Wood Mackenzie
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The utility industry worldwide is undergoing major transformation, spurred by decarbonisation, decentralisation and digitisation.

With these drivers also comes increasing pressure to find new sources of profitability and efficiency, and an emerging business model, known as ‘energy-as-a-service’, looks to be a significant solition.

This broad term describes a growing market of selling not only energy, but also technology, analytics, access to the grid, and personalised services.

“We are seeing more effort now to develop a new retail model than at any time over the last 100 years,” says James Sprinz, head of decentralised energy at Bloomberg NEF.

This market trend is in part driven by technology under the scrutiny of technologically-savvy consumers – looking to reduce costs and demonstrate their individual commitment to climate change. The second factor propelling change is utility-driven as major European energy suppliers look to recover market share lost to renewables.

“Energy providers are looking at other things they can sell besides electricity, which has seen a large increase in capital in the market, as well as more mergers and acquisitions,” he added.

UK majors move into energy-as-a-service by acquiring new companies

Most of the UK’s Big Six energy suppliers have increased their range of services through acwuisition – Centrica for instance bought AlertMe, who provide energy and home-monitoring hardware and services, as well as Panoramic Power, which helps companies improve operational efficiencies.

In 2017 a Bloomberg NEF report tracked 30 selected companies’ activity in decentralised energy products and services, and noted an upturn in investments and partnerships in technologies like battery storage and virtual power plants, as well as existing capabilities including micro-grids and energy management.

Competition

These companies are facing outside companies, such as Amazon’s Alexa, Google, with its Nest offering, as well as startups, such as ONZO and WATTY.

“There are many companies looking to move into this sub-sector because digitalisation allows them to aggregate and control assets, resources and demand in a way that previously wasn’t possible,” said Professor David Healey, director of smart energy at WSP.

Though still nascent, this market is poised to grow as electric vehicles and smart cities are adopted, and according to Navigant Research, the energy-as-a-service market for commercial and industrial customers is expected to reach $221 billion annually by 2026.

What about the existing hierarchy?

“No one can be sure where it will go, but certainly the business models of the large utilities will have to change dramatically over the next five to ten years to keep up with the changes,” says Professor Healey.

As the market moves to distributed, greener power, he adds, the sector will see new suppliers entering the market to offer more localised services at a lower cost, based on local generation supply.

This, according to Charmaine Coutinho, a principal analyst for Delta-ee’s New Energy Business Model Service, could see big tech players capitalise on their brand affiliation with new energy-as-a-service options.

“In their favour, they have a great understanding of data and data analytics, which is a key part of energy-as-a-service,” she says.

Trojan horses lead the way

Technologies such as Google’s Nest are a ‘trojan horse’ for the industry, says Duncan Barnes, partner at Deloitte, and Energy and Resources sector lead for Deloitte Digital in the UK.

“Once a consumer has this technology in their house their agency is with Google not the Big Six,” he says. “Currently, these devices are controlled by customers, but in the future, they could be run by algorithms, so those businesses that can manage data and provide insights will be the ones that succeed.”

Francesco Venturini, head of Enel X, says that the boundaries between energy and other sectors will continue blurring convention through new business models.

“If I think about electric mobility, utilities are competing with car manufactures; in energy managements systems, utilities compete with digital platform providers; in the field of the smart home, utilities are competing with the tech giants; and so on,” he says.

“Therefore, traditional utilities, which are not ready to tackle this new ecosystem, are definitely disadvantaged in comparison with those players that decide to deal with these new business models proactively.”

 “We are at a stage where several companies are the market leaders and are making the necessary investments, while others are unconvinced by the demand. Over the next few years, we will see which companies are successful,” Mr Sprinz at Bloomberg NEF concludes.

What about energy prices?

More services and competition in the utility market can be generally considered to be a positive development, but it’s effect on cost to the consumer is unclear.

Venturini insists this will allow consumers access to better pricing through for example, demand-side-response services, where customers will be able to shape their consumption to off-peak, cheaper supply times and pay lower prices.

He added: “Through these new business models, more and more companies will join the game, blurring the line between sectors and increasing competition, with potential pricing benefits.”

But there’s always a risk, cautions James Sprinz at Bloomberg New Energy Finance, that some new services may be considered more valuable than others, and if services are oversold, costs won’t be reduced and “consumers will just end up spending money on different things”.