Reference Strategies and Best Practice for Municipal Utilities

Reference Strategies and Best Practice for Municipal Utilities

Introduction

The energy sector is changing. As fossil fuel sources are being depleted across the globe and the resistance to nuclear power is rising, the demand for “clean” and sustainable energy from renewable sources is higher than ever before.
Understood to be one of the world leaders in technological advances, Germany has already started a nationwide program to promote renewable energy and to implement the required changes to their infrastructure. These changes are necessary on various levels, from the installation of new power stations for wind turbines or solar panels, to the modification and expansion of existing ones and improving networks supplying consumer households. This energy transition poses a great challenge to the energy suppliers.
In particular, municipal utilities need to review their strategies and adapt them to the changing environment in order to stay competitive. The following article uses project examples and best practice cases to illustrate the challenges faced by the municipal utilities and explain how they were eventually able to overcome them, and adapt their strate-gies successfully.

Challenges

In its energy sector projects, Tefen discovered a range of major challenges encountered by municipal utilities. One of the main energy transition changes was the way that energy is produced in general. In the past, most consumed energy was produced by large-scale power plants, such as coal-powered stations or nuclear power plants, which could generate huge amounts of electricity in one place. However, in the future, energy production will need to be more diversified and should be spread across a larger number of smaller plants. The connection of wind or solar parks to the transmission networks for example, remains difficult due to their locations (off-shore) and because they are often spread over a large area. The irregularity of the energy production and dependency on regional factors such as wind/sun intensity is another challenging factor. Having the storage technology to save excess energy at times of low production is as essential as the connection to long-distance electricity networks for transporting power from the North of Germany to the South.

Examples

Discussed here are some of the critical factors that municipal utilities must take into account when planning their future strategies. The main focus is on the challenges, objectives and proposed actions arising from products, marketing & sales, procurement and distribution networks.


Products
Thanks to technological advances, methods of generating electricity, gas and heat are changing. This and the ever rising environmental consciousness of the general public has encouraged energy suppliers to add renewable energies to their production and procurement portfolios. This has had a direct impact on the product portfolio of the municipal utilities, which are forced to reassess and adjust their product ranges in order to still compete in this developing environment. Thus, these products and technologies are becoming increasingly important, as they offer the utilities huge potential to enter new markets and expand their customer base. Failure to recognize the significance of these developments can of course have a negative impact on companies.
An example of this is long-distance district heating which has turned out to be a highly promising technology for a multitude of the municipal utilities Tefen worked with. Since the connection to district heating systems is a major financial commitment for the consumer (companies and homeowners), this leads to sustainable customer retention.

In addition to persuading customers to make a long-term commitment, utilities are also interested in acquiring new customers. A new set of products and services, combined with a tailored sales and marketing strategy, is ideal for achieving this. However, it has to be considered that not every municipal utility has the same resources and options. In most instances, utilities in Northern Germany have ideal conditions for power generation through wind power stations, while the southern regions rely more on the generation of green energy via solar power stations or by buying wind power from other electricity producers in order to offer these products to their customers. This makes an optimized procurement strategy even more important.

One segment in which municipal utilities rank behind the private energy companies is in the provision of service offerings for both conventional and new products. In order to stay competitive, the range of services needs to be expanded to include those products of current importance to the market. For example, a specific municipal utility under Tefen’s supervision updated its service portfolio, adding services to help private individuals and companies update and optimize their utility management and by offering maintenance services for technical installations.

Considering the importance of having up-to-date technology and a wide range of services, it is reasonable for the utilities to take a combination of products and services into account and hence profit from synergy effects.

Besides focusing on the products and services a utility can offer, it is just as important to adjust the tariffs to the needs of the market. In one case, this involved a tariff that could be signed up for online. Another feasible solution was a consumption and consumer-specific tariff structure. Thus, instead of offering a vast number of different tariffs that tend to confuse the customers or do not communicate any additional value to them, it is advisable to offer lean packages that directly address their needs.

Procurement

Another important topic for every municipal utility is an elaborated procurement strategy. As the majority purchase electricity from outside sources it is essential to optimize the procurement process to reduce costs and risks by diversification. Instead of relying heavily on one specific energy source or certain commercial partners, it is always advisable to develop new partnerships and diversify the sources of supply. To realize this, a defined segment and product-specific procurement strategy and process needs to be in place. This includes conducting feasibility studies, evaluating existing commercial partnerships and customizing the partners’ portfolios. Instead of entering into long-term contracts that might turn out to be disadvantageous in the long run, diversified and flexible purchase contracts are the preferable option. The basis for this is to set up medium and long-term procurement strategies for each sales segment. A diversified strategy is also important for the own production of energy, in order to minimize costs and risks, plus dependency on external sources.

Distribution grids

The expansion of the German distribution grids is a nationwide issue concerning every element of the value chain, from the producers of electricity right down to the consumers.

The first task for municipal utilities is to depict the network topology of their region and assess the current situation. Based on this, the future needs and potential must be evaluated in order to develop a strategy for a demand-oriented expansion and concentration of the supply network. One possible action that Tefen found to be of relevance was the acquisition of the regional networks. This means that the municipal utilities should keep existing concessions for electricity, gas and water as well as aquiring new ones to become a leading partner for concessions in that region.

In addition to the primary business segments, communication is another important factor that must be taken into consideration. As the data volume of the internet doubles every two years and the data consumption of the average household also increases, the existing infrastructure will soon no longer be adequate to meet demand. Compared to its neighboring countries, the extent of high-capacity cabling in Germany is on the verge of becoming outdated and the development of the fibre optic cable network seems inevitable. Especially those communities with a small population could profit greatly from updating the existing infrastructure and connecting sparsely populated areas. Feasibility studies and thorough planning are necessary to assess the cost-effectiveness of such investments.

Smaller municipal utilities suffer from low budgets and little investment potential, which pose the biggest hurdles for strategic planning. It is therefore all the more important to focus on optimizing the economic sustainability. Last but not least, all investment measures need to factor in tools for cost control and optimization.

Marketing & Sales

Next to optimizing the product portfolio, the right communication with the customers and a sophisticated sales strategy are of extreme importance.
Many customers aren’t even aware of all the different products and services that are available to them or are lost in the multitude of different offers. So, after developing consumption and consumer-specific tariffs, it is necessary to find the right communication channels to address the relevant customers. As an example, online tariffs and services should also be advertised on different online platforms instead of print media, whereas renewable energy products should be communicated to an ecologically sensitive audience willing to pay a surcharge to protect the environment and be sustainable. Also, the advantages of green products must also be highlighted to justify the higher costs. One municipal utility we worked with advertises its energy from renewable sources to companies by pointing out that use of this specific product enables them to portray themselves as environmentally friendly, thereby boosting their public image. Bearing in mind the strong competition amongst private energy enterprises, it is a challenging task to correctly define the customer segments and separate them, as well as to tap into new markets. Some utilities may find delivering energy to adjacent areas can emerge as a lucrative source of income and should be evaluated. The marketing activities can be integrated in the form of campaigns, to promote new products and services to the different customer groups by the Customer Relationship Management system (CRM).
On top of this, referral marketing is – especially on the regional level – an effective marketing tool. Strategic partnerships with banks or retail stores can help utilities to profit from greater publicity and synergy effects. Closely linked to an elaborated marketing strategy is the need for an excellent consulting and sales competence in the company, to turn potential customers into actual ones. This also includes tapping into new sales channels that have been neglected in the past.
A prerequisite for this is sufficiently qualified personnel. This means that systematic staff training and coaching is a necessity for many companies. The following graph shows an overview of best practice objectives and actions.

Best practice actions
Conclusion

Turning best practice into a competitive advantage has already enabled municipal utilities to think of solutions they would have never have considered before. Tefen’s experience and pragmatic approach easily leverages this potential with innovative or common best practice approaches like the following three step approach.

1. Starting with a quick assessment for the current positioning in the different steps of the value chain shows the gaps to best practices.
2. In the second step, this potential room for improvement is evaluated together with the client to determine feasibility and businessimpact. The result is a clear set of actions with measureable impacts.
3. Finally, the defined actions and their implementation are guided by strategic coaching to ensure and help the transformation into the operational routine.

The reference projects and client voices cited here have shown that in today‘s environment, it is absolutely essential to use the best practice approach in order to stay on top and be competitive. This applies especially to the mass of new independent energy providers with lean structures and processes.

By Matthias Bauer, Consultant, Tefen Germany

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