Energy Management: Can Utilities Seize the Opportunity?

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1 Energy Management: Can Utilities Seize the Opportunity? Energy management is generating plenty of buzz. But will it help utilities meet their growth numbers? Not until market trends shake out and partnerships are developed, according to recent A.T. Kearney analysis. 1

2 To many observers of the utilities industry, the wave of the future is energy management, the field in which energy providers help customers control home energy costs and usage. With smart meters, time-based electricity pricing, and customer rewards programs among the major initiatives already making an impact, energy management seems to hold significant promise as a source of growth in the business-to-consumer (B2C) market. Our examination of the energy management market finds a hazy picture for utilities, one marked by market uncertainty and fierce competition. Beyond this enthusiasm, however, just how much potential does energy management hold for utilities? Our examination of the energy management market finds a hazy picture for utilities, one marked by market uncertainty and fierce competition both inside and outside of the industry. While there are many potential benefits in energy management for utilities, capturing all of them may require partnerships with strong companies from other industries. This paper looks at the future of energy management for utilities, both in terms of its immediate impact and longer-term growth advantage. A Hot Topic Many B2C energy providers see great potential in energy management, which includes products and services that increase awareness of energy usage (in-home or online), remotely operate energy-consuming devices (such as turning on the dishwasher at night), or automatically shift usage to off-peak times (see sidebar: What s Driving Energy Management? on page 6). But recent market studies suggest that, at least in the next few years, energy management promises only limited revenue potential for utilities. The picture is clouded by uncertainty, with several variables at play: Market size. The size of the energy management market between $1.4 billion and $2.6 billion in Europe is likely to be only a tiny part of total utility revenues, which top $265 billion in Europe, $370 billion in the United States, and $1 trillion in Asia (see figure 1 on page 3). Fierce competition. Competition in the energy management market goes well beyond utilities to include information and communications technology (ICT) players, systems integrators, telecom operators, home automation companies, and consumer electronics makers. Unpredictability. Household revenues and spending are hard to project in volatile economic times. Additionally, considering strong competition from other industries, it is difficult to know what share of this market s revenues utilities can expect to capture. Limited consumer savings. Many consumers may find that energy management makes only a small contribution to household energy savings. Measures such as improving insulation and installing energy-efficient devices will likely offer greater savings (see figure 2 on page 3). 2

3 Figure 1 B2C energy management markets have limited revenue potential in coming years Energy management revenue ($ million) $2,500 $2,000 Aggressive forecast Average forecast Conservative forecast $1,500 $1,000 $500 $ Note: figures based on extrapolation of moderate, aggressive, and average scenarios, Revenues are from devices, installation fees, and information services. Sources: European home data from Smart Energy Homes, ON World Inc., December 2010; A.T. Kearney analysis Figure 2 Energy management likely will not be the main source of energy savings for consumers Household energy consumption (petajoules) Consumption 2010 Insulation measures Efficient devices (heat) Efficient devices (electricity) Microproduction Reduced energy use Net consumption Note: Based on maximum revenue potential scenario Sources: Energy Transition Model ( A.T. Kearney analysis 3

4 Utilities: Playing to the Strengths Among the players in the energy management value chain, different industries offer different relative strengths. Utilities have extensive expertise in information management, giving them an advantage over other contenders, such as telecom operators, systems integrators, and consumer electronics manufacturers. But most utilities lag in other areas, including device capabilities and software (see figure 3 on page 5). Understanding these strengths and weaknesses points to the way forward for utilities. Information services. Providing information services to end-users plays quite closely to the strengths of systems integrators and information brokers, which have extensive access to reference data and experience in data aggregation. However, utilities have an advantage here because of their experience administering energy flow costs and amounts. They also hold a trump card in their existing billing relationships with end-users and the online channels already available to them. This element of the value chain is where the value to the end-user is greatest and most visible. Devices. Consumer electronics makers have the natural advantage in marketing and selling energy management devices. Utilities can tap into this by partnering with manufacturers to source their devices with an eye toward ease of use, a critical success factor in the B2C market. Software. Software is an important element of the energy management value chain, yet software complexity and addressing it are barriers to entry. On top of that, services must be targeted at end-consumers; after all, no software equals no service. Most industries we examined particularly utilities have little to no software development capabilities, so systems integrators and ICT players have the advantage here. Energy utilities have witnessed dramatic market changes in the past two decades, and more are on the way. Typically, utilities cannot afford their own sales and delivery channels to provide the range of bundled or unbundled services including electricity and gas, energy management consulting, devices, insulation, and distributed renewable energy that will win over the greatest number of customers. So franchises and joint ventures will be crucial. Once they are set up, the challenge will be maintaining the promise, quality, and service levels. Capturing Indirect Benefits Although partnerships offer a lot of promise in energy management, the full direct benefits of energy management may be less than desired for many utilities because of competition and market uncertainty. However, energy management offers several indirect benefits for utilities, including better demand management, improved customer acquisition and retention, and lower infrastructure costs. 4

5 Better demand management. Energy management can help utilities reduce their penalties for supply imbalances and improve their energy sourcing efficiency. For example, evening out the demand curve during the day by automating appliances, introducing dynamic pricing, or using other control mechanisms to reduce usage during peak times could increase the minimum base load by 10 percent and thereby save on energy sourcing costs. Demand management will grow more complex as consumer energy use changes amid electric vehicles, distributed generation, and energy management tools. Utilities information on these changing patterns could help them increase their hedging and forecasting performance and reduce the penalties they pay for energy supply imbalances. We estimate that better demand management and tariff innovations could save a utility with about five million customers roughly $10 million a year, or about $2 per customer. And using consumer usage information to reduce imbalance penalties by 50 percent would save an additional $6 million a year. Figure 3 Utilities strengths in energy management are in brand awareness and information services Relative performance Utilities Home automation companies Telecom operators Consumer electronics makers Systems integrators Devices Ability to develop plug-andplay devices Installation, maintenance, and repair service Trustworthy partner and brand awareness Low Average Average Very high Average Average Average Very high Low Very low High High Low Very high Average Software Ability to develop complex software systems Ability to manage complex software projects Ability to incorporate consumer needs Very low High Low Average Very high Low Average Low Average High Low Average Average Low Average Information services Ability to gather and distribute data often Access to content databases Ability to administer costs and energy flows Average Average High Very low Very high High Average Low Very low Very high Very high Low Average Very low Low Source: A.T. Kearney analysis 5

6 What s Driving Energy Management? Many B2C energy providers see growth potential in energy management, and some leading utilities have already started initiatives to tap into its promise. For example, Canadian utility Hydro Ottawa bills its domestic and small-business customers based on when they use energy and rewards them for cutting energy use during peak times. Italy s Enel completed a mass rollout of smart meters that enabled a new, time-based pricing system. And several utilities, including EDF (France) and Vattenfall-Nuon (Sweden and the Netherlands), offer basic energy management systems in which customers connect devices with wireless plugs to monitor usage and enable remote switching of lights, central heating, or appliances. Three factors are front and center in the increased interest in energy management. Energy efficiency. Rising pressure on energy supplies has led to a global push for energy efficiency. For example, a proposed European Union (EU) directive in June 2011 called for measures to increase efficiency from energy transformation and distribution to final consumption. Customer desires. Consumers are more aware of and interested in sustainability. Evidence suggests that customers will act if the cost-effort threshold is low enough and benefits are high enough. This is seen in the adoption of more affordable green electricity in countries where these thresholds are indeed low enough, such as the Netherlands (see figure). Changes in the grid. Changes in the electricity grid are helping drive demand for energy management services among domestic consumers. For example, distributed generation is allowing small, local facilities (such as rooftop solar panels) to supplement or even replace mammoth, centralized power stations while wasting less power because of shorter transmission distances and technological advances. Electric cars are spreading, encouraged in part by government incentives. For example, drivers of electric cars in London are exempt from the city s congestion charge. Figure Green electricity is gaining popularity in countries where costs are low and benefits high Share of Dutch residential customers with green electricity 50% 49% 42% 44% 40% 37% 30% 20% 10% 0% Source: Dutch Antitrust Authority NMA (2011) 6

7 Improved customer acquisition and retention. Acquiring and retaining customers in the B2C energy market is never easy. But utilities can stand out by appealing to gadget-minded consumers. This starts by establishing the right sales and delivery network. Experience with smart meters shows that offering a new gadget along with an attractive primary offer can win new customers, and forecasts indicate that first movers will have an advantage. Offering energy management products and services can also improve a utility's brand as a green supplier. Provided the price is right, this brand adjustment may draw and retain environmentally conscious consumers. Reduced infrastructure costs. Smart investments in energy management could reduce infrastructure and maintenance costs. A medium-to-large European distribution system operator with five million customers typically spends about $300 million a year on infrastructure and maintenance, so even small-percentage savings here will make a big difference. Forward-thinking grid operators will plan for major investments to cope with distributed generation, electric vehicles, and other changes. Automation and increased control of different layers of the electricity grid will reduce the need to increase capacity and allow for better investments down the road. Increased monitoring, automation, and control will also reduce the amount of unplanned and thus more expensive maintenance. Distribution management at the home level (rather than the mid-voltage level) will increase the granularity of information and the potential savings. Changing Fortunes Market changes have been dramatic for energy utilities over the past two decades, and more change is on the way. To remain dominant in energy supply, utilities must address these trends with short-term strategies that make an immediate impact and longer-term goals that create a competitive advantage. So, while investing heavily in the B2C energy management market may not make sense yet, it could make sense in the future as the market evolves. Today, utilities should focus on the indirect benefits found in demand management, customer acquisition and retention, and infrastructure cost savings. Looking ahead, they should stake their position in the energy management value chain seeking out future partners where necessary to help deliver growth and competitive advantage over the long term. Authors Anna Bertona, partner, Amsterdam anna.bertona@atkearney.com Jan-Paul van Term, partner, Amsterdam jan-paul.van.term@atkearney.com Alexander Tamminga, consultant, Amsterdam alexander.tamminga@atkearney.com The authors wish to thank Casper ten Kate for his valuable contributions to this paper. 7

8 A.T. Kearney is a global team of forward-thinking, collaborative partners that delivers immediate, meaningful results and long-term transformative advantage to clients. Since 1926, we have been trusted advisors on CEO-agenda issues to the world s leading organizations across all major industries and sectors. A.T. Kearney s offices are located in major business centers in 39 countries. Americas Atlanta Calgary Chicago Dallas Detroit Houston Mexico City New York San Francisco São Paulo Toronto Washington, D.C. Europe Amsterdam Berlin Brussels Bucharest Budapest Copenhagen Düsseldorf Frankfurt Helsinki Istanbul Kiev Lisbon Ljubljana London Madrid Milan Moscow Munich Oslo Paris Prague Rome Stockholm Stuttgart Vienna Warsaw Zurich Asia Pacific Bangkok Beijing Hong Kong Jakarta Kuala Lumpur Melbourne Mumbai New Delhi Seoul Shanghai Singapore Sydney Tokyo Middle East and Africa Abu Dhabi Dubai Johannesburg Manama Riyadh For more information, permission to reprint or translate this work, and all other correspondence, please insight@atkearney.com. A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea. 2012, A.T. Kearney, Inc. All rights reserved. The signature of our namesake and founder, Andrew Thomas Kearney, on the cover of this document represents our pledge to live the values he instilled in our firm and uphold his commitment to ensuring essential rightness in all that we do.