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How "services" and "digital" are disrupting the heating markets - and soon the energy retail markets.

iStock 10295716 SMALLTime flies. I first blogged about Thermondo in October 2014, pointing out how I believed it could shake up the German heating market. One and a half years later they are in the very early stages of doing precisely this, and recently raised €23.5M to drive their growth into, in their words, “an integrated energy company in a distributed world of energy”. I visited the company’s headquarters in Berlin last week and thought I’d share some of my latest thoughts in this blog.

I previously characterised Thermondo as disrupting the traditional route to market for heating systems, by offering a 21st century way for customers to buy a new heating system and have it installed. They have been executing on precisely this over the last couple of years. Customers complete a survey and upload photographs of their heating system, receiving a firm quote from Thermondo whose software optimises the best solution for the customer. The company’s in-house installation teams across the country then carry out the installation. Thermondo is now installing thousands of heating systems a year in this way. The numbers are small in relation to the overall heating market: their challenge now is to get to scale, and as you’ll see below, broaden their offering.

As we delved further into the company’s business model and plans (they were one of the 36 business model innovations we dived into in our Energy Services Innovation project) we appreciated even more the opportunity that Thermondo is sitting on. I’ll now frame that opportunity.

The energy markets are transforming – becoming more distributed, service-orientated and customer centric. Helping companies navigate this transformation is of course Delta-ee’s mission, and we believe that winners in this transformation will execute on all three of these points. Through the foundation it’s built, Thermondo has the potential to do just that. Let’s take these three drivers of the energy system transformation one-by-one.

First, ‘distributed energy’. In addition to selling boilers, heat pumps, and solar thermal systems, Thermondo has sold and installed around 100 fuel cells in the last months, and it is easy to see how it can expand to other distributed energy products in the future (‘easy to see’, but certainly many challenges to ‘do’). In fact the founder’s original idea was to focus on building a virtual power plant using combined heat and power. Sure, it needs to expand its software, knowledge, and installer capability but it has the foundation to do so. For example, over the last few years it has gradually moved its installer teams in-house to help manage and drive quality. And its ability to specify the right system for the right customer in the most efficient way to keep down costs has continued to grow.

Second, ‘service-orientated’. Many examples from our Energy Services Innovation research illustrate the shift that we will see from shifting units of electricity and gas to focusing more on the services customers really need (and want). Thermondo is moving from ‘shifting boxes’ to ‘selling services’ by introducing heat leasing and gas product offerings in the next months. Through bringing finance and energy supply into its package, the company can move towards offering heat-as-a-service – built around a boiler, or potentially a fuel cell or heat pump. We’d expect Thermondo to take advantage of connectivity to remotely monitor its distributed assets, both optimising the service for the customer and its own operations.

Thirdly, ‘customer centric’. Thermondo’s whole proposition is ultimately about offering the customer a great 21st century experience. There will always be customers who want to wait in and meet one or a few installers, get a quote from them, negotiate with them, and have their new heating system (or distributed energy system) installed by a traditional one-man band. However, our research shows, and we expect this trend to continue, that customers are attracted to a simpler, more transparent, more online and digital buying process. The more that companies can use data analytics (the topic of our newest research service) to tailor the right proposition to the right customer, the more they will delight customers and the more they will sell. Thermondo is successfully building a brand that is attracting very large numbers of customers to their website. Their challenge will be to convert more and more of them to buying distributed energy and heating products and services from them.

Thermondo is by no means the only upcoming company seizing this kind of opportunity, but they are a great example. Although, the proof of this will be in the progress they make in growing their business in the next years. E.ON, who invested in 2014, appear to agree on the opportunity. They invested again in the company in their recent financing round. We are seeing more and more companies move in the overall direction Thermondo is moving in – from large established players such as utilities and large heat appliance manufacturers, through to new entrants from the telecoms sector and a wave of innovators and start-ups.

It can be a tough journey but companies like Thermondo appear to have the ingredients to succeed. Time will tell. Sign up to on our website to hear more!


 

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