Posted on EURELECTRIC’s ‘Powering the Debate’ blog on 01/03/2010. Accessible to EURELECTRIC members www.eurelectric.org (log-in required).

Written by Jon Slowe, Director, Delta Energy & Environment

The ‘customer side of the meter’ is relatively unfamiliar territory for many European utilities, particular for mid-sized and mass market customers. The market for energy services [1] - products and services on the customer’s side of the meter – is currently small, but growing in many markets.

Will the next ten years see utilities (primarily, but not exclusively retailers) across Europe generate significant value [2] from energy services, or will European utilities remain largely generation, networks and commodity focused businesses?

This post presents two different views of the future. Please find below the results of the poll.

Delta will then synthesise view and provide highlights of utility energy services engagement from Delta / Accenture’s recent research on utility strategies to grow value in a low carbon future.

Viewpoint 1:
Energy services will largely be an irrelevance for utilities
Utilities should not invest substantial human or financial resources in energy services – as supported by previous negative experience of utilities dipping their toes in the energy services water

In this scenario, markets for energy services will be mainly driven by regulation – for example obliging utilities to invest in energy efficiency, or limited incentives for particular technologies – and such regulation will not be consistent across Europe. Customer demand will remain weak, with only niche markets of energy users responding to energy services offerings.

These slowly growing markets will be dominated by specialist organisations – such as installers, building services providers and energy services companies. Utilities will play at best a very minor role.

That is not so say utilities will be wholly inactive – they will facilitate some aspects of the energy services market such as electrification of heat and transport, but not play an active role in providing services to customers.

Fundamentally, most utilities do not have deep energy services expertise; building a large-scale energy services business require substantially different business models from ‘core’ utility businesses; it is hard for utilities to compete in these markets; and the margins are unattractive compared to other parts of the electricity value chain.

Viewpoint 2:
Utilities will generate significant profits and value from engaging in energy services
Utilities (mainly retailers) need to be investing today in understanding energy services markets – customers, technologies and business models – in order to exploit significant future energy services opportunities.

The International Energy Agency predicts that, to reduce carbon emissions by 20% in Europe, investment in end-use efficiency in buildings ($382 billion between 2010-2030) will be bigger than investment in nuclear, renewables or CCS for Europe ($244 billion in power plants between 2010-2030).

Strong energy services market growth will be driven by a confluence of powerful national energy services policies, rapid technology development (better performance and lower costs) and growing customer awareness of and demand for low carbon products and services.

Energy retailers can position themselves as a trusted ‘low carbon adviser’, providing a portfolio of low carbon services to home owners and businesses. They can potentially bundle commodity, products and services to create customer offerings that are ‘simple on the outside’ but ‘complex on the inside’.

In addition to profit from selling energy services products & services, utilities can generate value from:

• Making customers ‘sticker’ (less likely to switch to other energy retailers)
• ‘Smart demand’ – using their energy services activity to use customer-sited resources to shape customer demand and for virtual power plants
• Keeping profits from delivery of regulated energy services obligations in-house.

By 2020 energy services will make substantial contributions to energy retail market profits (>25%) in many EU markets, as well as generating wider value across the utility value chain.

[1]For the purposes of this article, we define energy services as products and services that help customers manage and reduce their energy consumption – for example low carbon heating; distributed generation;
energy management systems; and energy efficient appliances.
[2] Possible values include profit from selling energy services; using energy services to influence or control the timing of energy demand; and using energy services to help reduce customer switching to competitive suppliers.