Industry Perspective
Continuous price pressures and negative spark spreads in several markets
present a significant challenge to merchant facilities. Retail markets
energy participants are also feeling the pricing pressure. Furthermore,
Retail participants are experiencing first hand that maintaining billing
and service relationships with millions of customers simultaneously is no
easy task. Additionally, the large energy company's aggressive moves into
this part of the market will have broad and far reaching impact on other
sectors of the energy industry.
Lessons can be learned from other markets like telecommunications and
financial services where competition is equally intense and frequently
price driven. In both these markets, it became increasingly difficult for
retail customers to differentiate one service provider offer from another.
This was especially true in the telecom sector where the single voice service
came at a price that was almost identical from one company to another. The
mobile market showed how this could change by customizing offers. When mobile
data services became available, service providers could differentiate themselves
by offering new services, again customized but this time for target audiences.
In financial services, loyalty was difficult to maintain as institutions
attempted to rationalize operations by reducing costs in the customer-facing
organization. This happened through the increased use of call centers and more
recently by the introduction of Internet banking.
Although each of these industries has unique characteristics, they demonstrate
characteristics that are shared with the energy business:
- The existence of large networks that need to operate at full capacity
- Erosion of loyalty in the face of price competition
- An increase in awareness that customers have genuine choices
- A requirement to diversify and introduce novel, complementary services
- Profit margin pressure but with an upside potential for those customers that can be won and retained
- A requirement to turn commodities into customer driven value
The Outlook
The resulting effect on the industry, and more specifically the energy
service providers could very well be an intense downward pressure on pricing.
A widespread or even regional downward pressure on pricing would impact almost
every single company in the business of power generation, as we have seen
already this year. The owners of distributed generation facilities, however,
would fair well as the value of their long-term power purchase agreements
would guarantee a certain return even in the face of such industry-wide
downward pricing pressures. Fuel costs are a driving factor in new distributed
generation opportunities; this is an area where Pinnacle excels as we have
identified alternative low cost fuels.
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