Blog Posts Business Management

Energy and Utilities

Blog: Capgemini CTO Blog

Now, with the impact of the global COVID-19 pandemic to contend with as well, this blog looks at how Energy and Utilities (E&U) companies can ensure cost resilience going forward.

The E&U landscape prior to COVID-19

First, a quick recap on the changes over the past two decades. In electricity generation, the increase in renewable energy production and exit from certain technologies in some countries (e.g. nuclear power) have led to changes in what’s known as the merit order, by which available sources of energy, especially electricity, are ranked based on the market price. Capgemini’s World Energy Markets Observatory (WEMO) 2019 reported that while renewable remained the fastest-growing worldwide energy source in 2018 at 14.5%,  investment in clean energy fell at the start of 2019.

WEMO noted that fossil fuel remained dominant, with oil, gas, and coal accounting for three quarters of the growth in energy demand in 2019.

What’s interesting here is that in recent years favorable coal prices have made many highly developed gas power plants unprofitable, leading to massive depreciation on investments and low planning security.

Energy grids are under regulatory supervision and must meet continuously increasing efficiency requirements. This has led to increased cost awareness, with the growing rollout of new technologies such as artificial intelligence (AI), digital twin and robotic process automation (RPA) being proof of this.

In energy sales, already low margins either stagnate or decrease in highly competitive market areas, such as commodity B2B for power and gas, as well as solutions for B2C and B2B. At the same time, the pressure on the strong long-standing customer base is constantly high due to new market players. Maintaining a healthy customer portfolio and highly efficient churn management on the one hand, and massive reductions in unit costs for standard order-to-cash (O2C) processes on the other, has been a balancing act for years. For example,  we see several companies targeting cost-to-serve (CTS) per end customer of less than €10 in the planning horizon.

These trends have led to many organizations pursuing massive reductions in their cost bases through reorganizing, reducing fixed costs and realizing process efficiency. Classic levers now seem to have been exhausted in certain instances.

The impact of COVID-19 for energy suppliers

There has been a decrease in energy demand in some markets (but not all) during the corona virus lockdown, along with a sudden change in consumption patterns, both of which will have a lasting effect.

Energy trading prices have slumped massively, far beyond all planning covered in risk scenarios. Suppliers who mainly adopt a long-term trading position to manage their portfolios have limited potential to sell these quantities to customers profitably. In addition, relevant quantity quotas have had to be sold with massive losses on the spot market.

Large quantities of B2B purchases, especially from manufacturing and core industries, were eliminated immediately when the lockdown began. Compared to the same period in the previous year, we have seen many utilities in this segment (and depending on the individual B2B portfolio) face declines of up to 35%, with dramatic consequences:

On the other hand, the lockdown has not had such a big impact on revenue streams in the B2C segment. Here, we have seen a slight rise in energy demand, alongside heightened competition for customers. Targeted sales push campaigns by enthusiastic energy suppliers and more knowledgeable customers have added to the pressure on margin positions in the profitable segment of long-term customers. Indeed, many markets have experienced steadily rising churn rates, which are being countered by increased efforts to capture after-sales revenue and a focus on retention.

As with B2B, the B2C segment also focuses on receivables management. Individual suppliers are already experiencing a deterioration in leading KPIs (e.g. many are facing outstanding amounts> 30 days, etc.) and it can be assumed that this will intensify significantly throughout 2020 and beyond.

Tackling the post-lockdown challenges

Overall, energy suppliers have not been as badly hit by the global crisis as other industries. However, several COVID-related challenges remain for the foreseeable (short-term) future and non-COVID related challenges in the medium- to long-term 3-year planning horizon:

Short-term challenges

Medium-term challenges

Long-term challenges

A new approach to cost

What’s clear to us is that classic cost-out programs or restructuring can only go so far against the background of fast and continuous cost base optimization. So, how should companies in this sector reshape their cost resilience strategy? Based on our experience of implementing numerous cost-reduction programs for energy suppliers, we recommend the following three steps as a starting point:

We run this process as a complete end-to-end service, from the conceptional phase with our fact-based target setting, through designing and quantifying the individual levers. We then bring to life what’s next, taking  responsibility for realizing the identified savings through the operational implementation of business services and apps as required.

We followed our own recommendations and used our proprietary Smart Cost Out approach when we ran one of the biggest performance optimization programs in the utilities sector in the last three years.

A process of re-organization, process optimization, digitalization, outsourcing, offshoring, activity dumping (non-profitable actions) and governance re-setting yielded impressive results:

Rapid action – right now

The economic effect of the lockdown might not be as stark as in other industries, but it will have a long-term impact on energy suppliers. Getting to grips with these financial challenges sooner rather than later should be a business imperative. Future viability and independence cannot be guaranteed without quick and consistent action.

Find out more

Click here to find out how Capgemini Invent can help you achieve Strategic Cost Resilience.
Or get in touch with Michael Kässer.

Leave a Comment

Get the BPI Web Feed

Using the HTML code below, you can display this Business Process Incubator page content with the current filter and sorting inside your web site for FREE.

Copy/Paste this code in your website html code:

<iframe src="" frameborder="0" scrolling="auto" width="100%" height="700">

Customizing your BPI Web Feed

You can click on the Get the BPI Web Feed link on any of our page to create the best possible feed for your site. Here are a few tips to customize your BPI Web Feed.

Customizing the Content Filter
On any page, you can add filter criteria using the MORE FILTERS interface:

Customizing the Content Filter

Customizing the Content Sorting
Clicking on the sorting options will also change the way your BPI Web Feed will be ordered on your site:

Get the BPI Web Feed

Some integration examples