Shifting sands the UK market for low carbon B2B offerings may never be the same again White Paper June 2015 Contact: Michael Brown michael.brown@delta-ee.com +44 131 466 5544 Dina Darshini dina.darshini@delta-ee.com +44 131 625 3334 Andy Bradley andy.bradley@delta-ee.com +44 131 476 4259
New and dynamic trends in the 2-3 billion a year market for B2B low carbon offerings 1 in the UK suggest that big changes may be underway, creating some important challenges but many new opportunities. This White Paper describes how the B2B supply chain is becoming more competitive, dynamic and complex. And while energy demand in the commercial buildings market trends upwards, it s also being driven to ever higher energy efficiency. For details of our multi-client study The Best Opportunities in the Commercial Buildings Market see: http://www.delta-ee.com/research-consulting-services/b2b-multi-client-study The UK Commercial Building Stock A Large and Varied Market There is very little hard data on the commercial building stock. Delta-ee is investing strongly in compiling new databases of the UK building stock, and our analysis suggests that: Around 40-50,000 UK non-residential premises per year have their heating systems replaced. Of these, ~35,000 are on-gas (potential in replacing gas boilers) and ~5,000 are off-gas (potential in replacing oil or LPG). ~3-4,000 new non-residential premises/year are forecast to be built between 2014-2020. This roughly translates into an additional 1 million m 2 floor area/year. There are ~70-100 district heating schemes in UK where commercial buildings are connected (these are classified as large heat networks and represent only 5% of all UK heat networks). The vast majority of heat networks in UK are small, having an average connection of 35 residential dwellings. FIGURE 1. CHARACTERISING THE NON-RESIDENTIAL BUILDING STOCK 1 Defined as including low carbon heating, cooling and energy efficiency. Including technologies such as HVAC, CHP, renewables, district heating and demand side efficiency (eg lighting, appliances, controls, BEMS). Delta Energy & Environment Ltd 2015 Page 2
The B2B supply chain is becoming more competitive, dynamic and crowded Energy utility strategies are changing and their offerings are diversifying. The main six energy providers in the UK have had business energy services businesses for years, but there is a new and urgent expectation from shareholders for growth from them. E.ON s recent announcement that it will split in two very different businesses is just one manifestation of a clear trend towards accelerated utility investment in B2B energy services. In one sense, these players are major new entrants to the market. In 2014, E.ON, one of Europe s largest utility, decided to split into two separate entities and spin-off most of its power generation, energy trading and upstream businesses - reacting to its burgeoning debt and the possible scenario of mothballing fossil fuel plants. Moving away from its centralised business model, E.ON now plans to focus on its renewable activities, regulated distribution networks and bespoke energy efficiency services. Underscoring this ambition was E.ON s acquisition of Matrix, an energy management and B2B energy efficiency services firm. The acquisition enables E.ON to tap into Matrix s portfolio of existing clients which include bluechip corporates in the retail, telecommunications and finance sectors as well as public-sector institutions (eg. Virgin, BT, Oracle, Marks &Spencer, and Tesco). Matrix would continue to operate as a standalone company and would retain its brand name. However, both E.ON and Matrix would collaborate on "complementary" services and test opportunities of crossselling services into the two customer bases. Other new entrants are making inroads into the B2B energy market it s becoming crowded. It s been a while since the long established players in the market, including the specialist ESCOs (Cofely, Dalkia etc) have had the market to themselves. They are these days increasingly joined not only by the utilities, but also by others such as those highlighted below: FIGURE 2. INCUMBENT AND NEW PLAYERS OFFERING B2B LOW CARBON OFFERINGS IN UK Delta Energy & Environment Ltd 2015 Page 3
Not only are some of these players very new to the B2B energy services market, but existing players are also adding new capability along different parts of the value chain, as Figure 3 below illustrates. And as with all industries witnessing a growing number of new entrants (particularly the SME market) developing new technologies and solutions for specific applications these can be tomorrows acquisitions for some of the larger companies. FIGURE 3. THE LOW CARBON B2B VALUE CHAIN New players are coming in and existing players are extending their reach along the value chain with a variety of business models Diagnostics / consulting Equipment / measures Design / construction / installation Operation & maintenance Energy supply Financing Data management / analytics Flexible demand M+E Consultant OEM Installer Erection & lease O&M service provider Energy supplier / Utility ONSITE GENERATION OEM, including after-sales business Full-service provider Integrated contractor (build-own-operate model)...... Legal / finance Virtual power plants / Demand response M+E / M&V Consultant Facilities management BEMS, Systems integrator ENERGY EFFICIENCY Buildings / Industry process optimisation Measurement and consumption analysis, including upgrades to meters, monitoring assets, process improvements Energy performance contracting Note 1: Onsite generation involves the provision of heat / electricity / cooling using small scale generation assets; while energy efficiency involves building or process improvements with or without material asset elements. Note 2: In reality, there are a wide variety of business models that integrate and expand on the examples above depending on the core business of the company, target customer segment, mergers and acquisitions, etc. Source: Delta-ee analysis.while energy demand in the commercial building sector remains on an upward trend Energy demand in the UK s commercial building sector is by far the fastest growing among all end user sectors. According to DECC data, in 2013 energy consumption by final users grew by 3.1% for the service / others sector, compared to 0.2% in the residential sector, 2.4% in industry and -0.7% in transportation. However, this aggregation of service / other final users masks the fact that virtually all of the increase in this sector has been in commercial services (private offices, retail, leisure, hospitality and warehouses) compared to the public administration and agricultural sector which gets lumped together by government statistic agencies. Delta Energy & Environment Ltd 2015 Page 4
FIGURE 4. PRIMARY ENERGY CONSUMPTION IN SERVICE / OTHERS SECTOR Use in private commercial buildings is the fastest growing part of the UK market 30 Million tonnes of oil equivalent 25 20 15 10 5 0 Public Administration Private Commercial Agriculture 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: DECC, Digest of UK Energy Statistics, 2014 What s driving this growth in demand? There are many factors, including: The UK services sector is driving overall economic growth, while industry and households continue to rein in. The health sector, including hospitals and care homes, represents a guaranteed source of growth for decades to come. Datacentre growth continues to expand rapidly the UK is one of the fastest growth markets globally. Case study: Data centres The UK datacentre industry currently uses about 3.1GWe of power and this is expected to rise to 3.68GWe in 2016, according to DCDi Census figures. With ~0.5 million m 2 of floor space expected to have been available by the end of 2014, the sector holds promising B2B low carbon solutions potential. For example, in 2014, UK s Green Investment Bank helped finance a 5m Citibank Data centre project involving a Combined Cooling and Power (CCP) system, energy efficient cooling units and efficiency improvements to the building s air conditioning system. The CCP system will generate 71% of the electricity needed to power the data centre..and drivers for energy efficiency continue to rise Yet while energy demand growth looks set to continue, there are now multiple drivers for efficiency among building owners and estates managers, in particular from the policy & regulatory environment and at least until recently energy price trends. Delta Energy & Environment Ltd 2015 Page 5
Policy and regulatory intervention, both from national and EU levels, is growing year by year, and includes: The CRC Energy Efficiency Scheme is now firmly established as a policy tool to promote greater efficiency in both public and private sectors. Enhanced Capital Allowance scheme which encourages energy saving technologies through a tax break. ESOS mandatory energy audits for large enterprises. The Commercial Renewable Heat incentive (RHI) where biomass heating has been the main beneficiary. Electricity Demand Reduction scheme to drive permanent power demand reductions. The EU is on a mission to drive energy efficiency across Europe through its 2012 Energy Efficiency Directive (EED) and the emerging 2030 Climate Strategy. Building regulations. but what impact will the oil price have on market evolution? Since November 2014, it has been increasingly hard to take a future view of any part of the energy market without reference to the oil price. How low will it go? Or is $50-60/bbl the new normal? For how long? How will it affect the market for low carbon energy products, services and technologies? Energy prices for commercial buildings have more than doubled since 2004. Until very recently, the conventional wisdom was that prices would maintain an upward trajectory for years. Has all this changed with the oil price collapse? Delta-ee don t think so: If asked how many of us believe prices will stay low into the long-term, it s likely only a minority would put their hand up. We can be confident that in the time frame of almost all low carbon energy investments, the overall trajectory remains the same. The dramatic oil price shift simply highlights the uncertainty over future energy prices. Investment in efficiency and / or on-site generation can seem a highly attractive means of providing insulation against uncontrollable external price shifts. Taking all this into account, the sands are certainly shifting and it s clear that the tide is coming in for low carbon offerings in the commercial building sector it s a growth market with sustainable long-term drivers that is becoming more diverse and competitive. This produces a series of new challenges to players in the B2B low carbon energy market Growing competition from new entrants in a market that is getting ever more crowded - but also more new opportunities and value if players can get it right Which parts of the B2B energy value chain should players operate in? What business models should be on offer? The ESCO / EPC market has yet to mainstream, despite many years of investment. Customers still ask what s the catch? and, in any event, much of the low hanging fruit has already been picked. Is there more value in energy efficiency or on-site investments? Or are the best returns to be made from integrated offerings? And perhaps most important of all, what actually is the customer base, what do they really want from their energy providers and how do they make their investment decisions? New challenges, new players, growing opportunities and changing market drivers: things may never be the same again for the UK B2B low carbon energy services market. Delta Energy & Environment Ltd 2015 Page 6
Delta-ee have a ten-year track record of delivering B2B consulting assignments to major European utilities, product manufacturers, policy makers and investors. Over two thirds of our clients are repeat business. Sample Delta-ee clients We support clients including utilities, energy service providers and manufacturers to develop the most effective strategies and make informed decisions concerning: Routes to market, partnerships and competitive positioning The end-use segments more likely to invest in the short-term and customers to target How to engage with customers and offer the right product eg. the bundling of products / financing models Realistic sales targets and the best technology focus Details of our multi-client study The Best Opportunities in the Commercial Buildings Market are available at: http://www.delta-ee.com/research-consulting-services/b2b-multi-client-study For more information, please contact: Andy Bradley at andy.bradley@delta-ee.com + 44 131 476 4259 Dina Darshini at dina.darshini@delta-ee.com + 44 131 625 3334 Delta Energy & Environment Ltd 2015 Page 7