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E.ON splits: a sign of things to come? But the innovation challenge remains

The logic of E.ON’s announcement is compelling. It creates an old world (20th) century utility and a new world (21st) century utility. The former is centralised and asset led. The latter is decentralised and customer led.
 
We like to think we’re far-sighted. Four years ago we forecast, in a joint study with Accenture, that to thrive in the future utilities would need to develop new business models around distributed generation and energy services. We even held two ‘Energy Services in Europe’ Summits in 2010 and 2011. But we concluded that utilities were far from developing new business models based on service rather than supply. Maybe we didn’t sell the story sufficiently well to utilities. Or maybe those at the top of the organisations weren’t ready to really listen. Since then, progress on energy services has been slow (and thats being charitable).
 
E.ON’s announcement isn’t a bolt out of the blue. Utilities have been starting to talk up growth strategies around energy services. E.ON’s launched a new business unit, Connecting Energies and has made some interesting strategic ventures investments in the area. EDF’s chairman talked about a future where energy services played a key role in its company. Centrica’s investing heavily in its Connected Homes subsidiary.
 
But few companies have – in our views, and in the views of utility equity analysts - yet shown they can grow significant energy services revenues. We believe that to do this the ability to innovate is a critical asset. Our new WHITEPAPER describes the growing drivers for change and the rationale behind our view on innovation.
 
The institutional barriers in many large utilities are one of the key barriers stifling innovation. An asset led business- most utilities today- makes a small number of conservative 'big' decisions that have longstanding impacts. A customer focussed business needs to be nimble, make many small decisions, segment its customer base, iterate, learn, and pivot. Almost the polar opposite. 

Eons strategic split addresses this barrier. It doesn't guarantee that the new utility will succeed but it gives it a better chance of succeeding.
 
And we see benefits for a range of stakeholders
  • Investors: they now have choice to invest where they see value
  • Employees: each company has a clearer strategy and can play to its strengths. They can attract and retain staff with the right skills for the right business
  • Customers: the new utility will be able to respond to their needs faster, innovation will (hopefully) accelerate and customers will be offered a range of compelling propositions.
So yes it's a bold move. But a logical one. E.ON is facing a new future head on and is structuring itself according where the market is going. It now needs to transform itself in a customer-focussed, innovating, distributed and fleet-footed business. A hard decision has been taken. But the hard work how has to be done.
 
We’ll be launching new research on Innovation and Energy Services shortly – subscribe to our blogs to keep in touch. To find out more about Innovation and Energy Services please contact Nigel Timperley.

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Telcos need to prioritise energy if they want to host the connected home party

In my previous blogs I’ve talked about the start of the connected home party, the impact of social media and the types of energy offerings we see in the market.  Today, I’d like to consider telcos and explain why energy isn’t the priority for most telcos, and why, based on our latest connected home research report, I think this could be a mistake.

Telcos could be the perfect hosts for the connected home party

The telcos are well positioned for an emerging market like the connected home. They have a large customer base, shops and e-channels, network quality, different access channels and services, billing system in place.  They can drive and shape this emerging market.

Telcos have understood that this market won’t be about single point solutions. There will be customers interested in security, others in smarter lighting systems, others in entertainment, others in assisted living etc. Their aim is therefore to be in the centre of the connected home via the internet router or a gateway that would be compatible with several types of products. The model is simple: their partners will pay to be on the platform and the telcos will deal with services, customer support etc. 

Most telcos seem to be adopting the US model to develop their European businesses

US telcos and broadband companies entered the connected home space starting with offering security / peace of mind solutions to their end-users, then expanding their platforms to offer energy and other solutions. Comcast and AT&T are perfect examples.

But Delta-ee see limited success from European telcos to date in adopting this approach.  Our latest detailed research is available in our new connected home report, which identifies and examines reasons why the US approach might never work in Europe, such as:

-          The European security / peace of mind market is highly fragmented

-          The demand for security products is lower than in the US

-          European citizens are not willing to pay as much as Americans for security products

I do see evidence that telcos are already waking up to the potential of energy in their connected home offering.  The conclusion of the last group discussion at a telco/broadband Digital home summit I attended in Berlin recently was:



And we do see some examples of telcos which recognise that the European party will be different to the US, and energy has a more important role to play.  Qivicon is one example where energy features strongly in its offering.  

But I believe energy needs to become a higher priority for many telcos than it is today, and there are many opportunities to create partnerships or complementary offerings with energy companies and heating equipment manufacturers, many of whom are now actively engaged in this space but do not yet have clearly developed strategies.  Rather than being a ‘pull-through’ product, energy could be the gateway to the home for many European consumers.

For more information on the Delta-ee Connected Home Service, email me at arthur.jouannic@delta-ee.com
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Utilities Wake Up To The Energy Challenge - But Do They Know How To Respond?

We had forecast already in 2010 that new business models involving distributed generation and energy services would be part of a successful utility in 2020. But at that time Delta-ee’s and Accenture’s conjoint survey of the European utility sector showed that this thinking had not yet penetrated the sector.

Now, three years later, a recent study from PwC is confirming that utilities around the world are finally waking up to the challenges that lie ahead.

Decentralized Energy – Disrupting The Utility Business Model

As my colleague Scott Dwyer wrote on this blog before, the feed-in of renewable electricity is increasingly threatening the European utilities’ generation assets. But the business model of the vertically integrated utility is under threat across all parts of the value chain – from generation, over transmission & distribution down to the retail businesses.

It is therefore not surprising that PwC’s global survey amongst power utilities found that 94% of respondents expect a complete transformation or important changes to the utility business model in the future. But do the utilities know how to respond to the challenges that lie ahead?

Recognizing The Challenge – Only A First Step

Well, PwC’s survey shows that they have at least woken up and indeed they are acknowledging distributed generation as an opportunity for their business (82%), rather than a threat (18%).

According to the study 67% of respondents were looking for “services to provide distributed generation” as a strategy to overcome the sector’s challenges. However, despite various demonstration projects like RWE’s Windheizung or EDF’s Smart Electric Lyon project, we don’t see much evidence of a successful implementation of new business models – yet.

Recognising the challenge is only the first step to making utilities’ business models fit for the future. Responding to the challenge is the hard part and this is what we and our clients are working on together.

We see heat pumps as being a key element of the future energy landscape. How the technology fits into the new utility world is going to be discussed at Delta-ee’s next Heat Pumps and Utilities Roundtable, organised together with the European Heat Pump Association on the 6th February 2014 in Paris.

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European utilities feel the pinch – and see distributed energy as a growth opportunity

European utilities feel the pinch - Distributed energy to the rescue? 

The big picture is clear – or at least the story that European utilities are telling investors is clear. The centralised power plant model is no longer the bedrock of utility strategies, with the demand side - and distributed energy - already featuring highly in the ambitions of some.

Falling power prices are hurting European utilities – badly. Vattenfall recently announced a €3.4bn write-down on the back of lower power prices, and said that their brand new CCGT  in the Netherlands would effectively be mothballed. One third of RWE’s power plants are losing money. E.ON is looking to shift capex completely away from conventional power plants (in Europe) by 2015, and also has a stranded shiny new CCGT in Bavaria.
A mix of sluggish demand (in the UK Centrica has seen a 15% underlying fall in gas consumption since 2008), a collapse in the carbon market, and growth in renewables are causing the pain – which is unlikely to go away any time soon. French giant EDF has largely escaped so far, but may not be immune – the French are in the middle of an Energy Transition Debate, with major discussion around energy efficiency, renewables, distributed energy and the future share of nuclear.

 
In 2010 Delta-ee, in partnership with Accenture, carried out an in-depth study on how well prepared 19 different European utilities were in order to thrive in a low-carbon future. At the time, it was clear to us that energy services would have a major role to play. Many utilities agreed, but although some were laying early foundations, there was little sign of real thirst to rapidly grow revenue from the customer side of the meter. Two years on, the story is rather different.  

Most have recognised that ‘doing nothing’ isn’t an option. All are at various stages of implementing strategies to cope, and hopefully in the longer term thrive again. RWE, E.ON and Centrica are  examples of companies where the ‘customer side of the meter’ features strongly in their recent strategy announcements.  

But at a time when they are cutting jobs and costs, driving strong growth in sectors that are not always in their current corporate DNA will not be easy. Success will come from deep understanding of customers and developing compelling propositions – that offer attractive margins and are highly scalable. And executing new service-based business models will require very different skills from building, running and trading on the back of a small number of large power plants.

If we wind forward two years to 2015, will the story have changed? Will some be succeeding in the ‘brave new world’ of distributed energy and energy services?  Or will the story being told to utility investors prove fiction rather than fact?  The distributed energy market will grow quickly, but it’s not necessarily the utilities that will be the victors – they could be the victims.  
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Will the Renewable Heat Incentive revolutionise domestic heating in the UK?

The announcement of the domestic Renewable Heat Incentive (RHI) scheme in July this year is welcome news for the fledgling renewable heat industry, as discussed in our previous entry: ‘RHI = Really Happy Industry'.  But, will the proposed incentive levels ignite genuine interest amongst discerning UK customers and drive significant uptake?

I’ve been using our Pathways Tool and Roadmap Service research to explore this question, and the answer is yes!

Over the next decade, there’s going to be a huge shift in the structure of the UK’s domestic heating market.  Overall boiler sales are set to fall by 30% (by more than 400,000 units per year).  Oil boiler sales will almost disappear (see the figure below).  These heating systems will be displaced by a range of low-carbon alternatives whose market will grow from low 10,000s today to 100,000s by 2025 – with an installed market value worth £2.5 billion in 2025.

Evolution of residential heating appliance sales in the UK to 2025.

Source: Delta-ee, 2013

And the winners will be….     
  • I expect to see a boom in sales of hybrid heat pumps to 2020 – the combination of a relatively low upfront cost with a great payback (even on gas), and a comparatively straightforward retrofit will grab the attention of UK customers. Most other low carbon alternatives will struggle to compete with this in the short term.    
  • And the market for ASHPs will take off – ASHP economics means they will become very attractive options for off gas homes, with this opportunity extending to on gas properties in the 2020 – 2025 period. 

But many other technologies will also have a role to play!  

Some other low carbon heating technologies are supported by the RHI (biomass, solar thermal, GSHPs), and others are supported by the feed-in tariff scheme (micro CHP and fuel cells).  With growing awareness of low carbon technologies that will come with the RHI introduction, all will become more attractive to customers and grow their market shares in the next decade. I expect to see growing competition among the low carbon technologies and an increasingly dynamic market.

What does all this mean?
  1. There are great opportunities for energy suppliers to become service providers, and to develop new product offerings for their customers.
  2. Boiler manufacturers face a real challenge as their boiler sales take a hit in the next decade.  But low carbon technologies, if added to their portfolio, could make up for this.
  3. The UK will miss its carbon target for decarbonising residential heat, if the uptake of low carbon heating appliances remains on this trajectory.

For further information on the above, please contact stephen.harkin@delta-ee.com

For shorter term forecasts to 2016 and insights into what UK customers really think, please check out our Microgen Insight Service.
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Green Deal Stuck On The Runway – But Will It Ever Take Off?

DECC has today announced that:

  • There had been 38,259 Green Deal assessments completed, where customers are given initial advice about what energy improvements they might be eligible for.
  • Of those, 241 households have confirmed they would like to proceed with work.
  • Four people have signed up for Green Deal plans
It' s a slow start - DECC expects that when the number of finance providers increases from the current five to the anticipated 50 by year end, this will spark market competition, customer interest and uptake.  But will it?

Our recent Delta-ee research with owner occupiers under the Microgen Insight Service tested customer attitudes to incentives, including the Green Deal.  Some of our findings included: 

  • People are used to paying for their system upfront – over 40% would prefer to pay cash, loans have low appeal.
  • Upfront grants are a popular incentive - even if they may not be as economically attractive as an ongoing subsidy.  This is because upfront cost is and remains a significant barrier to uptake.
  • Many customers have already heard of the Green Deal (two thirds of customers in our research had heard of the Green Deal – the same level of awareness as the FiT).  But the majority of customers said it was the least appealing out of the current incentives, evidence they currently struggle to see "whats in it for me?"
  • Customers have major concerns about taking a loan (especially at what is seen by many as a not particularly attractive interest rate) and a high number of customers are worried it would affect the value of their home.
So is the proposition under the current Green Deal ever going to be strong enough to attract thousands of customers?  If you consider some of the comments posted on the BBC website following their news story, then it seems unlikely.  Many of the comments support our recent research findings, and highlight how customers fear paying inflated prices and being the victim of mis-selling.

The Green Deal only works if the customer is placed at the centre and can clearly see "what's in it for me" (as opposed to 'big industry', 'government' or the 'greater good').  Presently, this does not seem to be happening – but if the Green Deal is ever to reach take off, it's absolutely critical.
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