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Podcast S01E03

Heat as a Service – selling comfort to the customer

Heat as a Service – selling comfort to the customer

Jon Slowe is joined by Michael Verger, CTO at Engie Home Services, Matt Lipson, Business Lead – Consumer Insight at Energy Systems Catapult, and Charmaine Coutinho, Principal Analyst at Delta-ee.

This week they’re discussing Heat as a Service, selling comfort to the customer.

Episode transcript

Episode 3: Heat as a Service - selling comfort to the customer

Jon Slowe, Director, Delta-ee

Michael Verger, National Technical Director, Engie Home Services

Matt Lipson, Consumer Insight Business Lead, Energy Systems Catapult

Charmaine Coutinho, Principal Analyst, Delta-ee

 

Jon: Welcome to Talking New Energy, a podcast from Delta-ee, the new energy experts. We will be talking about how the energy transition is developing across Europe with guests who are working at the leading edge of this transition.

In this week’s podcast we’ll be talking about heat as a service. Thomas Edison, in the world’s first electricity system, sold light, not kilowatt hours. He provided customers with electricity and electric lamps, effectively selling them lumens. Then, with the advent of meters and cheap light bulbs, customers bought units of energy and light bulbs and have done that ever since. Are we about to come full circle with heat, with customers buying 21 degrees comfort instead of buying kilowatt hours of energy and heating appliance separately? With other industries, from Netflix, to the automotive industry, moving from selling products to services, leases and subscriptions is becoming more common. Will the energy and heating sectors meet one of our most basic needs, that of comfort, in this way too?

In this episode I’ll be talking with three guests to shed some light on this question. So, let me introduce my first guest, Michael Verger. Michael, Engie is one of Europe’s biggest utilities and you work for them with a wide range of activities. Can you explain a bit about your role at Engie and give me some facts and figures about the part of the business you work in – the heating services business in France?

Michael: [1:40] Thank you Jon and in a few words Engie Home Services is a subsidiary of the Engie group and we are the number one for the maintenance of the heating system of the residential market in France. We have about 1.5 million maintenance contracts and 4,200 employees – mainly technicians or engineers. And we are covering 100% of the French utilities through 200 agencies. So to give you other figures maybe, each day we enter in our customers’ homes 40,000 time and we are making about 70 million kilometres a year.

Jon: [2:28] So a big business and your role in that business is around the technology, is that right?

Michael: [2:33] Yes mainly.

Jon: [2:42] Now your business has been based on what I call the old model or the current model of selling boilers and selling maintenance and breakdown insurance. This model’s starting to change, isn’t it? Can you tell us how that’s starting to change?

Michael: [2:59] That’s right Jon, you are absolutely right. It’s starting to change and the question is more about the speed of this change that we don’t really know today. And the other method you describe is eventually dead and gone. Not only Engie has now adopted a new strategy line, but we already have developed and begun to sell a new offer, based on the comfort as a service concept. This offer, called Edelia, includes a full package of technical, energetical and financial services. Our customers can now, by signing a single contract, have a new boiler along with maintenance and breakdown insurance, and expect a financial at 0% offer, which allows them to save money, in fact with Edelia. It is also important to say that it is combined with our 200 technical network centres in France. Because technology is there to support our technicians, to maintain and increase the relationship with our clients. At the end, our customers have to pay a single monthly fee, about 44 Euros per month, and just forget about anything else. But enjoy friendly, good, well heated environment: this is what we are looking for.

Jon: [4:39] So much more like a subscription model than the old model? Now let’s introduce my second guest, Matt Lipson. Matt you work with the, slightly grandly named, Energy Systems Catapult in the UK. In a nutshell, can you tell us what the Energy Systems Catapult does and what your role is there?

Matt: [5:00] Yeah, hi Jon and thanks for having me on the podcast. The Energy Systems Catapult is a not for profit set up by government to help the energy sector innovate and my role there is I head up a team that focuses on consumer insight and we are a hybrid kind of market research, digital design consultancy type offering, specialises in trials, real world experiments, to help other parties move forward from idea to impact, faster with less effort. And we work with others across the Catapult, to use sensors, to see beyond what people say, so that you can understand what they’re actually doing, because with energy in particular people often use it unconsciously without thinking so it’s hard for them to explain what they’re doing and describe that in accurate detail. And we also work with people who have modelling capability, the building area and national scale, to relate the behaviour we see to the rest of the energy system. The important things matter.

Jon: [6:07] And you’re using this to innovate around providing comfort to customers, rather than providing kilowatt hours to customers, aren’t you?

Matt: [6.18] That’s right Jon, so we got asked to do some work for the UK government and a bunch of larger energy players around six years ago, and they asked us to look at, you know, how can we decarbonise heat, which is one of the perhaps more challenging aspects of meeting our climate change commitments. And we realised that the smart home offered unique opportunities, both to consumers, to get, kind of, better experiences from energy, but also across the entire energy system. So we started to upgrade homes around the country in the UK to the 2020’s level of data and control and we gradually discovered that if you show people information about the cost of heating their home in different ways, so you can imagine, whole home, all day, one price, or part of your home perhaps just slightly lower temperature just for part of the day for a different price, it is completely transformative, so you find bill payers who aren’t particularly interested in energy, maybe they switch, perhaps not, become discerning customers, the life blood of any market, just by seeing these two options, because they then realise which they prefer and they start asking you about, well what would it cost me to have that room a bit warmer or that one a bit cooler. So starting from there we realised that there was something quite powerful here, potentially, that might enable us to tackle this challenge. We took it one step further and we asked consumers whether they might prefer to buy a warm home rather than units of fuel, which is not a new concept to people who work in the energy sector, we might call it heat as a service, part of an energy as a service offering, which is just one business model amongst many, but this capability for consumers to decide what outcome they want and what thing they get and get a fixed price for that is at the heart of lots and lots of different business models. So we took that little bit a bit further and started to think through, in detail, how might you do that in the real world and designed a starter for 10 energy as a service offer which we would expect the sector to move forward, so just to reiterate, we’re a not for profit, we’re not trying to set up a business, we’re trying to learn how to accelerate other people’s business ambitions, and I can tell you a bit more about that if your interested.

Jon: [8.46] Great, so is that one-way Matt, like you strategically were setting up in this direction but in another way, that by listening to customers, you allowed customers to steer you to this type of trial and project, looking at selling comfort rather than kilowatt hours. How much was listening to customers, or combination of both?

Matt: [9.11] Yeah, I think that’s a great point. What we realised early on is that at the end of every pipe and every wire sits a consumer and if they don’t like what’s coming out of the pipes and wires, or they can’t use that stuff to get the things that they want, they won’t be very happy to pay for energy today but also for the infrastructure overhaul that’s required to decarbonise our energy system. So we realised early on that we really need to understand what consumers need, want, value if we are to design, you know, a low carbon system that they actually want and without their support it’s going to be difficult to drive the change that’s required through. So we just applied, what is actually a standard approach in many sectors to the energy system and maybe it’s a bit less common in the energy sector.

Jon: [10.05] I think you’re right there, the energy sector’s probably not famous for being customer centric at the moment, although it is moving more in that direction. Matt we’ll come back to some of the details of what you’re doing but now lets introduce my final guest, Charmaine Coutinho, principal analyst here at Delta. Welcome back Charmaine. Now the concept of heat as a service is banded around a lot at the moment, you see it on PowerPoint slides, you hear people talking about it. Can you break down that concept a bit for us Charmaine and just make it a bit realer rather than a grand aspiration of heat as a service.

Charmaine: [10.43] Thanks Jon, and it’s great to be back. So in our research here at Delta we’ve identified three different types of business models associated with energy as a service, and I mean that’s an interesting point to start with. We’re talking about heat as a service specifically but we do see energy when you’re incorporating electricity and heat as other different types of business models in this area. So, on the kind of less complex end, we have, effectively, what is an asset leasing model, so, a product or service that is fundamentally financed by a third party, now that’s offered to customers with a finance package. Additionally we see that model developing to our second model which adds on maintenance and servicing aspects, and that really focuses on making sure that that product or asset within a customer’s home is performing optimally and talked about some of those elements in the way that energy is doing that. And then the third, more complex model is really based around the provision of an output or an end goal in itself, so comfort, heat, and that really incorporates the element of fuel. So if that asset is usually to electricity or gas, incorporating that into a package for the end customer, and it really looks at what is the customer getting at the end point rather than what products and services can we or one as a service provider put forwards to our customer.

Jon: [12.13] Ok so, starting then with asset leasing or some form of asset subscription then adding maintenance then maybe adding energy supply and through to providing an outcome or a service.

Charmaine: [12.26] Yeah, exactly that, and I think heat is particularly interesting because you can power a heat product either by electricity or gas so last point is be critical about what you do with your energy and fuel supply provision.

Jon: [12.39] And what we’re seeing at the moment is a number of projects on this spectrum popping up across Europe, so I think it’s a fascinating time to be talking about this, lets come back to Michael, to Engie. So, I’m interested in what’s, you’ve talked a bit about what’s driving Engie to change its model, you used to sell boilers and maintenance separately, now you sell the, or offer the monthly fee for boiler and maintenance combined. Are you changing this because you’re having to or are you changing this because you really want to and see a big opportunity?

Michael: [13.26] That’s a good question Jon. I agree our model was good anyway, but times are changing and our business is undergoing profound and rapid changes brought on by logistical, technological and economical development. To say that, in fact Engie Home Services is to adopt a new and clever position in the market, in fact our goal is now to be recognised as a comfort provider, it’s a little bit more ambitious than a simple heater as a service offer because we strongly believe that our clients would prefer to see Engie Home Service as a comfort partner rather than technical operator of heating system. Let’s say, piece of mind as a service. That means a lot of things for us of course, that means we have to develop a new range of reliable, efficient equipment with economy rates contracts. Our customers are waiting more and more for all in one solutions for their heating system, not only technical solutions but package offers. Specifically designed so that it can be used as a convenient, secure and consultable solution.

Jon: [14.56] So, are you seeing pull from customers for this Michael? Are you seeing customers actively interesting in this or are you having to push this to customers would you say?

Michael: [15.10] In fact we are making both, we are pushing and we are hearing our customers, they want something and we are the first to provide it, so where to find a good way.

Jon: [15.28] I guess a balance between educating them or explaining a new type of offer to them, that takes a bit of time.

Michael: [15.37] You get the point, it is exactly that.

Jon: [15.41] Matt if we come back to your project, so you’re running some trials at the moment, can you help me understand a bit about what the customer offer actually is. If I’m a customer and you’re offering me comfort what can I choose or what am I buying? I’m a customer how would you explain the offer to me?

Matt: [16.05] Yeah, sure Jon. So, we’ve done lots and lots of different bits of research over the six years on this topic for ourselves initially and for government, more recently for different parties who are exploring how to enter this space. The start of our journey as I said earlier was just exploring with helping people understand the cost of heating their home in different ways. We then realised, actually there’s something very important here in terms of giving them control over the outcomes they get, and there was no language of service. So we decided to create a starter for 10 and design something from scratch, I expect the sector would move it forward very rapidly, but what ours involved was offering consumers the chance to buy warm hours instead of kilowatt hours, we did lots of cocreation with consumers to define what we meant by warm hour and then changed it loads during the course of those interactions with consumers but in the end warm hour was an hour when any of their rooms was warm, that’s what they expected it to be, so they’d be nought to 24 hours a day. And we sold them a heat plan which is a fixed price for a certain number of warm hours which creates a kind of hence a warm hour, kind of miles begun if you like for the home. And what we found in our cocreation with consumers is that they could really quickly get their head around that and that they started to compare themselves with one another, so one person might say to another, how come I’m paying 20 pence her warm hour and you’re only paying 10 pence per warm hour. And very quickly they would realise that it costs more to heat, you know, a big old home than a small new one.

Jon: [17.54] Ok so, Matt the warm hour then is a metric, that’s what you’re selling, you’re selling a warm hour and the price her warm hour will be different for different customers based on their house and how well insulated it is for example.

Matt: [18.09] Yeah, I mean, I think the price a business chooses to charge for a warm hour or for a heat plan with a certain number of warm hours is a commercial decision but the cost of delivery definitely does depend on the building physics but also on the weather and various other characteristics. And in our plans, a bit like a mobile phone contract, you know, they were, there was set number of hours within a plan and you could buy extra hours if you wanted to and then there was a certain amount of freedom consumers had. The way we did it, what we were doing was using smart control to help consumers discover how many hours they wanted, what temperatures they liked, which rooms they wanted warm, so that they can buy the right plan for them

Jon: [18.55] Ok, and you’ve got how many customers on these sorts of plans at the moment or how big is your trial or the project?

Matt: [19.02] So the first time we’ve done looking at this in the real world was last winter, so it finished a year ago almost, and when we offered a hundred homes the chance, just under a hundred homes in the end, the chance to buy one of three plans. There were three, so there was the cheapest plan was a fixed plan which came with a certain number of hours, the hours in their schedule, and it was the cheapest because they weren’t able to adjust their schedule, they could change, they could add hours by buying extras but they couldn’t adjust their schedule. There was a mid-price plan, which was a flexi plan, which came with a kind of bundle of spare hours in their plan, and it was flexible in the sense they could move them, reschedule them whenever they wanted. And then there was a premium plan which was our unlimited offer. And each of those plans was priced using data for each of the homes in our trial so give them a bespoke centre of three plans and with three bespoke prices.

Jon: [19.59] Ok, so we’ve got now, if we come back to that spectrum Charmaine you described at the beginning, Engie are on the selling subscription or monthly fee for a boiler and the maintenance included, so piece of mind around your heating system for a monthly fee. The Energy Systems Catapult are at the end of the spectrum in terms of offering comfort. Can you characterise a bit, across Europe, how much activity we see at various parts of this spectrum or what we’ve heard about common place at the moment or is this part of an emerging trend?

Charmaine: [20.36] Yeah, for sure Jon, I mean you referenced it earlier in the introduction there are so many thought pieces and PowerPoint presentations about energy as a service but what’s really nice about this podcast is actually its two really excellent examples of commercial business actually putting something out into the market. So obviously not for Catapult but Engie doing their offerings and the Catapult with their partners and one of the things that is really interesting is we haven’t seen, to date, many examples of the more complex heat as a service offerings. So there are many examples of the asset leasing and financing models but with the additional services and with the heat element to provide that comfort level its very, very few. So a lot of interest across Europe, but very few commercially available models we see, and I’m not really sure why.

Jon: [21.28] Something we could see a lot of in the next year Charmaine?

Charmaine: [21.30] Yeah, I mean, for sure, I think, I definitely think there’s been a pace of change in terms of launches in the last six to twelve months, we’ve seen more people announcing these type of propositions and they’re very complex to do, its not an easy task, that’s one of the reasons why there probably isn’t many of them around, and It’s definitely the direction of travel, we see many types of energy companies looking towards.

Jon: [21.56] On that not easy to do, lets turn our attention a bit now to the risks, so you could think of technology risk, performance risk. Lots of different types of risks involved in doing this. Michael could we start with what you’re doing at Engie and can, I guess you’re taking the technical risk of the boiler and taking responsibility for that, can you tell us a bit about how you see the risks and how you’re managing these?

Michael: [22.29] Yes, in a few words, its risk on the control, we are facing new technologies and we know that we have to continue to learn by working, clearly. If we have a long history as a service provider and operator our teams have a deep knowledge of how markets, to be clear, the be part of the group like Engie, so with digital is part of the strategy, obviously, besides Engie Home Service has invested amount of money in two main points. The first one is one we have to develop and secure solid technology and two to upgrade the skills of our technicians, its very important. And then the third point is to build a strong back office. So for, in terms of risk, I’m very confident, but one challenge for us consists to help our clients to accept this kind of new services at home, we talked about that before, and this will take time, we know that, and we are just at the beginning of the history, that’s why we need for one small, reliable and first steps, even knowing where we want to go but we have to go in that way if we want to secure the approach.

Jon: [24.06] So you can help to manage some of the risks through technology for example, we’ll see more and more connected boilers in the future across Europe where you can use remote diagnostics, but also your strategy is to be quite pragmatic and take small steps, learn the risks, understand the risks and learn by doing. Matt in terms of the risks on your model, I can imagine risk managers at companies tearing their hair out and thinking what if the customer opens the window or what if the heating appliance doesn’t operate as efficiently as we think it would. How do you think about risks and the industry partners you’re working with, what’s your perception of their attitude to these sorts of risks?

Matt: [24.58] Yeah, I mean our role is to accelerate a market by showing the art of the possible so there are risks here, but we believe they’re manageable, and that’s why we’ve done things in the real world to demonstrate that they’re manageable. I think there’s three kinds of risks, if I was to categorise them at that more complex delivering, in our case, heat as a service or if you added cooling and comfort as a service. Risk is really about understanding consumer expectations, so that you know what service they want but you’ve also perhaps shaped their expectations so that they understand what’s not possible and you’ve banded their expectations so that they’re clear on what’s included and what’s excluded, in our case what the concept of the extras is all about. The second one is really about pricing the cost of meeting those expectations and doing that in a way that’s attractive to consumers but also affordable to business. And then the third is the consumers are going to need protecting in this, kind of, smarter new energy world and unless industry can find a way of doing that, regulators will impose something I think. So those are the three challenges and I guess we take different approaches to kind of thinking through how to manage those, perhaps you’d like some examples?

Jon: [26.16] I would love examples Matt but I’m also keeping a beady eye on how time is rushing past us so what I think we’ll do now, well the common point I’m hearing from both of you actually and from the work we do at Delta is that technology is the attitude to restrict important, the learning by doing, the understanding the risks and then technology helps to manage some of those risks through things like remote monitoring or censors in homes or understanding heat loss in buildings through measuring temperature at different parts of the home. So the risk seems like a big question but unless you explore it and work out ways to manage it, then it’s going to be hard to move forwards. So we’ve got just a couple of minutes left, what I’d like to do to finish with is ask each of you where you think your heat as service type resource will be in the next few years, so if you had to look forward into your crystal ball, Michael how big a part of Engie’s business will this be? Matt what do you think will happen in terms of industry adopting the sort of models you’re working on at the moment and Charmaine, across Europe in three to five years, will this become widespread? So maybe starting with Michal, where will this be in Engie in the next few years do you think?

Michael: [27.47] Do you want me to give some explanation but what our customers are waiting or do you want me to go through directly to the forward three to five years?

Jon: [27.57] Yeah more to the three to five years I think, let’s look at that.

Michael: [28.02] Ok, so in fact we don’t know exactly a time where and what could be the big numbers anyway, we know and I do believe that customers are waiting for that kind of solution, we are sure that and they don’t care about technologies they want services. So by 2020 we are thinking that we will reach at least 20,000 services-based heating offering, at least, and in the meantime it is very important for us, we will continue to develop new lines of connected products so we don’t, heaters or the main lines, product lines, and technical analytics to keep the key maintenance, to have more efficient services. We are continuing to move, for instance, we could open new services or other items. Why not heat pumps or electrical vehicles or batteries or voltage? And at the end we could manage a whole energy as a service in the same time of energetic transition.

Jon: [29.20] Yeah I guess ok so picking up Charmaine’s point about heat as service just being one aspect of energy as a service or service-based energy models. Matt, from your side, in your crystal ball, how widely has this been adopted in the next five years.

Matt: [29.40] Well we see lots of interest from different players but I’m not really here to tell you what the future will be like, my role is instead to make sure that consumers like the future. There are clearly lots of opportunities for retailers, product manufacturers, networks but I guess one I need to highlight is the opportunity for governments as well. So just very briefly, we know that low carbon is going to need to be as good as, or ideally better than high carbon before it becomes a choice for the mass market, and I think services offer a route for government to decarbonise in a way consumers will support and businesses will support, and that’s because people care more about their experience and how its delivered, so as long as they can get the comfort they want they don’t really mind how that’s delivered, whether that’s from a gas boiler, a heat pump, a district heating system, a hydrogen boiler, a biomass boiler or anything else. After all, if you enjoy a meal you don’t often ask what oven it cooked in.

Jon: [30.36] I like the analogy. So Charmaine…

Matt: [30.42] That opens up a new policy option for government to impose a kind of long term technology neutral carbon target and leave service providers free to deliver service without the carbon but in order to help answer your question, sorry to avoid it initially, of how large that might be, I think it’s a chicken and egg problem, which is how can businesses invest in new business models without understanding the policy trajectory and similarly how can governments, you know, roll out new policies without having some understanding of what business models might exist, but if they could work together, government and industry, they could show how well things could work in practice and give everybody the confidence they need. So in order to kind of help us and learn in the real world we’ve kind of created a living lab from the smart homes we’ve been working with so that the public and private sector can come together to crack that chicken and egg problem and learn how to harness market forces to deliver decarbonisation consumers will support and, you know, and to design high quality, low carbon heating products and services but, of a wide range, all the way from the stuff I’ve been talking about to the stuff Michael’s been talking about and numerable other things that we haven’t even discovered yet, and I think that’s the thing which will make the difference, is a bit of an ability for different types of party to come together to design the future that we all want.

Jon: [32.04] So then I guess what we’ve seen here is Engie is a commercial entity taking some, doing something new, learning by doing. With your work Matt, again learning by doing in a different way. Charmaine, when you look at the heating and energy industry across Europe, how much appetite do you see for this learning by doing and in three to five years is there sufficient appetite to try these new things that we’ll see much, much, many, many more heat a service offerings?

Charmaine: [32.37] Well I think to answer your first question, I think there is a significantly more appetite for learning by doing in small steps, so the way that Michael outlined is, you know, a really classic, agile way of learning for new disruptive and technologies and propositions and how to bring them to market quickly, especially when you’re putting the customer at the centre of that, so actually getting customer feedback throughout the product development process rather than at the end when there’s a fully formed project. So I think that’s really important and I think we see more and more of that, not just around energies or heat as a service but in other types of new energy propositions. I think in terms of how widespread will it be, well it’s kind of obvious that different propositions will lead to different types of customers, one of the guests mentioned the desire to move much more, kind of, service-based propositions and that reflects the wider society changes, so I think that’s an important piece that will drive, from a customer’s perspective, some of these business models. I do also think that there are so many different types of new energy technology, so Michael again referred to this, what about EVs, what about heat pumps. And the fact there are so many technologies that are proliferating, customers will probably want a level of simplification around their energy provision, whether that’s the asset, whether it’s the service, so simplifying all of these technologies and concepts into one as a service proposition is very appealing to most customers I imagine. So from that perspective I think we’ll see a lot more in the next three to five years, especially as people learn, test and learn. Costs come down, all that kind of stuff. So yeah, I think, based on the last six months I imagine we’ll see many, many more.

Jon: [34.21] Great, well thank you to my guests, I think we’ve showed on this podcast that heat as a service will be explored in a passing fashion and likely a significant part of the future for the heating and energy industry across Europe. Many, many thanks to Michael for your time and sharing what Engie is doing.

Michael: [34.45] Thank you it was a pleasure.

Jon: [34.48] Matt, likewise to you from the Energy Systems Catapult and your living lab.

Matt: [34.53] It was great, it was good to talk to other people who are grappling with these challenges.

Jon: [34.59] And Charmaine, as always for your observations and thoughts on what’s happening across Europe. Thanks to all of you, thanks for listening and we hope you enjoyed the podcast and look forward to welcoming you back next week. Good bye.

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