The transition towards a sustainable future: Business model innovation for incumbent utilities

The transition towards a sustainable future:

Business model innovation for incumbent utilities

Master thesis

MSc. BA Strategic Innovation Management

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Abstract

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Table of Content

1. Introduction ... 5

2. Theoretical Background ... 7

2.1 Business models ... 7

2.1.2 Business model conceptualization ... 8

2.2 Business model innovation ... 9

2.3 Business models for renewable energy ... 10

2.3.1 The electricity value chain ... 10

2.3.2 Two business models for renewable energy technologies ... 11

3. Methodology ... 15

3.1 Data selection ... 15

3.2 Data collection ... 17

3.3 Data analysis ... 18

4. Results ... 20

4.1 The changing electricity market according to experts ... 20

4.2 The changing electricity market according to utilities ... 24

4.3 The utility-side renewable energy business model ... 25

4.4 The customer-side renewable energy business model ... 27

5. Discussion ... 29

5.1 The emerging value chain ... 29

5.2 The positioning of utilities ... 29

5.3 Two generic business models ... 30

5.4 Business model innovation capabilities ... 31

6. Conclusion ... 32

6.1 Limitations and future research ... 33

7. References ... 34

8. Appendix ... 38

Appendix A: Expert interview protocol ... 38

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1. Introduction

In the fight against climate change the reduction of greenhouse gasses emitted by the burning of fossil fuel is an important step (IPCC, 2014). In 2015 the Netherlands together with 167 other countries committed to the Paris Agreement (UNFCCC). In their Intended Nationally Determined Contributions (INDCs) countries state how to avoid and deal with climate change, and the core components are targets and actions for reducing greenhouse gas emissions (Rogelj et al.,2016). The Dutch climate policy focuses on both adapting to climate change and the reduction of greenhouse gas emissions (Klimaat Agenda, 2013). Those emissions constituted of 196 Megatons of CO2 equivalents in 2015 and the main part is related to energy usage. The largest contributor is the electric power sector with 26% of the energy usage related emissions. To achieve a transition towards 80% – 95 % CO2 emission reduction by 2050, the Dutch government addresses three important elements (Energieagenda, 2016) which are a switch to low-carbon renewable energy production, improvement of the European electricity market and the adjustment of the electricity system to facilitate local energy production and improve flexibility of the system.

The Dutch electricity market is currently dominated by utilities, both in sales and the production of electricity. To increase the share of green electricity, the Netherlands liberalized the green electricity market in 2001 while providing tax incentives to consumers to buy green electricity. The major suppliers used different strategies to meet the risen demand for green electricity, but the main strategies were the import of wind and hydropower or the import and burning of biomass in coal fired power plants (Reijnders, 2003). As a result, the share of renewable energy supplied in the Dutch retail market grew to 34% in 2016, but this is for 69% based on certificates (Guarantees of Origin) which are imported from other countries (Mulder and Zomer, 2016). With a domestic production of green electricity of only 10% of the total demand, the Netherlands is one of the lowest performing countries in the European Union (EuroStat, 2015). Therefore, this research will consider utilities operating in the Dutch electricity market.

The transition of electricity production from fossil fuels and nuclear energy to electricity production from renewable energy technologies will fundamentally change the electricity market. It will impact the way electricity is produced but also the way it is transmitted and sold (Frei, 2008; Schleicher-Tappeser, 2012). This changing environment is proving to be a challenge for the utilities. Germany for example in 2012 produced 23% of its electricity from renewable energy sources, but Richter (2013) found that less than 12% of the renewable electricity production is owned and operated by utilities. This means that the utilities have lost 20% of their market share over the past fifteen years to other parties that own and operate renewable electricity production. He offers two reasons for this loss: on the one hand financial investors from other sectors have entered the electricity market because of the stable returns that large-scale renewable projects offer. On the other hand, the private users of small renewable energy systems such as photovoltaic systems, have become an increasing source of electricity generation (Richter, 2013).

6 of renewable technologies within their company (Frantis et al., 2008: Nimmons and Taylor, 2008). If utilities fail to adapt to these new technologies, it will result in a loss of market share as other participants join the electricity market.

Literature shows that large incumbent firms often struggle to innovate their business model when changes in the environment or technology might undermine their current and still profitable business model (Sosna et al., 2010). According to Christensen and Bower (1996), firms find it especially difficult when new technologies do not fit with their existing business model or have no application in the market in which they operate. However, the loss of a leading position in the market is seldom caused by technology itself. Teece (2010) argues that in order to capture value, technological innovation has to be matched with business model innovation. Chesbrough (2007) goes even further and states that ‘a better business model often will beat a better idea or technology (p.12)’. The transition towards renewable energy creates enormous challenges for utilities as their current business model is likely to be undermined by the changing world around them. This leads to the following research question:

‘’How do utilities innovate their business model to respond to the energy transition?’’

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2. Theoretical Background

To answer the research question, it is important to get a better understanding of the literature about some of the concepts used in its formulation. In the first part, the concept of a business model is explained and a definition is provided. The second part elaborates on business model innovation and also provides a definition. After these two sections, the third part explores the Dutch electricity market. It starts by explaining the current value chain of this market and it explores two possible business models that utilities can adopt to engage in renewable technologies.

2.1

Business models

The research of business models started in the 1990s during the internet boom. With the rise of the internet it was expected that the old way of doing business was over and new business models were emerging. The term became a buzzword and it was used for everything related to the new ICT based economy (Osterwalder, 2004). But the topic also became of major interest to scholars. However, Zott et al. (2011) state in their extensive literature review that after more than 15 years of research there is no clear consensus on what a business model entails. According to Teece (2010) ‘the essence of a business model is in defining the manner by which the enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit’. Therefore, the business model reflects the management’s expectations of a customer need and how a company can receive a payment and make a profit while meeting those needs in a certain way. Ostenwalder and Pigneur (2009) define the business model as ‘the rationale of how an organization creates, delivers and captures value’ (p.14). This definition is extended with a concept of nine segments grouped into four pillars as can be seen in table 1. Because the concept of Ostenwalder and Pigneur has been tested in practice extensively and has been applied to the field of renewable energy (Okkonen and Suhonnen, 2010; Richter, 2013), it is also chosen for this study.

8 the technology in products or services, needs to design a business model as well to convert the value potential of the new technology into a market outcome (Chesbrough, 2007). But next to using the business model to bring technological innovation to the market, companies can also consider the business model itself as a subject of innovation (Mitchel and Coles, 2003). Business model innovation is discussed in section 2.2, after a brief explanation of the four pillars constituting the business model concept of Ostenwalder and Pigneur (2009).

2.1.2 Business model conceptualization

The first pillar of the business model concept of Ostenwalder and Pigneur (2009) is the value proposition. It consists of a bundle of products and services that together present value for a specific customer segment. This value is created through a mix of elements such as performance, customization, price and convenience. According to Ostenwalder (2004) it describes why customers buy from the firm and the way the firm differentiates itself from its competitors.

The second pillar is the customer interface which comprises the customer segments, channels and customer relationships. It describes all the interaction between a firm and its customers. The customer segments are groups of customers who have the same needs, behaviors or other attributes. Dividing the market this way can help a company to target a specific group of customers. Channels describe all the manners by which a company reaches and communicates with its customer segments to deliver a value proposition. Aspects like communication, distribution and sales also play an important role in the customer experience. A firm should establish what kind of customer relationships it wants to build with customers, because profits from customer relationships are what keeps businesses in existence (Ostenwalder, 2004). The relationship might be driven by the acquisition of new customers, the retention of profitable customers or the boost of sales. Ostenwalder and Pigneur (2009) define a range of customer relationships, from self-service to personal assistance and co-creation.

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2.2

Business model innovation

According to Teece (2010) the development of a business model is insufficient to assure competitive advantage as it is often easy to imitate. Changing and adapting the business model of a company can itself become a pathway to competitive advantage if the new model is hard to replicate for competitors. IBM found in their global survey that CEO’s consider, above creating new products and services, business model innovation to be a key source of sustained value creation (Pohle and Chapman, 2006). However, in their literature review on business model innovation Foss and Saebi (2017) state that, despite the fast expanding research on the subject of business model innovation, there is no consensus on a clear definition of what it entails. The concept of business model innovation is closely related to the concept of the business model itself, which in literature is described as the mechanisms for creating, delivering and capturing value. In most definitions this includes the components: value proposition, target segments, value chain organization, and revenue capture mechanisms (Foss and Saebi, 2017) as mentioned in section 2.1. However, scholars disagree on when exactly to speak of business model innovation. Some argue that business model innovation can be a change in only a single component of the business model of a firm (Amit and Zott, 2012) while others require a complete novel combination of both the components and the linking architecture of the business model (Velamuri et al, 2013). Foss and Saebi (2017) define business model innovation as “designed, novel, nontrivial changes to the key elements of a firm’s business model and/or the architecture linking these elements”(p.201). This will also be the definition used in this study.

There can be many reasons to engage in business model innovation. For example, business model innovation can be viewed as a necessary response to strategic discontinuities and disruptions (Doz and Kosonen, 2010), competitive pressure (Johnson et al., 2008) or unpredictable changes in the environment and the increasing importance of knowledge and innovation (Voelpel et al., 2004). In their theory on business model innovation, Foss and Saebi (2017) state that the antecedents of business model innovation can be external, such as changes in competition, technologies, stakeholders and demand. But they can also be internal, such as a change in strategy. Two antecedents or drivers that are gaining attention of researchers are servitization and sustainability (Foss and Saebi, 2017). Servitization refers to the adaptation of a service-dominant logic in which a company moves from selling products to selling products and services or engages in value co-creation for long-term mutual betterment (Karpen et al., 2012). It therefore requires a shift towards a service-driven business model. The second antecedent, sustainability, can refer to both social or environmental sustainability. For example, the popularity of the sharing economy has resulted into new business models that enable the sharing of underutilized assets.

10 innovate their business model when changes in the environment or technology might undermine their current and still profitable business model (Sosna et al., 2010). According to Christensen and Bower (1996), firms find it especially difficult when new technologies do not fit with their existing business model or have no application in the market in which they operate. Christensen and Overdorf (2000) differentiate between sustaining and disruptive innovations. Sustaining innovations are innovations that improve a product or service that the mainstream market already values, and are nearly always developed and introduced by incumbents. Disruptive innovations create an entirely new market by introducing a new product or service. At their introduction they are often considered to be worse in performance metrics, but they improve so rapidly that they ultimately address the need of the mainstream market. Because disruptive innovations are often inconsistent with the incumbents values, the established firms almost never introduce, or cope well, with these innovations (Christensen and Overdorf, 2000).

As utilities have to change their business models to facilitate the commercialization of renewable technologies within their company (Frantzis et al., 2008: Nimmons and Taylor, 2008), the next section will explore business models for renewable energy technologies.

2.3

Business models for renewable energy

Besides considering the business model on individual firm level to commercialize technologies, it is also important to investigate the business model for entire industries. When looking at large infrastructural changes, such as a transition towards renewable energy, Johnson and Suskewicz (2009) argue that the key is to shift the focus from developing new technologies to the creation of entirely new systems. They introduce the business model as part of their framework to think about systemic change. As the transition towards renewable electricity generation is expected to fundamentally change the energy sector (Frei, 2008; Schleicher-Tappeser, 2012), utilities will have to innovate their business model. This section explores the literature about business models for utilities using renewable energy technologies. It starts by introducing the value chain of the electricity market.

2.3.1 The electricity value chain

In order to understand the traditional business model of utilities and possible new business models, it is helpful to consider the current value chain of the electricity market. Schoettl and Lehmann-Ortega (2010) argue that, when utilities decide to develop new business models, they first have to decide in which part of the value chain they want to engage. So when utilities decide to engage in a certain segment of the value chain, they have to develop a business model that fits the segment of the value chain they want to engage in. The traditional value chain, as presented in figure 1 (Valocchi et al., 2010), consists of five segments. A description of each segment for the Dutch electricity market is provided.

11 Generation of electricity is the process of producing electricity out of primary energy resources. According to the International Energy Agency, the majority of electricity in industrialized countries is being produced in large scale power plants out of fossil fuels and nuclear energy (IEA, Key World Energy Statistics, 2017). In the Netherlands, two thirds of the electricity in 2016, has been produced centrally (CBS, 2017). Those assets are often owned and operated by a small group of utilities. Although the Dutch electricity market was liberalized in 1998, the three largest utilities owned a market share of almost 80% in 2014 (ACM, 2014) and so the market remains very concentrated. The target of the Dutch government is to largely replace the current generation capacity in the coming decades with renewable energy technologies (Energieagenda, 2016).

Transmission comprises the long distance transport of electricity at high voltage via a transmission grid. With the Electricity Act in 1998 the Netherlands appointed Tennet as the only independent transmission system operator (TSO). The current grid is designed to transport electricity from a few points of central production to all the customers and will require multiple adaptations to facilitate renewable energy technologies. The TSO is responsible for the overall grid stability. However, the largest three utilities in the Netherlands have what is called ‘program responsibility’. This means that the utilities have to match the consumption of their customers at every moment with the same amount of generated or bought electricity.

Distribution networks deliver electricity at low voltage level to end consumers. Distribution system operators (DSO) are responsible for all connections of the end users to the grid. Although not required by the European Union, the Netherlands decided in 2008 that utilities can no longer have any ownership of DSO’s (Nooij and Baarsma, 2009) to prevent competition problems. Currently, seven independent DSO’s operate in the Netherlands.

Retail or energy services is considered to be a mainly administrative task that includes communication with customers, metering and billing. Retailers can purchase electricity on the market and sell it to their customers.

Consumption of electricity happens on the end customer side of the meter through electric devices and appliances.

Scholars argue that the large scale deployment of renewable technologies will impact every segment of the traditional value chain (Frei, 2008; Schleicher-Tappeser, 2012). Utilities operating in the Dutch market are only allowed to engage in the generation, retail and consumption segment. The changing environment can offer both threats and opportunities, but both scholars and experts agree that utilities need to fundamentally innovate their business models (Valocchi et al., 2010; Capgemini, 2012; Klose et al, 2010; Helms, 2016).

2.3.2 Two business models for renewable energy technologies

12 different logics Richter (2012) identified two generic business models for renewable energies in literature. Both business models reflect a very different field of business, and are located on different sides of the traditional value chain (see figure 2).

Figure 2. Two generic business models (Richter, 2012) In reality there might be overlap between the two business models, but they provide ground for analysis of the different logics. However, it is likely that utilities will employ a combination of both generic business models.

Utility-Side Renewable Energy Business Model: According to Richter (2013) this business model comprises large-scale projects, using technologies like on- and offshore wind energy, photovoltaic systems, biomass and biogas fired plants and solar thermal energy. The capacity of these projects can be between one and some hundred megawatts. The value proposition consists of the bulk generation of electricity, which is delivered to the customer by feeding it into the grid. The incumbents customer interface consists of a power purchase agreement, without any other relationship with their customer. Utilities own and operate the assets and, although the capacity is often lower than conventional power plants, they have a centralized character. The overall business model logic is reasonably similar to the traditional business model (Richter, 2013).

Customer-Side Renewable Energy Business Model: instead of large-scale projects the renewable technologies are located on the property of the customer (Richter, 2013). This can be solar photovoltaic systems, micro wind turbines, geothermal heat pumps or micro combined heat and power systems with a capacity from a few kilowatts up to one megawatt. The offered value proposition can range from consultancy to a full service package in which the utility finances, owns and operates the assets. These services intensify the customer relationship and can even provide access to new customer segments. This business model requires the management approach of many small scale projects with higher costs for installing and operating the system. Revenues come from return on the assets and/or charging for services. This logic is very different from the current business model (Richter, 2013; Klose et al., 2010).

13 Table 2. Two generic business models (Richter, 2013) In conclusion, this theoretical background demonstrated that companies have a certain rationale of how they create, deliver and capture value. This is their business model. This business model can be conceptualized into four different pillars (Ostenwalder and Pigneur, 2009). In order to gain competitive advantage, or to respond to changing environments or technologies, firms have to innovate their business model (Teece, 2010; Doz and Kosonen, 2010; Johnson et al., 2008; Voelpel et al., 2004). Business model innovation is defined as designed, novel, nontrivial changes to the key elements of a firm’s business model and/or the architecture linking these elements (Foss and Saebi, 2017). As the energy transition requires a move towards the use of renewable technologies, scholars argue that utilities will have to fundamentally innovate their business model (Frantzis et al., 2008; Nimmons and Taylor, 2008). Two generic business models for renewable energy technologies can be identified (Richter, 2012). Therefore, the following research question is explored:

‘’How do utilities innovate their business model to respond to the energy transition?’’

Scholars forecast that, because of the large scale implementation of renewable technologies, the electricity market will fundamentally change (Frei, 2008; Schleicher-Tappeser, 2012). Some argue that utilities have to move away from being a commodity supplier and become service providers (Helms, 2016; Klose et al., 2010). They assume the market will become decentralized and customer proximity will become much more important. But as this new energy landscape is still in evolution, others argue that large-scale projects will remain the backbone of the energy system (Frei, 2008). To extend the understanding of future developments in this market the first sub-question will be directed to experts in the energy field. The first sub-question is:

‘’What changes do experts expect to occur in the electricity market?’’

14 engage in, and innovate their business model in response (Schoettl and Lehmann-Ortega, 2010). Therefore, the second sub-question is:

‘’What changes do utilities expect to occur in the electricity market?’’

When considering the transition towards renewable energy technologies, two generic business models can be identified (Richter, 2012). Although in reality it is more likely to see a combination of both types, the separation of both provides ground for analysis of the different logics. Therefore, the third and fourth sub-questions are:

‘’How do utilities engage in renewable energy on the utility-side?’’ ‘’How do utilities engage in renewable energy on the customer-side?’’

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3. Methodology

After exploring the literature on business models, business model innovation and business models for renewable energy, this section will focus on the methodology of the research. Despite the fact that scholars indicate that the electricity market will fundamentally change, utilities find limited guidance in literature in what ways to innovate their business model to respond to this transition. This led to the following research question: ’How do utilities innovate their business model to respond to the energy transition?’’ Four sub-questions are used to identify the changes in the electricity market due to the energy transition, and possible responses of the incumbent utilities to those changes. To find an answer to those questions this research is based on the theory-building approach. According to Eisenhardt (1989) a central activity in organizational research is the development of theory. She argues that this testable, relevant and valid theory should not only be build on previous literature, common sense and experience but also have an intimate connection with the empirical reality. Therefore, this research considers incumbent utilities operating in the Dutch electricity market. The use of case studies is appropriate to build new theories about phenomena (Eisenhardt, 1989; van Aken et al., 2012). The incumbent utilities can be considered a case when multiple sources of data are being used. In organizational research, qualitative research methods are important to understand how organizations perceive their situation, what their goals are, and what strategies they employ to reach these goals (van Aken et al., 2012). To better understand the situation of the incumbent utilities, this research also makes use of systematizing expert interviews.

This research follows the step-by-step process of building theory from case study research as described by Eisenhardt (1989), to produce reliable results and address possible biases. This method starts by defining a research question. The research question of this research has been mentioned above. The next step is the selection of cases. To define the limits for generalizing the findings, the selection of an appropriate population is recommended (Eisenhardt, 1989). For this research the in-depth investigation of a small number of incumbent utilities is considered the preferred research method. The third step is the collection of data. Several data collection methods are available, but the use of a combination of multiple data collection methods provides stronger substantiation of constructs or hypotheses. For this research, interviews are selected as the primary way to collect data, and documents as the secondary way. As the fourth step the collected data is analyzed. According to Eisenhardt (1989) it is useful to start by analyzing within-case data and then search for cross-case patterns. By the highly iterative process of comparing the emerging frame to evidence from each case, propositions are shaped. The fifth step is the comparison of the emerging concepts with the extant literature to search both for conflicts and similarities. In the final step closure is reached at the point of theoretical saturation. Having background information about the cases is important according to Eisenhardt (1989), in order to perform this research method. In the next sections, the data selection, data collection and data analysis of this research are explained in more detail.

3.1

Data selection

16 scale deployment of renewable technologies will impact every segment of the traditional value chain (Frei, 2008; Schleicher-Tappeser, 2012). To better understand how the energy transition will impact the value chain, the first sub-question of this research is: ‘’What changes do experts expect to occur in the electricity market?’’. The aim of the first sub-question is to develop a realistic scenario of how the deployment of renewable technologies will impact the traditional value chain. According to Ramirez et al. (2015) scenario research methodology can complement more established research approaches, such as surveys or case studies. Scenarios are about the context or environment of the research subject, rather than this subject itself. As a scenario is developed specifically for a research subject, this actor-specificity differentiates scenarios from forecasts (Ramirez et al., 2015). To develop a scenario independent of the estimations of incumbent utilities, the first sub-question is directed to experts. However, literature is divided on the definition of an expert. Borgner and Menz (2009) distinguish between exploratory, systematizing, and theory-generating expert interviews.

They argue that the selected type of interviews also determines the definition of the expert. When using the expert interviews as an exploratory tool, they argue it is sufficient to consider someone as an expert when they possess contextual knowledge. However, if the systematizing or theory-generating expert interviews are used, the goal is oriented towards gaining knowledge from the expert which is derived from practice. Therefore, Borgner and Menz (2009) argue that in this case the expert must not only possess contextual knowledge, but the expert’s knowledge must also have an effect on practice, for example through their profession. For this research the systematizing expert interview has been selected. This is the most widespread form of expert interview used in research. Its aim is exploratory and it is considered an attempt to obtain systematic and complete information from experts who possess valid pieces of knowledge and information (Borgner and Menz, 2009). Therefore, three experts are selected for this research who both possess knowledge of the energy field and are professionally active in this field. The first expert is employed at a Dutch university, researching energy market development, the regulation of energy markets, policy making on market design and the impact on the organization and operation of energy companies. The second expert is employed as a business developer for sustainable energy at an independent Dutch organization for applied scientific research. The third expert is employed at a Dutch consultancy firm, consulting both businesses and governments about the energy transition. Together, these three experts are considered to possess sufficient valid knowledge to provide a better understanding of the changes in the electricity market.

17 together have a market share of around 80% (Pieters et al., 2016). Of those utilities Eneco, Essent, Nuon and DELTA agreed to cooperate with this research. During the interview with DELTA however, it became clear that this company recently sold all their generation capacity and only operates as retailer. Therefore, it no longer met both of the above stated criteria of operating on both sides of the value chain. This left the following three incumbent utilities to participate in this research: Eneco, Essent and Nuon. According to Eisenhardt (1989), a case study can be conducted with a single case. However, using multiple cases will result in more generalizable information and increase the external validity of this research (van Aken et al., 2012). As the number of incumbent utilities operating in the Dutch market that meet the above mentioned criteria is four, these three cases are considered to be sufficient for this research.

3.2

Data collection

The primary way to collect data for this research is the use of interviews. As secondary data also documents are used. Using two different data-collection techniques will permit the researcher to more reliably confirm the results (Eisenhardt, 1989). The data collection consist of two steps. The first step is to conduct systematizing expert interviews and the second step is to conduct in-depth semi-structured interviews at the utilities.

With regard to the expert interviews Meuser and Nagel (2009) consider an open interview based on a topic guide to be an appropriate method for data collection using these interviews. The open interview provides the interviewees the room to unfold their own outlooks and reflections. However, it is important for the interviewer to prepare the interview topics thoroughly by building up a knowledge base of the field (Meuser and Nagel, 2009). Therefore, the open interviews are based on the literature review as presented in the theoretical background. The segments of the traditional electricity value chain (Valocchi et al., 2010), as presented in figure 1, served as topics for the interview. The aim of the Dutch government is to achieve a 80% – 95 % CO2 emission reduction and a switch to low-carbon renewable energy production by 2050 (Energieagenda, 2016). Therefore, 2050 was selected the scenario end date. The interview protocol for the expert interview is located in Appendix A. Two experts were interviewed on location and one expert was interviewed using Skype. The interviews were conducted in Dutch and lasted approximately one hour.

18 To ensure the reliability of both the primary and secondary data, this research relies on the quality criteria as described by van Aken, Berends and van der Bij (2012). The controllability of this research is ensured by providing a detailed description of the methodology. This allows other researchers to replicate the study (van Aken et al., 2012). To ensure reliability, four potential biases have to be addressed (van Aken et al., 2012). The researcher bias is limited by recording all the interviews. This allowed the researcher to focus on the interview and not miss important information. The interviews were transcribed at a later moment. These transcripts were send to the interviewees to be checked, and in some cases corrected. The case studies rely on multiple data sources to control for instrument bias. Interviews as primary data and documents as secondary data. To control for respondents bias this research only included interviewees who are involved in the development of sustainable energy solutions and have strategic influence within the utility. The interviewees were interviewed on different days and on different times to control for the circumstantial bias. All the interviews were conducted in quiet rooms without interference of any colleagues. The interviewees are listed in table 3.

Table 3. Research participants

3.3

Data analysis

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4. Results

This chapter describes the key findings derived from the interviews and the secondary data. It consists of four sections. The first section describes the expected changes on the electricity market according to experts. The second section describes the changes on the electricity market expected by the utilities. The third and fourth section describe how utilities engage in renewable energy on both the utility-side and the customer-side, using the business model concept.

4.1

The changing electricity market according to experts

When considering the transition towards a renewable energy supply, several scenarios are possible (Klose et al., 2010). The first scenario is a partial continuation of the status quo in which reduction of carbon emission is achieved by large-scale renewable technology projects mixed with conventional technologies and carbon capture and storage. An opposite scenario would be a completely distributed energy system in which small-scale decentralized renewable technology systems will completely displace conventional technology and allow consumers to generate their own electricity supply. A third scenario is in between the previous two, in which both large-scale centralized and small-scale decentralized renewable energy technology projects are combined to provide a renewable energy supply. To drastically reduce the CO2 emissions by 2050 the Dutch government focuses on three important goals. The aim is to switch to low-carbon renewable energy production, to improve the European electricity market and to adjust the electricity system to facilitate local energy production and improve flexibility of the system (Energieagenda, 2016). This section presents the changes experts expect on the Dutch electricity market due to the energy transition. It shows what scenario the experts consider most likely, and how this scenario will impact every segment of the traditional value chain as presented in figure 3.

21 electricity needs. According to the experts the scale of projects will depend on the end-user. As another expert explains: ‘I currently have enough solar panel on my roof to generate my own electricity demand. But when I start driving an electric car or install a heat pump I will require much more electricity, and I simply don’t have surface area for more panels’. For large industrial users experts consider it to be practically impossible to completely generate their own electricity demand. To supply their energy needs large centralized projects are necessary. All experts agree that the most important technologies considering these projects will be large scale offshore wind farms, followed by onshore wind farms and solar parks. All technologies mentioned so far are intermittent energy sources, which are sources that are, although often predictable, not continuously available to generate electricity. This will create challenges on which the next section will elaborate. Other sustainable generation technologies are available to provide a more stable base-load. Ultra deep geothermal energy can be applied in many regions in the Netherlands. However, this technology is still in development. Conventional power plants burning biomass or biogas as fuel is another option, however experts expect there will be an increasing discussion about the origins of the biomass. Concentrated solar power plants can also provide a more continuous generation but these technologies are better suited for countries closer to the equator. As the generation of electricity from fossil fuels is, in most cases, still cheaper than the use of renewable technologies, the regulatory landscape will have an important impact on the outcome of the transition. In conclusion, the experts describe a scenario in which multiple renewable technologies will be implemented, both centralized and decentralized, to generate renewable electricity.

22 implementation of renewable energy technologies will require new systems to balance the power grid. Energy storage and smart grids are considered to be the main enablers of a distributed energy system. However, there are still many uncertainties that surround the smart grid development and all the experts therefore expect natural gas fired power plants to be the primary method of balancing the grid for several decades to come.

Retail or the energy services within the electricity market will also change during energy transition. In their latest World Energy Outlook, the International Energy Agency forecasts a declining primary energy demand in Europe up to 2040. The demand for electricity however is expected to grow (International Energy Agency, 2017). Despite efforts to improve efficiency of electric appliances, the electrification of mobility and heating will give rise to higher demands. As one expert explains: ‘If the average household will use electricity for heating and mobility the demand will more than triple. There is no way efficiency can compensate for this increase’. Not only the demand for electricity is growing but also the number of producers. This will impact the way electricity is traded. New platforms will be developed that allow users and producers to trade electricity with each other. Experts believe that not every producer and user will trade electricity by themselves. One possibility is that companies will trade for them in return for a fee. But also the use of information technology is becoming increasingly important in this segment. Trading for instance, could be automated using algorithms. Communication with customers, metering and billing will also change due to information technologies. Smart metering technologies for example are the basis of new services such as detailed consumption data and automated billing.

23 Table 4. Changes in the electricity market according to experts. The expected changes on the electricity market as described in this section will fundamentally change the value chain of the market. The changing value chain, as described by the experts matches the emerging value chain as depicted in figure 4 (Valocchi et al., 2010). However, all experts are skeptical about the value of the so called smart electric devices and appliances, as depicted as a segment of the emerging value chain.

24 When asked where the experts expect utilities to operate in this emerging value chain the opinions differ. They all agree that incumbent utilities have to adapt to a market which is changing from a supply-driven commodity market to a demand-driven service market. One expert argues that incumbent utilities traditionally are capable of organizing large scale projects and so the realization of large wind and solar farms will suit them best. Another expert agrees on this, but expects the offering of flexibility to become their main business by investing in storage facilities. The third expert however argues that the incumbent utilities have a large customer base and therefore should become service providers by offering home energy solutions.

In conclusion all the experts agree that the energy transition will fundamentally change the electricity market. They consider the scenario in which both centralized and decentralized renewable energy technologies are necessary to supply electricity demand to be the most likely scenario. The implementation of renewable energy technologies will increase the complexity of the electricity market and will require new balancing systems. Both the storage of electricity and the introduction of information technologies will contribute to match production and consumption. Customer proximity will become increasingly important in the emerging value chain and new products and services will be necessary to enable the consumer to engage in renewable energy technologies.

4.2

The changing electricity market according to utilities

25 utilities attempt to operate in these two segments of the value chain. The first business model is the utility-side renewable energy business model which comprises large-scale renewable energy technology projects (Richter, 2013). All managers indicate that their company engages in the utility-side renewable energy business model. As manager C explains: ‘Only a few utilities in the Netherlands generate electricity on a large scale and we are one of them. We want to continue generating electricity and this requires investments in large sustainable projects’. Manager B states: ‘Not everybody likes solar panels on their roofs. So centralized generation capacity will remain necessary’. The second business model is the customer-side renewable energy business model. Instead of large-scale projects the renewable technologies are located on the property of the customer in this business model (Richter, 2013). All managers indicate that their company also attempts to engage in the customer-side renewable energy business model. As manager A explains: ‘a part of our customer demand is self-sufficiency, and therefore it is important to enable our customers to generate their own electricity as much as possible. But also enable them to choose energy efficient solutions’. Also manager C explains: ‘As the costs of solar panels keeps declining and with the current regulatory framework, we can see that many of our customers find the installation of solar panels very attractive’.

In conclusion, the incumbent utilities recognize the expected changes on the electricity market as described by the experts. They attempt to engage in every segment of the emerging electricity value chain. The managers consider the expert scenario of both centralized and decentralized renewable energy technology projects to be the most likely. Therefore all three incumbent utilities attempt to operate in both the generation segment and the consumer segment of the emerging value chain. Based on the business model concept of Ostenwalder and Pigneur (2009), the next sections describe in detail how and why the utilities attempt to operate in both segments of the emerging value chain. Section 4.3 starts by describing how the incumbent utilities engage in the utility-side renewable energy business model and section 4.4 describes how the incumbent utilities engage in the customer-side renewable energy business model.

4.3

The utility-side renewable energy business model

In this section the results about the utility-side renewable energy business model are presented. All interviewed utilities engage in the utility-side business model. Mainly by realizing large scale wind farms, both onshore and offshore, but the number of large scale solar parks is growing. One utility also engages in biogas and hydropower projects and two utilities have started pilots to explore ultra deep geothermal systems. The findings are presented following the four elements of the business model as described in the theoretical background: value proposition, customer interface, infrastructure and revenue model. The business model concept allows the structured examination and comparison of the utilities.

26 a certain location. For example wind energy from the Netherlands, or even more regional, green electricity from a specific wind farm. This can be sold in the form of a guarantee of origin, guaranteeing the customer that their electricity is generated from a certain renewable source. However the utilities also seem to incorporate a share of the generated electricity from large scale renewable projects into their so called gray electricity products. Scholars expect that the transition to renewable energy will require new business models and value propositions (Valocchi et al., 2010; Klose et al., 2010). They argue that utilities have to move away from their role as commodity suppliers, and instead have to offer comprehensive energy solutions by becoming service providers (Helms, 2016). Currently however, the large-scale renewable energy projects do not drastically impact the traditional value proposition.

Customer interface comprises the customer segments, channels and customer relationships. It describes all the interaction between a firm and its customers. The customer is becoming increasingly important in the realization of large-scale renewable projects. As customers become aware of the environmental impact of their energy usage, they are willing to switch their supply to renewable energy sources. This is especially the case for large business clients. As manager C explains: ‘When realizing large-scale projects we try to involve one or several large customers from the start. This will offer us some financial safety, but it also offers value to the customer’. A green image can be considered important here, both for the utility as the customer. Another benefit is the long term relationship utilities can build with customers when they involve them in a project. Another possibility is to develop projects together with a city or a neighborhood, which will increase the public acceptance.

Infrastructure describes the architecture of the companies value creation. Innovation literature considers organizational structure and partnerships to be especially important (Boscherini et al., 2011). Therefore, this part will mainly concentrate on these two issues. Concerning the organizational structure it is found that all participating utilities have established separate business units with regard to their activities in renewable technologies. One of the utilities takes it one step further and has completely separated all renewable energy activities from all fossil fuel based activities by splitting the company into two different listed ventures. As the manager explains: ‘It is difficult to focus on both tracks in the right way. Also, we have to get rid of the brown coal image to be taken seriously’. When realizing large-scale projects, the incumbent utilities try to cover the entire value chain. From project development to the maintenance and operations of the assets. All respondents consider the know-how of the utility and their access to capital to be the most important explanation for this. With regards to external partnerships, all respondents state that these partnerships are becoming increasingly important. Manager B explains: ‘We are just starting the energy transition in the Netherlands, and we have gigantic steps to take. We don’t have the illusion that we will achieve this all by ourselves’. The utilities form partnerships with suppliers and other strategic partners. Large-scale projects, such as offshore wind farms, are often realized by engaging in a consortium or joint venture. Several reasons for partnerships can be identified: the access to knowledge, outsourcing specific tasks and the sharing of risks.

27 have to estimate the market price by the time the project is realized’. All managers agree that large-scale renewable projects are in general profitable. It depends on the location but also on the subsidization of the project. Economy of scale is important when realizing these projects according to the respondents. Not only the size of the project itself, but in some cases also the size of the used technology plays an important role. The efficiency of windmills, for example, increases with their size.

4.4

The customer-side renewable energy business model

In this section the results about the customer-side renewable energy business model are presented. All interviewed utilities engage in the customer-side business model. Mainly by installing and/or operating photovoltaic systems on the property of the consumer, but also by offering a variety of products such as heat pumps and home battery systems. Another way by which the incumbent utilities engage in renewable technologies on the property of the customer, is to market products and services that provide detailed consumption data.

Value proposition consists of a bundle of products and services that together present value for a specific customer segment. In contrast to the utility-side value proposition, the value proposition of renewable energy systems on the property of the consumer is no longer just electricity. It is self-sufficiency or a green life-style, at least up to a certain point. According to the respondents the value proposition is the possibility to generate your own electricity. As manager B explains: ‘Instead of selling fish, we are now also selling a fishing rod’. The value proposition of products and services that provide detailed consumption data is not necessarily the data itself, although some customers are interested in it. Rather it is the savings that can be achieved by acting on this data. Manager A states: ‘we want to provide this data to our customers and enable them to act on it’. This can be achieved by providing more efficient alternatives to reduce electricity consumption, or to match consumption with certain prices in the market. This way of engaging in renewable technologies has fundamentally different value propositions than the traditional value proposition.

28 Infrastructure describes the architecture of the companies value creation. Innovation literature considers organizational structure and partnerships to be especially important (Boscherini et al., 2011). Therefore this part will mainly concentrate on these two issues. When considering the installation of renewable products on the property of customers, the utilities do not create a separate business unit for it. Rather, it is incorporated in the renewable generation unit. The products and services concerning consumption data, so called ‘smart solutions’, are however placed in a separate business unit. The utilities have either subsidiaries or contracts with installers to realize and maintain the projects. According to all respondents, partnerships are especially important with regard to the development of new products. As managers B explains: ‘It can be challenging to develop something new in a large company as this. Young start-ups that have been operating a few years outside our company are a very interesting party for us’. Depending on the situation the utilities start a joint venture, buy the start-up or become strategic partners.

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5. Discussion

The results section provided an in depth understanding from the case analysis about how incumbent utilities innovate their business model to respond to the energy transition. This section will discuss and compare these results to the investigated literature as described in the theoretical background of this research and other relevant literature.

5.1

The emerging value chain

To understand business model innovation within the electricity sector it is important to consider the value chain of this market (Schoettl and Lehmann-Ortega, 2010). The transition to renewable energy technologies is expected to change the electricity market (Frei, 2008; Schleicher-Tappeser, 2012). Some scholars argue that customer proximity and servicing will become key elements of the future business model of utilities (Helms, 2016) while others claim that large-scale projects will remain the backbone of the energy system (Frei, 2008). The findings of this research indicate that the energy transition will fundamentally change every segment of the traditional value chain. Both energy and information used to flow in one direction within this value chain. The introduction of renewable energy technologies and information technologies will result in a more complex new value chain in which electricity and information will flow in both directions. The consumer is becoming increasingly important in the emerging value chain. Decentralized renewable generation technologies allow the consumer to generate electricity. As demand is expected to increase, it makes economic sense to move the generation of electricity as close as possible to the end-consumer, to prevent costly investments in the existing power grid. The increase in information technologies will also provide consumption data which will enable consumers to reduce their consumption. However, due to electrification, the demand for electricity is expected to exceed efficiency savings. Decentralized renewable generation technologies are expected to be insufficient to meet this demand, especially for cities and large industrial users. Therefore, centralized large-scale renewable energy technology projects are also necessary and important in the emerging value chain. In conclusion, the energy transition will fundamentally change all segments of the electricity value chain. The end-consumer is becoming increasingly important in the value chain, but most consumers will be unable to meet their energy need with decentralized renewable technologies alone. Because of the complexity, most consumers will not realize the renewable energy technology projects on their own property by themselves. Therefore, new products and services are required to enable the consumer to engage in renewable energy technologies.

Proposition 1: Both large-scale centralized and small-scale decentralized renewable energy

technology projects are necessary to supply the future electricity demand.

Proposition 2: Customer proximity and servitization will become increasingly important in the

emerging value chain of the electricity market.

5.2

The positioning of utilities

30 changing value chain and decide in which part they want to engage (Schoettl and Lehmann-Ortega, 2010). The theory of organizational ambidexterity suggests that companies, in order to be successful in the long term, have to exploit their existing capabilities while at the same time also develop new competencies (Raisch et al., 2009: Tushman and O’Reilly, 1996). To survive, firms have to reconfigure their knowledge and assets according to their changing environment (Teece et al., 1997). Richter (2012) identified two generic business models for renewable energies in the literature. Incumbent utilities engage in the utility-side renewable business model because they consider the realization of large-scale electricity generation projects to be their core-competency. Using the business model concept this research indicates that the utilities believe to have both the knowledge and access to capital to realize and operate these projects. Both the experts and utility managers agree that the incumbent utilities have been realizing large-scale electricity generation projects for a long time and therefore the realization of large-scale renewable energy technology projects fits within their existing capabilities. According to this research the most important changes in the environment of the incumbent utilities are the rise of decentralized renewable energy technology projects and the increasing importance of customer proximity and servitization. Findings of this research indicate that large incumbent utilities recognize their changing environment. As a response, the utilities also engage in the customer-side renewable energy model. Using the business model concept this research indicates that the incumbent utilities attempt to meet customer demand and build long term customer relationships by engaging in the decentralized renewable technology projects. The utilities consider it to be a necessary step to become an energy transition partner that provides energy solutions to their customers. It can therefore be seen as the first steps towards becoming a service provider.

Proposition 3: Utilities engage in the utility-side renewable energy business model because it is in

line with their core-competencies.

Proposition 4: Utilities engage in the customer-side renewable energy business model to reconfigure

their knowledge and assets according to their changing environment.

5.3

Two generic business models

31 or service (Christensen and Overdorf, 2000). By using the business model concept this research shows that when utilities engage in the customer-side renewable energy business model the value proposition is fundamentally different from the traditional value proposition. Instead of offering electricity, the utilities offer the possibility to generate your own electricity and reduce electricity consumption. This new value proposition contradicts their traditional value proposition. Therefore, the use of renewable technologies in the customer-side renewable energy business model can be considered a disruptive innovation for the incumbent utilities. In order to reconfigure their knowledge and assets according to their changing environment utilities engage in the customer-side renewable energy business model. However, this research indicates that utilities struggle to develop new sustainable revenue streams in this business model. The utilities attempt to develop new streams of revenue by linking the consumption data of the customers to energy saving products, or by adjusting consumption to market prices. However, this research shows that the incumbent utilities currently have no clear answer to the loss of revenue caused by the decentralized use of renewable technologies.

Proposition 5: The use of renewable energy technologies is a sustainable innovation for utilities

when they engage in the utility-side renewable energy business model.

Proposition 6: The use of renewable energy technologies is a disruptive innovation for utilities when

they engage in the customer-side renewable energy business model.

5.4

Business model innovation capabilities

In their attempt to engage in more service-oriented business models, the incumbent firms struggle to innovate their business model and develop sustainable revenue streams. Literature offers several approaches to improve the business model innovation capabilities. The first approach is to establish separate ventures or independent business units for renewable technologies. This will create an open and flexible environment for new ideas and overcomes the internal barriers within the parent company (Bessant et al., 2004). Findings indicate that one of the utilities included in this study established a separate venture, and both others did establish separate business units with regard to renewable energy technologies. However, both large-scale projects and decentralized energy generation systems are included in these business units. The second approach is by expanding the external cooperation. As utilities operate in a radically changing environment, external partnerships are an important way to accumulate knowledge and innovation capabilities (Boscherini et al., 2011; Gebauer et al., 2007). Findings of this research also stress the importance of external partnerships in both business models. The incumbent utilities collaborate with start-ups and suppliers to explore and develop new products. However, the literature on guidelines for service implementation is still limited (Baines et al., 2009).

Proposition 7: To improve business model innovation capabilities, utilities can establish separate

ventures or business units.

Proposition 8: To improve business model innovation capabilities, utilities can collaborate with

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6. Conclusion

33 capabilities, the incumbent utilities can establish separate ventures or business units with regard to renewable technologies. This will create an open and flexible environment for new ideas and overcomes the internal barriers within the parent company (Bessant et al., 2004). The utilities can also engage in external partnerships. These are an important way to accumulate new knowledge and innovation capabilities (Boscherini et al., 2011; Gebauer et al., 2007).

This study has demonstrated that the business model concept provides a valuable tool for both research and practice. Concerning the theoretical implications, the business model concept provided a structured way to examine and compare the companies. It also showed that this concept, when linked to research on disruptive innovation and organizational ambidexterity, can contribute to the understanding of the changing electricity market and its stakeholders. Concerning the managerial implications, this study has demonstrated several ways in which utilities can engage in renewable energy technologies. The utility-side renewable energy business model is in line with the core-competencies of utilities and the utilities should try to exploit these existing capabilities as long as possible. But incumbent utilities also have to reconfigure their knowledge and assets according to their changing environment, in which decentralized electricity generation, customer proximity and servitization are increasingly important. Therefore, utilities should also engage in the customer-side renewable energy business model. As this business model is inconsistent with their current value, utilities can improve their business model innovation capabilities by establishing separate ventures or business units and increase their external partnerships. If utilities fail to innovate their business model in response to their changing environment, this will eventually lead to the loss of market share and revenues. The challenge for utility managers will be balancing integration and separation of utility activities and service activities.

6.1

Limitations and future research

This research has several limitations. The small number of investigated cases is the largest limitation, for it is difficult to ensure the generalizability based on only three cases. In addition to this, only one manager of each company was interviewed. However, as all participating utilities are large established firms, sufficient data could be collected from other sources such as websites, newspapers and company publications. The comparison of the primary data from interviews, with secondary data increased the validity of this research. Another limitation is that the scope of this research is limited to the electricity market. All investigated utilities sell both electricity and natural gas. Although the use of natural gas is decreasing in the energy transition, the interviewed experts stated that this will not result in an all electric energy system. Heat systems and heat networks will become increasingly important and this offers new possibilities to utilities.

Future research could investigate more cases from other countries. This can help increase the generalizability of this research but will also help identify country specifics. Besides the generation and consumption side of the value chain, also other segments can be investigated. As this study demonstrated, the energy transition will impact every segment of the value chain. But it was beyond the scope of this research to elaborate on how utilities engage in electricity storage and trading platforms. It is however interesting to research how utilities innovate their business model with regard to these segments, as well as with regard to heat networks.

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