Imagine meeting some friends and casually dropping into the conversation that you’ve started a power company. That was the scenario at this month’s Vista Group lunch, and it neatly illustrates how the Internet can enable very lean businesses to be built.
The cost of power delivered to your home or business is made up of various components:
- A wholesale energy spot price per kilowatt-hour - what the electricity costs to generate at any time; highly variable (it changes every half hour in NZ) and driven by demand, supply, the weather and the cost of generation, fuel, and alternatives such as wind and water availability.
- A hedging component - basically averaging the cost of wholesale electricity to the retailer and you; those nasty derivatives being badmouthed in the media are actually useful financial instruments in real commerce.
- A variable transmission line cost for moving the electricity from the power generating station to your area.
- A variable distribution cost for local distribution from the transmission substation to you.
- A fixed distribution cost - to cover the cost of simply being connected to the network and having capacity to supply a basic level of supply to you.
- And finally a retail margin for servicing you, the customer, and taking care of all of the above.
When I ran a power company, that retail margin was less than 10% of the price of electricity, from which you had to cover your wholesale market operations, hedging costs, customer service costs, metering costs and make a profit. With industry reform, the transmission and distribution businesses were separated from the generating and retail businesses. The inevitable outcome was that the only players in electricity retailing were power station owners - the generators. Everyone else exited the retail business because the margin was just too thin to cover all the costs of running a pure retail business and make a profit.
Until now, that is. If your customers can service themselves via the Internet, all you need is a website and an ability to buy “delivered electricity” inclusive of all the other costs of supply - a facility now offered by some generators. The collaborative stance of generator-owned PowerShop was a key factor. Vista Group member Natalie Ferguson is part of a small team who cut a deal with a generator and built a web-based electricity retail business in just 3 months! Even though the retail margin today is even less than when I was in the industry, it is now possible to make a buck, because the business costs little to build and little to run. (As an aside, PowerShop has surprised many web-savvy business people with its heavy TV advertising. Good PR would have probably been more effective and a lot cheaper; deep pockets are not always good.)
Web-based electricity retailers like Flower Power and stable mate Green Power are almost the ultimate in lean businesses, since they will compete on branding, product design, price, user experience. etc. without actually generating or delivering electricity, and with minimal live human staffing. It’s too early to say which, if any, business models and strategies will work, but what is clear is that businesses like them probably wouldn’t be built without the Internet.