Utilities transforming into energy service providers?

A recent Financial Times (FT) article  ‘Crisis-hit European utilities square up to technological revolution’, argues that the large utilities have underperformed compared to the broader European equity market and, according to the CEO of RWE, are facing ‘the worst structural crisis in the history of energy supply’. The article reports that some utilities are divesting, others are diversifying into more profitable markets but ‘all of them are trying to transform themselves from mere suppliers of gas and electricity to providers of increasingly exotic energy services’. I’m not so sure that this transformation  is quite as imminent as is suggested in the article but I hope that my research on diffusion of energy service contracting undertaken at the Centre on Innovation and Energy Demand (CIED) will soon provide clarity to questions regarding the scale and direction in which the UK’s energy (service) market is evolving.

Energy systems in Europe are currently undergoing significant transformations and it remains unclear what the future holds for utilities. Some will be able to retain market shares while others will not and this may partly be the result of chance and luck as much as socio-technical foresight. The example of the two German utilities E.On and RWE is particularly revealing in this context as they are under additional pressure from Germany’s nuclear exit as well as the explosive growth of renewables and low wholesale energy prices mentioned in the FT article.

Whether their changing strategies imply a business model transformation towards the provision of energy services, however, is still unclear. It is true that changing business models and new entrants are challenging the market and that energy services are one of the few market segments that have witnessed growth in recent years. At the same time the pace of expansion is more modest than energy analysts had forecast 10-15 years ago. Nevertheless, most of the incumbent utilities are increasing their vertical integration by diversifying into energy services even though the energy service market remains poorly defined and masked by uncertainty.

Energy service companies (ESCOs) have been providing decentralised heat and electricity generation, often from renewable sources, combined with a service component exceeding that of the conventional ‘customer services’ provided by utilities for decades. Subsidiaries of utilities are increasingly dominant in this market thanks to the transferral and concentration of appropriate skills and knowledge through mergers and acquisitions of specialised energy service companies. Successful energy service contracts tend to be concentrated in the public sector and among large industrial customers but huge if not insurmountable barriers are preventing the emergence of home energy services. Transaction costs and shared ownership/responsibility (also known as the tenant-landlord problem) of assets are the most prominent barriers. The small share of energy services compared to their total revenue and the difficulty of making significant profits also act as discouragements for some of these issues to be tackled.

An imminent technological revolution in home energy services as suggested in the FT article may also fail to materialise for other reasons. Not everyone will feel the need to be able to switch on lights remotely and research on digital thermostats indicates that apart from enthusiastic nerds, few people are willing to engage in energy management gadgets (Peffer et al). The entrance of new technology companies in the energy market, particularly the example of Google’s acquisition of Nest Labs also needs to be taken with a pinch of salt as many commentators have pointed out that the primary objective is data mining as opposed to an energy service transformation. It also remains to be seen in how far projected energy savings actually materialise. Many developments promising energy savings through increasing energy efficiency may fail to do so because of the increasing energy requirements of the gadgets themselves that are designed to manage energy efficiently and incentivise energy demand reductions.

A lot is currently being speculated in relation to smart technologies and the ‘internet of things’ but it appears likely that neither the centralised conventional fossil-fuel powered utility energy market nor the decentralised and predominantly renewably operated and needs-oriented energy service market will prevail. Centralised generation will remain a core element of our generation infrastructure while the share of energy services and building management with energy service components by integrating smart and renewable technologies is going to increase. Households are an untapped resource in this rapidly changing socio-technical environment but it is early days to predict the way the market will evolve and how incumbent companies will respond.

Colin Nolden is a Research Fellow at the Centre on Innovation and Energy Demand (CIED) and is currently researching the diffusion of energy service contracting seeking to provide more clarity to questions regarding the scale and direction in which the UK’s energy (service) market is evolving. The response of utilities to the growing share of energy services in light of uncertain developments in their core business as well as the role of technological and business innovations in driving what might potentially mount to a technological revolution will be scrutinised in order to develop a better understanding of the conditions for a successful diffusion of energy service contracting, low-carbon technologies and demand side management.

The Centre on Innovation and Energy Demand is based at the Sussex Energy Group in SPRU at the University of Sussex.

Advertisements
This entry was posted in Comment and tagged , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s