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Could Subscription Save Utilities?

April 2, 2019
Investing in the subscription model could be a major disruption for an already struggling power industry with stagnant electricity demand and falling prices.

Twenty years ago, you couldn’t drive a mile in an American suburb without seeing a Blockbuster. Thanks to Netflix, children today have never heard of the once-publicly traded company worth billions. The story of Blockbuster’s downfall is just one example of a tried-and-true business model being disrupted by a scrappy newcomer to the market, and utilities could be next.

It’s no secret that utility companies are searching for ways to boost profit margins at a time when electricity prices are low and demand is flat. The headlines about Pacific Gas & Electric Company’s (PG&E’s) bankruptcy in January 2019 coupled with similar stories from 2018 — like Sempra Energy investors demanding the company halt new growth efforts and CenterPoint Energy’s acquisition of Vectren Corp. — shows that utilities are feeling the heat.

Utilities have an opportunity to avoid making Blockbuster’s mistakes, such as underestimating the subscription business model. Though Netflix may have made the business model popular among consumers, subscription has been around for 60 years in the business to business space. Xerox introduced its subscription model in 1959, bringing the company to the top of the photocopying market by leasing equipment that most businesses wanted but couldn’t afford.

Today, many subscription and as-a-service startups like Sparkfund, SmartWatt, Metrus Energy and Redaptive have emerged in the energy space. These businesses buy and install energy-efficient technology like LED lights and electric vehicle charging stations in a customer’s space and maintain it over the length of the contract term while customers pay a fixed, monthly fee.

These companies claim the main advantages of the model address customers’ financial and personnel barriers to adopting energy efficient technology. According to the Bloomberg New Energy Finance report, “The Art of Financing the Behind-the-Meter C&I Energy Deal,” surveyed businesses said, the top two barriers (at 30 and 27 %, respectively) to making energy efficiency improvements are a lack of funding and a lack of technical expertise to execute projects.

“Subscription removes the key barriers that traditional financing options present for the commercial real estate sector without compromising environmental or financial sustainability,” said Asher Burg, chief revenue officer at Sparkfund. A subscription doesn’t involve upfront capital, so it has no negative effect on an organization’s balance sheets. Monthly energy bills plus the subscription cost are generally lower than before and the organization can put its capital elsewhere.

Energy subscription companies also specialize in the procurement, installation and maintenance of efficiency technology, he said, so experts are always installing and repairing the equipment. As a result, they absorb the bulk of the risk-taking that businesses normally take on in-house. For example, Sparkfund’s customers are protected under a functional guarantee that says, if a piece of equipment isn’t functioning properly, the customer won’t pay for it until it’s fixed.

As the model begins to take off in the energy space, utilities and other energy providers are starting to take notice. Sparkfund announced a partnership with Shell in 2018 and Burg said the company is working to announce additional partnerships with utilities in 2019. Though investing in the subscription model may not be the only solution to stagnant electricity demand and falling prices, if Netflix is any indication, it could be a major disruption to an already struggling industry.

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