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Business Model Challenges in Energy Industry Essay

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Updated: Dec 11th, 2020

Introduction

With the complex nature of the energy industry, companies are challenged by developing business models that will address the issues of sustainability and digitalization. According to Al-Debei and Avison, a business model refers to the abstract representation of a company developed by organizational management to dictate the present and future operations and address the needs, goals, and objectives of the business (360). A traditional business model is divided into such components as lay activities, value proposition, customer relationships, customers, revenue channels, key resources, costs, and key partners.

Business Model Challenges: Energy Industry

Energy providers have been challenged to reconsider their business models due to issues arising in the areas of sustainability and digitalization. Concerns for the environment fueled by the financial dependence on fossil fuels and its limited reserves as well as the need for sustainable economic development and population growth shape the current energy landscape (Hall and Roelich 286). In terms of the challenge of digitalization, energy companies must recognize that many consumers are becoming producers of energy through the use of technologies like rooftop solar.

Some customers have made a shift to supporting energy with specific attributes such as zero carbon emissions from smaller private energy service companies that offer certificates of renewable energy. Overall, customers are starting to rely less on traditional energy providers, which has an impact on the shaping of the traditional business model (Hall and Roelich 289). For instance, “global investment in digital electricity infrastructure and software has grown by over 20% annually since 2014, reaching $47 billion in 2016” (IEA).

New entrants to the energy market that have offered customers both sustainable and technologically advanced solutions are also challenging the current energy industry. For example, Arcadia Power, a private energy service company, offers a clean energy program that gives consumers who cannot access solar farms to invest in solar renewable energy certificates. In this way, the company has managed to eliminate the reliance of customers on utilities, leaving traditional providers behind if they cannot offer anything similar.

The connections between shifts in energy supply and the introduction of new technologies go hand-in-hand and therefore prompt organizations with traditional business models to approach their business in a new way. Such technologies as smart grids, distribution system management, remote energy monitoring, behind-the-meter storage, and others have become necessary for managing energy resources and addressing customer demands.

Innovation in financing energy transactions is also challenging for energy providers. As customers gain more control over their choices, the commercial-scale technologies (e.g., SparkFund) for efficiency offer ‘efficiency-as-a-service’ models that allow customers not only to save money but also to avoid committing to outdated service providers that have not adjusted to the innovation progress.

Solutions to Enhance the Traditional Approach

All of the mentioned sustainability and technology trends in the energy industry point to the need for organizations to reevaluate their business models. The traditional approach may not work on a long-term basis, which is why accepting developing trends is a recommended strategy for the majority of energy industry companies. In the next section, a review of recommendations for addressing the identified challenges will be presented. A special emphasis will be placed on adapting business models to the unique combination of ecological sustainability and digitalization.

The first recommendation for energy organizations is reconsidering the customer relationships that have been established within the traditional business model. At the moment, customers are trying to have more independence when it comes to choosing their energy and using it sustainably. New options offered by consumers can range from energy-efficient technologies to efficiency-as-a-service models illustrated by the example of SparkFun. In this way, companies will maximize the access of customers and minimize the risks of organizations in terms of selecting, maintaining, and paying for new technologies for energy. Service-as-a-model strategies are considered as effective as solutions because they change the status quo for how the solutions for energy efficiency are delivered.

The second solution is linked to the idea that a new business model should also recognize the divide between sustaining and disruptive technologies about the energy sector. Over time, the performance of products has been expected to increase because of the progress due to sustaining technologies, performance demanded by both the low and high ends of the market and disruptive technological innovation. Sustaining innovation is considered with improving existing products and capitalizing on the strengths that they have to increase their value and allow them to compete within an industry.

Disruptive innovation is targeted at creating new markets and value networks. In the context of the energy industry, embracing both types of innovation is recommended to improve the traditional approach toward existing business models. While disruptive innovation can add to the revenue streams of companies who decide to introduce new technology-oriented energy solutions, sustaining innovation can be useful for improving customer relationships, finding new partners, and improving the value proposition.

Sustainability through innovation is the recommended route toward improving the traditional approach toward energy companies’ business model because of the potential benefits of spurring significant business value for customers. The example of the Danish industry suggests that innovation helped companies to become more aware of the limited opportunities of unsustainable energy organizations.

In 2007, two Danish companies, Novo Nordisk and Ørsted created the Climate Partnership to address the challenges the industry sector faced. The Partnership provided to provide additional value by combining existing services and products, which is evidence of sustaining rather than disrupting innovation. The partnership aimed at providing a comprehensive and customer-based value proposition among energy companies for ensuring the provision of business value.

Another point to recommend energy companies as a solution to the existing business model challenges is associated with the realization of energy savings that can be used to finance renewable energy. Companies can combine renewable and non-renewable energy to offer potential customers the option to choose between the services they want to purchase (Hejlesen et al.). In this way, companies will increase demands for renewable energy sources and strengthening climate initiatives in both public and private organizations.

Concluding Remarks

To conclude, it must be mentioned that the participants in the energy sector must be aware of developing trends. For them to address the challenges associated with environmental sustainability and innovation, it is imperative to work collaboratively with customers and technical service providers in the industry for creating a new business model. While there is no unified approach as to how the new business model should look, it is clear that the traditional view is no longer sufficient suggesting that there is a need to learn from both failures and successes during the process.

Works Cited

Al-Debei, Mutaz, and David Avison. “Developing a Unified Framework of the Business Model Concept.” European Journal of Information Systems, vol. 19, no. 3, 2010, pp. 359-376.

Hall, Stephen, and Katy Roerich. “Business Model Innovation in Electricity Supply Markets: The Role of Complex Value in the United Kingdom.” Energy Policy, vol. 92, 2016, pp. 286-298.

Hejlesen, Morten, et al. “Implement Consulting Group. Web.

IEA. “Digitalization and Energy 2017.” IAE. 2017. Web.

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