By Peter Kästel, Lead Associate, Financial Services & Energy
The digitalisation of our life disrupts processes, business value chains and the way we perceive and interact with the world.
This blog looks at the definition of markets, which role technological advances play and how digitalisation is the catalyst for disintermediation, blurring established market boundaries. Using the Power market as an example, we can take a look at how a decade-old business model has been shaken up by new technology and will continue to change through the force of digitalisation, where the gradual convergence of the Energy market and emerging technologies is in the making.
Markets and Technology
Markets are defined as systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange of goods and services. Typically the access to a market is restricted by criteria such as geography, membership and/or rules. However, some of these criteria may be informal, e.g. you need a certain economic size to participate, or change over time, e.g. geography becoming less of a restricting factor because of recent globalisation. Also, market segmentation and hierarchical market order are quite common. That is typically reflected in a value chain structure, which develops over time.
The term technology is derived from the Greek τέχνη – techne and λογία – logia and means the ‘Science of Craft’. It is a collection of techniques, skills, methods and processes used in the production of goods or services. Hence technological developments have influenced market dynamics decisively. Generally technological advances generate positive market developments, although typically isolated to specific market segments. But, some technological developments have the power to redefine economies and question basic market structures and their value chains.
Digitalisation as a Game Changer
Digitalisation is based on a fairly simple but abstract concept. It is the representation of an object, image, sound, document or signal by generating a series of numbers that describe a discrete set of its points or samples. What’s crucial is that it allows the transmission, storage and processing of data and information in a fast, efficient and effective fashion. Consequently, it gives us the ability to leverage the link between objects and information in an automated way via software.
The fast advancement of digital technologies in the economic context has lead to the situation where information and market access barriers are increasingly broken down. With that comes the possibility to redefine market boundaries, value chains and the use of existing technologies. That materialises with marketplace, platform, prosumer and as-a-service models gaining ground. This can then lead to disintermediation of market functions and significantly impacts existing value chains. The graph below is a good demonstration of how prosumer models can disrupt or even replace value chains, typically facilitated via digital means.
Source: Bremdal, B.A. 2012. Prosumer oriented business in the energy market
Example: Power Markets
Power markets have been and still are dominated by a traditional value chain model. However, they are disrupted by the emergence of decentralised power generation and the need for decarbonisation of the energy market (see graph below). New technologies like PV, wind, biogas, smart meters and grids are widely adopted and their economic benefits may be enhanced by connecting them in an intelligent way. This is where the digitalisation and connection of sub-markets and technologies will make a significant difference. It allows for the creation of new business models, e.g. prosumer models and the automated combination of objects to unlock efficiencies. It can be observed that business models, infrastructure and regulatory framework are adapting.
Peer-to-Peer energy networks
These two articles – Energy Prosumers & Blockchain Technology and Energy Management and Monitoring – are examples of emerging business models, which would not be possible without digitalisation. They are also good examples of how different technologies, e.g. generation devices, meters, sensors, actors, cognitive computing and/or distributed ledger technology in combination create a new value proposition which goes beyond existing technologies.
When diving into more detail it also shows how disintermediation is apparent (e.g. wholesale generation and transmission in P2P networks) and the need for innovative business models becomes more important than ever in competitive power markets. For incumbents that is a challenge on how to deal with it technically, economically and culturally. For new markets entrants it is often more a question of gaining market penetration and overcoming a regulatory regime which has been designed for a linear and oligopolistic value chain model.
Agile Transformation Approach
An agile digital transformation approach can be a suitable tool to master such challenges. Having a strategic outlook on the future market structure and thinking and acting in sprint-like development steps allows an agile and flexible approach in a fast changing environment. It allows us to combine and adjust to new disruptive technologies and trends, make use of advanced data science and apply change management strategies to take customers and employees along.
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