UK energy groups think digital to serve homes of the future
Under pressure to cut bills, utility companies diversify to safeguard profits
Enter the home of the future. As well as solar panels on the roof and a heat pump providing hot water, an electric car is in the drive, plugged into a charging point. When the battery is full, an app suggests you discharge some of the electricity to use in the house when you need it most.
The app also detects that your heating is too high and asks if you want it turned down; and points out your boiler is inefficient and offers to arrange an engineer.
This is the vision of Engie, the French utility company that believes energy providers will switch from passively supplying electricity and gas to actively managing customers’ homes.
At a time when UK policymakers are seeking to clamp down on what they describe as “rip off” energy bills and homeowners are interested in generating their own electricity through solar panels, utility groups are having to diversify to safeguard their profits.
Wilfrid Petrie, head of Engie’s business in the UK, likens the transformation to the telecoms industry. “The value is less on the landline itself but how to use it as best as possible,” he said at a recent launch of the company’s household energy service in the UK.
In other words, energy companies are starting to go down the same route as telecoms groups, which bundle together a range of services such as broadband and pay-TV with the basic provision of a landline. Core energy supply is expected to become a low margin activity but value will be added through ancillary services.
Centrica, the UK-listed owner of British Gas, has long had a sizeable services business that offers products such as boiler repair. In the past few years it has been developing other services around the idea of a “connected home”, where digital devices such as smart thermostats help households better manage their energy usage.
It has developed a “Hive” smart thermostat, which allows users to control their heating and hot water via their mobile phones. For an extra monthly fee, subscribers are offered a range of products, including smart plugs that can be switched on or off via a mobile and motion sensors that alert them if a window or door has been opened.
“The margins on all of these services are much higher [than energy supply],” says Iain Conn, chief executive of Centrica. “Energy supply is not a high margin business in the first place. Last year we made a margin of £52 on an average energy bill, which is £1,044 in our case.
“Will bundled services be part of the future? Absolutely.”
Newer “challenger” energy companies are muscling into the market. Ovo Energy this year bought Corgi HomePlan, a company that offers services such as boiler maintenance. Others, such as First Utility, have branched out into broadband.
Big technology groups are also active. A rival to British Gas’s Hive thermostat is Google’s “Nest”.
However some analysts are yet to be convinced that these ancillary services will be sufficiently profitable to make up for the loss of margin on energy supply, particularly if price restrictions are introduced.
Both the Conservative government and the opposition Labour party have pledged a cap on the most common energy tariff.
“What is unproven at the moment is the monetisation of that,” says Martin Brough, utilities analyst at Deutsche Bank. “British Gas has been at the forefront at least in residential of coming up with Hive thermostats and apps and has had some very good feedback from customers. They like it. What isn’t yet proven is if they are willing to pay ongoing subscription-type revenue.”
Centrica has sold 900,000 connected home products, according to its most recent trading update, but that division made an adjusted operating loss last year of £50m.
It is still in “start-up mode”, says Deepa Venkateswaran, analyst at Bernstein. “That business should be profitable [in future], yes, but is it going to be a £300m, £500m business? I doubt it.”
Mr Conn admits these newer parts of the business are still relatively small but they are “growing rapidly”.
Julian Critchlow, a partner at Bain & Company, stresses that in the immediate future at least, most utility companies will need — and will continue — to make money on basic energy supply. Until more homes move “off grid” by installing their own solar panels and batteries that can store excess electricity, energy supply will remain a core activity.
He points out that companies will probably need to radically cut costs to protect profit margins under any price cap.
Utility companies have warned that a cap could hamper investment, including in areas such as technology.
“Until we get batteries . . . more locally and domestically, I am still going to end up being connected to the grid and I am still going to have — especially if I have an electric vehicle — a relatively noticeable consumption and somebody is going to have to supply that,” says Mr Critchlow.
Utility companies have diversified before — into areas as disparate as financial services — but have since withdrawn, Mr Critchlow points out. “These waves of thinking come through the industry every decade,” he says. “Is the energy supply business dead? I don’t think it is dead but it is going to have to evolve.”