As the chapter closes on 2022, it’s easy to mark it as the mid-point of some dystopian novel. Bad news seems to be snowballing, coming out of a pandemic and straight into an energy crisis, economic uncertainty, and geopolitical instability. That’s before we even get into a bleak climate outlook where we’ve been drinking steadily in the last chance saloon for a decade.
But…… perhaps it’s not? Perhaps we’re at the start of something much more hopeful. The changes happening in energy now could mean a much better long-term future, as the whole industry has been jolted into action and we rapidly ween ourselves off oil and gas.
At LCP Delta our research service on New Energy Business Models has been watching closely as investors, innovators, energy suppliers and manufacturers navigate 2022. The rise in energy prices has created a wave of interest from domestic and business customers on how they deal with their energy bills. Investment in renewable energy is starting to become a “no brainer” for those who can afford it. For those who can’t, innovative business models and customer propositions could provide access.
As the saying goes, “never let a good crisis go to waste” and there is now an opportunity for a dramatic shake-up that could transform the market in the next few years. Here are some of our highlights of 2022 and a sign of changes to come for 2023.
What’s the business model for home energy management?
At the start of the year, we looked at the increasingly competitive home energy management market. For over a decade we’ve heard about the “battle to capture the home”1, or how “home energy management is the holy grail”2 for energy services. The reality though is that this has largely been industry-led. LCP Delta’s customer research in 2021 highlighted that fewer than half were aware of HEM-style products, and a similar number were willing to pay for it.
Two major factors could finally tip the market: rising energy prices and increased ownership of large electrical loads like EVs and heat pumps. Both factors mean a more aware and receptive audience. Our HEM survey identified that 90% of respondents answered that having “lower energy bills” was important for them and 64% of customers with a large electrical load were likely to purchase a HEMs.
Complexity is still an issue, both for customers and suppliers. Without standards, integrating multiple devices in the home is difficult and the user experiences can be fragmented and clunky. There is uncertainty on the business model, with a diverse range of offers from offering HEM for free as part of another purchase (MyEnergi in the UK) through to HEM being included as part of a wider energy service contract (Sonnen in Germany).
With growing demand and a very active supply market, we expect HEM to become an even more intense battleground for energy suppliers, manufacturers, and software providers in 2023.
Smart tariffs and the push towards cost reflective pricing
In May we looked at the market for smart tariffs in Europe. The EU is now above 50% penetration of smart meters for electricity, and there are growing calls for half hourly settlements and more cost-reflective pricing for domestic customers. If the supporting digital infrastructure is there, how is the market responding?
We looked at two types of smart tariffs:
- Price risk – giving customers access to real time, variable pricing like Octopus Agile in UK
- Volume risk – providing a cap or price penalty during peak demand periods like EDF Tempo in France
There’s also a school of thought that introducing customers to more complexity and sharing risk are backward steps. What cost reflective pricing really does is create opportunity for energy suppliers to manage on behalf of customers, such as Endesa Unica in Italy – a fixed price, fixed volume subscription tariff.
As the number of electric vehicles and heat pumps increases, there are a set of new dynamics to consider. Networks are already thinking about domestic services needed to manage constraints (See National Grid’s Equinox trial). New products allow customers to make informed decisions about cost vs convenience when charging their car, or when they turn the heat on. Innovation in tariffs though has stagnated, and the energy crisis has driven energy retailers into survival mode instead of investing in new propositions. Could the disruption over the last 2-3 years create a new platform for energy suppliers to help customers reduce costs?
Collective self-consumption and the resurgence of solar power
Solar power has seen a resurgence, with 2021 reaching record highs in annual installed capacity and 2022 almost certain to top that3. The “invest to save” model has never looked more attractive due to higher energy prices, especially if customers can find a way to increase how much solar power they self-consume. Solar is now an attractive proposition in previously borderline countries like Belgium, Czech Republic, UK, and Sweden.
As energy prices stabilise and the market matures, the need for new business models will be crucial to sustaining growth. One of the more interesting developments is “collective self-consumption”, where the power generated from a solar asset is shared with multiple users within a local area. This could be in high density residential areas like an apartment block (Repsol Match in Spain), an industrial estate or business park (Urban Chain in the UK) or across an entire local community like a town (Cleanwatts in Portugal).
As more solar gets connected to the grid, the greater the impact on energy suppliers and networks will be. Local balancing and flexibility will become crucial and increase in value. If decentralised power is a given as part of our path to net zero, then we need new services like collective self-consumption to make it a reality.
How green is your grid?
At the end of the Summer, we looked at the growing shift to 24/7 renewable energy certification. Greenwashing has been a regular fixture in the press this year and the EU is looking at “regulating traders to only make clear, verified, and non-misleading claims about the environmental aspects of a product.”4
In energy this is a particular problem for “green energy” tariffs and power purchasing agreements. The current certification system guarantees that a unit of renewable energy has been put into the grid, but that bears no relation to when customer demand is. Certificates are only reconciled annually, and the reality is customers are often being misled.
A move to hourly, or 24/7 certification, would mean greater proof that demand and supply of renewable energy are aligned. In terms of business models, it creates stronger price signals for local balancing and a number of prominent energy suppliers are developing new PPA products with 24/7 certification such as Vattenfall and Statkraft. It also opens to conversation on certification of green hydrogen, and how to verify the amount of renewable power used in production.
It sounds a positive move, but there is also the added complexity and risk to consider. A single renewable energy asset could require 8,760 certificates a year rather than the 1 today, which means the verification process needs to be incredibly robust otherwise it falls into the same traps that the current system.
Is Heat as a Service the start of the “energy as a service” revolution?
In the final quarter we looked at whether the growth in heat pump sales has been followed by innovative new business models and customer propositions. Heat as a Service has been emerging over the years and we identified 3 types of propositions in the market:
- “Project and Protect” – a single provider takes responsibility for design, financing, install and aftercare but the customer owns the product (e.g., British Gas and Engie)
- “Normal” HaaS – a leasing or subscription deal with the provider taking on after care and managing some performance risk (e.g. EWE’s HeimatWärme in Germany)
- “Full” HaaS – outcome-based service where the customer only pays for heat, and the provider owns the heat pump (e.g., OK’s Nærvarme in Denmark)
As a pure economic decision, the total cost of ownership of a heat pump is gradually reaching parity with that of gas boilers across Europe. What HaaS can do is deliver more customer value: reduce upfront costs, provide more certainty and peace of mind. Like all service propositions, it does require the provider to take on more risk, but with the aim of increasing long-term value.
With growing interest from banks in funding energy assets in the home, and government pushing more subsidies, we think economics will not be much of an issue for the right homes. The potential for almost any “as a service” business model is there, and could be far-reaching for heating, solar and EV charging. From a customer perspective, the business model offers great benefits. It reduces complexity, costs, and risks. We’ve already seen many industries transform as they moved away from asset ownership into more service-based business models, including entertainment, transport, telco and accommodation. Is 2023 the year we start to see new players or new partnerships that move this model forwards in new energy?
A Happy New Year for 2023
Thanks to all our subscribers and contributors over the last 12 months. It’s been a difficult time for customers, but also for many of those in the industry too, so we’re thankful for all of those who’ve supported the service. The LCP Delta team from the New Energy Business Model Research Service wish you all a Happy New Year and the best of luck for the year to come. We’ll be watching with interest to see which way the story goes.