By Albert Cheung
Head of Analysis
A stroll around the European Utility Week exhibition floor is usually a decent indicator of the latest trends in technology and services for the power sector. When I first attended in 2009, the conference was still called Metering Europe, and the floor was dominated by smart meters, communications technology and in-home displays. Above all, the emphasis was on products, which were invariably intended to be sold to utilities.
That picture has changed drastically in recent years. A tour of the floor this year will undoubtedly reveal some new trends, but two have already been apparent for the last couple of years:
- The emphasis is on end-customer services, combining distributed energy resources, flexibility, digital technologies and customer engagement.
- Utilities themselves are marketing these services – they are no longer just buyers of tech.
Bloomberg NEF research bears out these trends. Almost every large utility in Europe has a strategic focus on customers, and intends to increase its offerings in ‘decentralized energy’ – a heading that includes small-scale generation and storage, EV charging, demand response and digital energy management. Utility innovation programs are overwhelmingly weighted in this direction: in the three years to 2017, leading U.S. and European utilities made 106 venture capital investments into start-ups, and 80% of these deals were related to decentralized energy services. Europe is very much in the lead: seven of the 10 most active investors were European utilities.
The immediate reasons for this shift are clear: turmoil in the wholesale power markets, increasing pressure to differentiate in the retail supply market, and a growing focus on sustainability among business customers.
And of course, there is the big long-term driver: technology is fundamentally changing the nature of the customer relationship. In our recently published New Energy Outlook 2018, we project that a full 20% of Europe’s power demand in 2050 will come from electric vehicles, that these will need to be flexibly charged, and that 11% of all energy will be generated from small-scale PV. This equates to 11GW of rooftop PV being added each year to 2050. We also project a total of 247GW of battery-based storage in Europe by 2050, of which 19% will be customer-sited. As soon as 2030, flexibility, not cost, becomes the main barrier to further addition of renewable energy. All of this is opportunity for decentralized energy services – and all of this occurs in a broader market that isn’t growing. Power demand growth averages just 0.2% per year to 2050, according to our projections.
Clearly the technology fundamentals are there, and yet it is hard to find a utility that is achieving scale and profitability in the decentralized energy services and flexibility arena today. The markets are still small, incentives are not as favorable as they once were, customer awareness is still at an early stage, and there are many players vying for market share – including non-traditional energy companies.
So how do utilities really see the investments that they are making? Through what lens do these investments make sense? Language is important, and in our conversations with utilities, we often hear statements like these:
- “Decentralized energy services are on a pathway to achieving scale (and therefore profitability).”
- “Customers want a one-stop shop for a variety of energy-related services.”
- “There is a first-mover advantage in decentralized energy services.”
- “If we don’t do it, someone will do it to us.”
- “We are uniquely positioned to deliver on the vision of a one-stop decentralized energy shop.”
- “We have the customer relationships, and the technical competence to handle complex, bundled service offerings.”
At this point, it’s time for a quick health warning: these are not facts. (They aren’t even real quotes – I’ve paraphrased them.) These are simply hypotheses – statements upon which to hang a strategy, and they may ultimately prove true or false. To simplify, let’s boil them down to three hypotheses:
1. Decentralized energy services will be a profitable business area in the future.
2. It is important to act early and gain a strong position before others do.
3. Energy companies are well positioned to be market leaders in this area.
The first is a market hypothesis – this is what you have to believe about the market to make it attractive in the first place. Unfortunately, it is nigh impossible to forecast profitability of a business area over decadal timeframes, particularly when business models are still emerging. But all the signs point to significant growth in the area of decentralized energy, and growing markets usually generate value for their market leaders, especially if brand value can be built and services can be designed to be ‘sticky’. So most European utilities have espoused this hypothesis, and are unlikely to throw it out any time soon.
The second hypothesis is about urgency, and can be boiled down to, “We’d better get on with it, or else it will be too late”. Here there is more divergence in thinking. The most ambitious utilities are investing aggressively in new business areas, acquiring demand response aggregators and EV charging networks, developing digital energy management platforms, rolling out connected home programs and so on. There are others, however, who are adopting a more cautious attitude, preferring to keep their powder dry. These companies may well believe in hypothesis 1, but are waiting for the market to truly take off.
The last hypothesis is about the competencies of energy companies. It provides a reason to believe that, through a multi-decadal industry transformation, it will be today’s energy companies that prevail. This is not a foregone conclusion. We are already seeing new non-utility players enter the sector, bringing their own competencies: automakers understand the EV industry best; start-ups have the agility to develop new business models; sole traders are well placed to undertake home improvements including distributed energy installation, and tech giants such as Amazon and Google can introduce product offerings and achieve scale faster than anyone – and have a history of disrupting various industries.
Europe’s utility companies hold several important advantages: they have local ‘boots on the ground’; trusted – or at least, familiar – brands; technical and market knowledge; growing digital capabilities; and large-scale access to customers (at least in the markets where they operate). They have a history of delivering complex projects – and where there is complexity, there is usually value that flows to those who can master it.
But utilities aren’t as local as the ‘man or woman in a van’, and they don’t have the global scale of Amazon – so if the decentralized energy market evolves to be either hyper-local or hyper-global, it may spell trouble for big energy companies. If on the other hand the value lies in having both scale and a local presence, with a dash of technical and market complexity thrown in, then it may be that our hypotheses prove valid, and that utilities will lead the way into a brave new future of decentralized energy.
Albert Cheung will be speaking at this year’s European Utility Week Summit this November.