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Technology drives change in energy

Technology drives change in energy

The world of energy used to be fairly straightforward. Big state-owned utilities generated power and fed it through wires and pipes into customers’ houses. It was a well functioning system that seemed to be set in stone. But this centralised, “command and control” model is under pressure as never before. Energy is changing fast, as technological innovation disrupts the old paradigms. Smart grids, smart meters and smart home appliances embedded with sensors that connect them to the “internet of things” promise to revolutionise our approach to energy use. Nothing better highlighted these changes than Google’s $3.2bn acquisition in January of Nest Labs, a four-year-old start-up that makes smart thermostats and smoke alarms for the home. Users can turn up or switch off their heating from anywhere using a smartphone app.

Others are following suit. Apple is working on a software platform that will turn the iPhone into a remote control for lights, security systems and other appliances. Samsung recently unveiled its Smart Home range of washing machines, refrigerators and TVs that can be controlled from its mobile phones and watches.

Suddenly, big technology providers are focusing on energy as a potentially lucrative sector. High street retailers and telecoms companies are also waking up to the opportunities of retail energy provision.

This presents a huge challenge to the traditional utilities – the big power companies such as RWE and Eon in Germany, Centrica in the UK and Enel in Italy. For decades, these vertically integrated monoliths, which both generate power and supply it to millions of homes and businesses, dominated their markets. But the changing economics of the energy industry have depressed their returns and constrained their balance sheets.

Some, especially the “big six” suppliers in the UK, are facing mounting public anger over rising fuel bills and complaints about poor service. They are being subjected to much greater scrutiny from regulators, while a growing number of politicians are calling for them to be broken up.

“The big six are finding retail very painful,” says Omar Abbosh, senior managing director of Accenture, the consultancy. “It’s not in sync with their core competence, which is big capital formation and asset stewardship.” That contrasts with companies in the retail, telecom and technology space, who “have brands that consumers relate to” and “are better at managing customer relationships”.

For Google, buying Nest does not necessarily mean it will become a big energy player. “But,” says Mr Abbosh, “it realises it can use Nest’s technology to learn more about its end consumers, what those consumers need, and how it can profit from them.”

Already, there are some examples of new entrants into the supply business. Hungary’s Magyar Telekom sells gas and electricity to residential and business customers. UK retailer Marks and Spencer has teamed up with SSE, one of the big six, to offer energy packages, with the promise of M&S vouchers to those who make the switch.

Some big utilities are meeting the challenge head on, offering more services to their huge fixed installed base of customers. There is a big incentive for them to do so.

The backbone of their business – thermal power generation – has become a lot less profitable in recent years, undercut by weak energy demand in Europe, the rise of renewables such as wind and solar, and low power prices. Burdened by debt, they are largely unable to invest in new plants and have instead been cutting costs and divesting assets.

“There’s a strategic necessity for them to find new models of business development that are less capital-intensive,” says Roger Reynolds, managing director for utilities at Exane BNP Paribas. Hence the attraction of “capital-lite” services, such as advising customers on managing consumption, or installing energy-efficient boilers or batteries in their homes, he says. “They don’t want to just roll over and let Google and Apple take over that business.”

Instead of trying to beat the technology companies at their own game, some are forming partnerships with them. Eon, Germany’s biggest utility, is working with rooftop solar developer Sungevity to sell co-branded panels to customers in the Netherlands. Npower, the UK subsidiary of RWE, has teamed up with Nest, offering customers its thermostat for £99 – down from £279 – if they agree to fix gas and electricity prices at current rates until 2017.

Similarly, British Gas, a subsidiary of Centrica, recently launched Hive Active Heating, a service that lets people control their heating and hot water remotely from a smartphone, tablet, SMS, or via a website. The company says it can save households up to £150 a year.

Such innovations may be relatively minor, but they show that some companies are using technology in ways that could redefine their relationships with customers.

“This industry is leaving a world where customers were just meter numbers,” says Peter Terium, RWE’s chief executive. Companies such as RWE can no longer just “sell kilowatt hours”, he says. They have to present a much broader offer, reflecting the rapidly changing world of energy.

RWE is being forced to change by the “Energiewende”, Germany’s radical shift from fossil fuels to renewables. The transition has given rise to a new phenomenon – “prosumers” with solar panels on their roofs and wind farms in their fields who both produce and consume energy.

Germany now has 6.5m energy producers, many of them households.

“What renewables have been able to bring is the miniaturisation of the equipment needed to produce electricity,” Gérard Mestrallet, chief executive of GDF Suez, said in a recent interview. “A wind turbine is a thousand times smaller than a power plant.” This allows for distributed generation – production in small quantities near the point of use, rather than in vast amounts in a few locations.

With the rise of the prosumer, houses are gradually turning into small power plants that produce and store electricity. Mr Terium says the utility of the future will form partnerships with prosumers, helping them sell excess energy to the grid when their batteries are full and buy it in if grey or windless days leave them short of power.

They will also advise them on reducing their consumption, which is one reason why so many are involved in smart meters that show customers how much energy they use and how much they pay for it.

“We want to offer bundled products, where all those functions can be combined under one contract,” Mr Terium says.

The smart meter revolution comes at a time when pressure on household budgets from rising energy bills and concerns about global warming have underlined the importance of energy efficiency, sometimes referred to as the “invisible fuel”.

The growing realisation that the energy we do not use can have almost as much impact as the energy we do has had a huge impact on everything from building designs to street lighting.

Mr Reynolds says the move by companies such as RWE into such energy services is inevitable. But he is sceptical. “I think it’s going to be difficult for them to build up a meaningful business,” he says.

Meanwhile, some say that by telling customers how to cut their energy use, utilities are shooting themselves in the foot, reducing demand for their chief product.

Mr Terium’s responds: “If I don’t shoot myself in the foot, someone else will. I’d rather be in the front row of that than wait and let others take it away.”

Fonte: Financial Times


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