Energy companies will have to change their business models from gas and electricity supply only as the EU's Energy Efficiency Directive takes shape, says Jon Slowe, director at Delta Energy and Environment, a consulting firm.
Jon Slowe is a founding director of research and consulting company Delta Energy and Environment. Slowe leads Delta’s work with utilities, helping them develop decentralised energy and low carbon strategies and tactics. He spoke to EurActiv's Ana-Maria Tolbaru.
?Read a related news article here.
What can companies do to sell their energy services?
Jon Slowe is a founding director of research and consulting company Delta Energy and Environment. Slowe leads Delta’s work with utilities, helping them develop decentralised energy and low carbon strategies and tactics. He spoke to EurActiv's Ana-Maria Tolbaru.
?Read a related news article here.
What can companies do to sell their energy services?
For me it is a matter of developing a position where the customer really trusts what you are saying and you are making it exciting for them.
The company Opower in the US works with utility companies to get customers to take up energy efficiency. In their first work, they tried telling customers "you could save money". The customers were not interested. They tried telling customers "you could save the environment". The customers were not interested. They told their customers "you are doing the right thing for the country, you are increasing energy efficiency". The customers were not interested. But when they told their customers "here is how you are using energy compared to how other customers use energy, they were suddenly interested.”
There is no big investment there for the customer; you find out a bit more about the customer, you can help them understand how they are doing and then give them very tailored and personal advice on how to get better. You could give them for example some rewards or presents if they meet some pre-defined targets. Companies are starting to experiment with this, but I haven't yet seen any that is doing it very well.
Why is that?
Because many utilities see their core business as supplying electricity and gas to the metre and they are not fully engaged in working with their customers on how they use energy. Because they think customers are not interested and it goes against their current business model, which is selling more electricity and more gas. They have not had to do it, it is not their core business, it is not what they're good at.
Only now some companies are starting to realise that they could actually make some money doing this or that they are going to have to do this. For example, with the Green Deal and Energy Efficiency Directive, they can see what is coming. They realise that the Energy Efficiency Directive will maybe reduce demand for their product, so they would have to start doing some activities that they don't really understand or that are new to them or are not part of their core business.
Are energy services profitable for energy companies?
I think there is a real opportunity to develop really profitable businesses around energy efficiency services, but that is quite a new thing to do for most utility companies. My view is that this market will develop whether the utility companies get into this business or not, someone will create this business and I think the forward-thinking utilities see that they have the opportunity to get some of this business.
Countries could create a regulatory incentive – they might offer some reward to the energy company for selling less energy.
You can try to bring in private-sector finance to help pay for the upfront costs of energy efficiency and this finance is paid back out of the energy savings – or, possibly, public money, but personally I don't think that's necessary. If you make the obligation on the energy companies, ultimately they'll have to pay for it and ultimately they'll pass this cost on to customers. Ultimately, they'll have to raise electricity price a little bit to pay for this.
Does this not mean that consumers will end up paying for all the costs?
Overall, the customer is winning as he or she uses less energy overall. If you do the cost benefit analysis - nearly every time you see the customer is better off; even if the company has to cover the cost of their activity through higher prices, the customer is saving more than they are paying extra.
Companies don't want this, but, ultimately, to achieve the EU's carbon targets, buildings and appliances and heating systems will have to be much more efficient. We cannot achieve these targets only through renewable electricity generation, we must achieve this partly through better energy efficiency. This is going to happen anyway, whether the energy companies like it or not.
Increasing energy efficiency by 1.5% a year won't destroy their business. Energy companies will sell less units of energy, so that's why many see it as a threat. But if they define their business just as generating and supplying energy for sure, it will have a negative impact on their business. If they define their business as generating, supplying energy and helping customers use energy efficiently, then they can grow their business.
So what will it take for companies to switch to the energy services business model?
I think it will take imagination, I think it will take innovative sales and marketing, it will take propositions for example where the customer doesn’t need to pay anything upfront and then they can pay things back out of their savings.
It will be targeting the right customer with the right proposition at the right time. Maybe a new brand. You have to understand that every customer is different. And you divide up your customers and you target the right group of customers with the right offering.
Some energy companies already understand this with detailed customer segmentation. They have lots of different products and services and they target the right customer group with the right products and services. For other energy companies this is still new thinking to them. It’s not how they traditionally work.
To make this work you have to become a customer-focused business. If you look 10 years ago, utility companies, you could even argue, they didn’t have customers. They just had meters and bills that they read. They have not had to be very customer-focused, innovative, quick thinking, quick moving organisations.
If you compare them to telecommunications companies, which are a long, long way ahead, in terms of how they think about their customers, the types of deals they offer their customers. Many energy companies don’t have that mindset.
Should consumer behaviour be the key concern of energy companies?
I think the overall goal for me is helping customers understand more about their energy consumption. There are different ways to do this. The way I describe that I now see my energy consumption doesn’t involve a smart metre at all. But, you can do this with smart metres as well.
You can have individual display units that we see on the market. Customers can do this on applications on their smart phones. They could see it on their computers. They could even see it on the television. They could even get hard copy analysis of how they’re using energy, such as individual reports.
I’ll give you an example. There is an energy company in Norway that, if you improve your house’s energy efficiency to a certain level, the energy company will give you a little badge to put on your building. And this makes the homeowner feel good. It allows them to show off. It’s a bit like driving a hybrid car.
Just like the eco-design products…
Yes, exactly. That’s exactly the sort of innovation I think it will take to get customers interested and excited. The market research we do we see that customers do want to do more with energy. They are genuinely interested in this topic. But there is a huge gap between this interest and their actions.
Fundamentally, I think many people are interested in the environment; many people would like to do something. But there is a big disconnection between what they would like to do and what they actually do.
Having some kind of obligation, or some kind of incentive for energy companies to offer these services to help their customers become more efficient, I think is needed.
Is EU legislation tackling this adequately?
I think the energy efficiency directive is quite an interesting way they’re doing this. For me it’s very encouraging. There are huge opportunities for carbon savings through energy efficiency.
If we look back at previous directives, the strongest directives have been around the production of energy - the carbon trading, the renewable energy directive. And these are good, they are necessary.
But now we’re starting to see some stronger emphasis on how energy is used. And using energy more efficiently is good for consumers, it’s good for European competitiveness, it’s good for security of supply, it’s good for carbon emissions. I think it’s difficult to achieve, because you have to influence large numbers of people, but I think it’s absolutely the right direction to move in, and the Energy Efficiency Directive that I see is a very good step in this direction.
But the industry, even companies that are already offering energy services, oppose this directive. Why is that?
Generally the less regulation from their side, the better. If I was an energy company I would want as little regulation as possible. So I can sympathise with this.
And you could say that if there is an economic case for energy efficiency then the market will deliver that. People will become more efficient, they’ll insulate their homes, they’ll do everything necessary. But we see that isn’t happening, for different reasons. So if you want to keep the goal of high energy efficiency, you need to intervene in the market to encourage this to happen and ensure it happens.
What are the biggest challenges for the industry right now?
I think there are maybe two or three challenges. One is how to get customers interested - for energy companies, this is one of the biggest challenges.
Another challenge is: what role does the energy company have in this market? Should they give energy efficiency services capability within their business? Is it part of their core business? Or is it something that they outsource? Or they just look to meet their obligation at the lowest cost?
And then thirdly, how can they turn this obligation into an opportunity to help grow their businesses, and grow revenue streams into new profits, in the same way that Centrica is already doing in the UK?
Ultimately, if you set the overall framework for energy services, or energy efficiency services and that framework may have to initially or for some time require obligation, and you get sufficient competition in the energy services market, and you start to grow customer demand for this, then you would not need regulation in the medium to long term. If the market can deliver the energy efficiency savings that are necessary, there is no need for anything else.
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