sometimes niche, high-value offerings for consumers?

 

How can we also enable the construction of offers such as Heat-as-a-Service, Vehicle-as-a-Service, Battery-as-a-Service, and other offerings connected to specific usage or equipment?

This is where we want to play a role. You may know that Augmented Energy  is responsible for balance. You may also know that [company name] offers applications and services to suppliers, producers, and storage operators. Does Augmented Energy spread itself thin across these multiple activities? No, each of the solutions we are currently developing and marketing constitutes a building block in the creation of a new OS for the emergence of suppliers 3.0.

 

Augmented Energy is not a supplier but a facilitator for businesses wishing to build a 3.0 supply activity. Our goal is to limit the upfront investment and the time to launch such projects. We are developing an ecosystem where suppliers can integrate all types of decentralized assets, value and optimize their flexibility, and develop truly differentiating offers for their customers, while securing their margin.

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We are thus working towards the birth of a holistic solution that enables the creation of "as-a-Service" offers, which will truly change the landscape of electricity supply in Europe and contribute to accelerating the electrification of the entire energy system.