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CONSUMER BUSINESS MODELS

Innovative energy business models appeal to specific consumer groups but may exacerbate existing inequalities for the disengaged

Innovative energy business models, such as peer-to-peer trading or energy as a service, are attractive to different groups of customers. Disengaged consumers with low trust in the energy market could face further disadvantages, while already active consumers could reap even greater benefits, which risks widening existing socio-economic inequalities.

Messages for Policy

  • New retail energy contracts are emerging that are more complex and beyond what retail market regulation was designed to accommodate

  • Not all consumers will adopt these business models. Willing adopters all tend to be younger, but some want new models because they are disengaged, they mistrust energy companies and worry over energy bills; others are highly trusting, higher-income groups that are enthusiastic for new technology

  • Environmental concerns are at best secondary motivators in consumer behaviour compared to the desire to save money, get the best deal, or be independent of large energy suppliers

  • Without intervention, already affluent, educated and engaged consumers will capture the benefits of low carbon business model innovation and exacerbate existing socio-economic inequalities.

BASED ON S. Hall et al. Nature Energy https://doi.org/10.1038/s41560-021-00781-1 (2021).

The policy problem

Growing opportunities for self-generation, smart metering and electrification of heat and transport mean that utilities are offering consumers new tariffs that go beyond traditional pay-per-kilowatt models. These tariffs include some element of utility control over energy use (such as smart thermostats), more complex pricing regimes (such as time-of-use tariffs), or alterations to the fabric of buildings (such as installing insulation products). The transition to net-zero energy systems is likely to accelerate these trends, enrolling domestic consumers in novel and potentially more complex relationships with their utility providers. There is little understanding of how much consumer demand there is in the wider energy market for these innovative new offers and what the aggregate social outcomes might be. As such, there is a risk that new business models could exacerbate the problems of the existing energy retail market, which is already complex and failing to protect consumers.

The findings

We identified four new energy business models that could emerge in UK utilities: A ‘new electrifier’, helping consumers to switch to electric heat and mobility; an ‘energy service company’, which uses long term contracts to finance smart retrofits; a peer to peer model where consumers generate and trade energy with each other; and a ‘third party control’ model where consumers allow a third party to meet their energy and other utility needs, taking decisions on their behalf. We presented these new models to existing consumers alongside a fifth ‘control’ model, ‘same but smart’ (a standard electricity tariff with a smart meter). We found that innovative energy contracts appeal differently to four specific consumer segments (Fig. 1), each defined by a combination of characteristics relating to demographics, income, education, trust and willingness to innovate. Despite a willingness to change, individual circumstances (such as not owning their own home) will lock some consumers out of new offers. Other consumers are satisfied with the status quo or have trust issues with the energy market and are unlikely to engage with innovative offers. Retail energy market regulation is currently insufficient to acknowledge this complexity and the risk of poor social outcomes. These relations were observed in the UK retail energy market but could apply to other nations with liberalized energy systems.

Fig. 1: The four consumer segments and their characteristics.
figure1

Adapted from Hall, S. et al. Nat. Energy https://doi.org/10.1038/s41560-021-00781-1 (2021); Springer Nature Ltd.

The study

This study recruited 38 industry, academic and government stakeholders in the UK energy system in June 2016. We used a business model collaboration process to identify four new utility business models that may become widely available to retail energy consumers. We then undertook a representative survey between 30 March and 13 April 2017 of 2,024 domestic consumers in the UK with some responsibility for choosing their energy contract. We presented the consumer-facing attributes of the business models in a paired comparison exercise to identify preference factors alongside socio-economic and attitudinal data collection. We performed a cluster analysis and identified segment characteristics. These findings should be read as how consumers state they would participate in a future energy market with new options, not how the current retail energy market is segmented.

References

Further Reading

  1. Hall, S., Mazur, C., Hardy, J., Workman, M. & Powell, M. Prioritising business model innovation: what needs to change in the United Kingdom energy system to grow low carbon entrepreneurship. Energy Res. Soc. Sci. 60, 101317 (2020). This work explores how the same business model archetypes used in the current study invite new regulation and policy across the energy system.

  2. Poudineh, R. Liberalised Retail Electricity Markets: What We Have Learned After Two Decades of Experience? (Oxford Institute for Energy Studies, 2019); https://ora.ox.ac.uk/objects/uuid:7f3578a6-27b8-47d0-b2f2-c3aeff2b9053This study evaluates the stresses placed on retail energy markets by business model innovation and how these stresses invite a systemic rethink of retail energy market regulation as opposed to more incremental intervention.

  3. Ambrosio-Albala, P. et al. From rational to relational: how energy poor households engage with the British retail energy market. Energy Res. Soc. Sci. 70, 101765 (2020). This study shows how moving from an individual rationality to a social relations perspective can uncover the ways in which social inequalities can be exacerbated by retail energy markets for domestic consumers.

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Acknowledgements

The original study was partly funded by the Engineering and Physical Sciences Research Council (grant EP/N029488/1), the Economic and Social Research Council (grant ES/M500562/1) and the UK Research Councils (grants EPSRC EP/L024756/1 and NERC NE/G007748/1) as part of the UK Energy Research Centre (UKERC).

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Correspondence to Stephen Hall.

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Hall, S., Anable, J., Hardy, J. et al. Innovative energy business models appeal to specific consumer groups but may exacerbate existing inequalities for the disengaged. Nat Energy 6, 337–338 (2021). https://doi.org/10.1038/s41560-021-00821-w

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