Energy suppliers are increasingly looking to add-on services to give them the edge in the competitive marketplace. Energy management – a relatively untapped market – offers great potential, argues Andrew McKechnie, energy analyst with Datamonitor.
Figure 1. The Climate Change Levy will have the greatest impact on the use of energy management.
Faced with diminishing revenues and driven by a highly competitive market, energy suppliers are being forced to explore other ways of increasing their returns. One of the reasons why energy supply is not very profitable is the level of churn in the market, with customers changing their energy suppliers every year or second year. Suppliers therefore need to concentrate on retaining their existing customers for the longer term, by building stronger relationships and also delivering an indispensable service.
Energy supply has traditionally been a commodity market and suppliers need to find a way to differentiate their product. Energy management is viewed by many as the perfect tool to do this: it forces companies to work closely with each other, and also helps to consolidate relationships as some energy management contracts can span up to 20 years.
Figure 2.Will energy management be offered as part of an integrated package, and if so, how will it be delivered?
In order to establish the likely future of the energy management market in the UK, Datamonitor has conducted extensive surveys of electricity and gas suppliers operating in the UK as well as specialist energy management companies and industrial and commercial energy customers.
Results from these surveys have revealed that the majority of suppliers believe that energy supply and energy management will be marketed and sold as a single product by 2005. An energy supplier will no longer be just that, but will work in partnership with the customer, giving advice and assistance in all matters associated with energy use.
How will this service be delivered? The energy management market itself is a highly competitive arena and energy suppliers are unlikely to enter into the market independently. The majority of suppliers believe that ‘the energy package’ will be delivered to customers through partnerships with current energy management companies. These partnerships may well materialize as joint ventures with one energy management company, as joint ventures with many energy management companies, or alternatively, energy suppliers may well outsource the entire function.
Figure 3. Major energy users views on energy management, 1999
The certainty that overrides these results is that the energy management market is set to change a great deal in the next five years, and energy suppliers are perfectly positioned to make the 0ve large customer bases to market their energy management products and services to, irrespective of whether these services are delivered directly through them or via a third party.
A £2 billion market?
According to Datamonitor’s research, by 2005, the energy management market in the UK is set to grow to 179 per cent of today’s value, when the value of products on the market is forecast to be £677 million (a1.1 billion). However, the potential of the market is far greater than this – if all industrial and commercial users invest in energy management solutions, then the market value of all products in use will be close to £1.8 billion.
Overall, the suppliers interviewed during Datamonitor’s research felt that there will be a huge increase in the rate of growth of the market, as technological advancements make energy management solutions cheaper and therefore more accessible to the smaller end-user.
However, the Climate Change Levy will have the greatest impact on the use of energy management in the UK. Although currently under-recognised by consumers, when the impact of this levy is realised there will be a great surge in demand for energy management solutions. Energy suppliers need to ensure that they are in a position to offer the required services in order to meet this demand.
Driving market growth
Datamonitor asked survey respondents to identify the greatest factors that will drive the energy management market over the next five years, and how the development of new technologies will impact on the use of energy management. Survey respondents were asked to rank the importance of the following five drivers for future uptake of energy management services:
- Climate Change Levy
- Convergence of energy prices
- Increase of energy prices
- Increase in availability of energy management services
- Decrease in price of services.
The overwhelming result from the survey was that the Climate Change Levy was seen to bring the greatest future impact on the market. All respondents rated it as the most important factor – and this should not be a surprise. The feeling within the industry is that customers
Suppliers and energy management companies alike agreed that the minimal margins in energy supply cannot be sustained in the long term, particularly in the industrial and commercial gas market. It is also uncertain exactly how the new electricity trading arrangements (NETA), which are due to be implemented in October 2000, will impact on electricity prices: obviously the reasons for introducing NETA are to stop the large generators fixing prices thus helping to bring wholesale electricity prices down. Whether or not this will happen is not yet known, but industry executives, as well as customers, are skeptical as to whether electricity prices are going to fall significantly. As such, the respondents felt that an increase in energy prices will have the second greatest impact on the use of energy management in the future.
Increased availability of products will have the third greatest impact on the use of these products. The range of products on the market is increasing and with suppliers of energy management pushing their products through direct marketing, customer awareness is also increasing and this will be a significant factor for the use of these products.
Within the next five years, advances in technology will have a great impact on the use of energy management. Survey respondents were also asked two questions regarding the development of new technologies:
- “Will the development of new technologies increase a customer’s ability to reduce energy consumption?”
- “Will the development of new technologies reduce the costs of energy management services?”
The results to both of these questions was overwhelmingly “Yes” – a view held by 79 per cent and 71 per cent of respondents for the first and second question respectively. It is interesting to note that more respondents felt that the development of new technologies will increase a customer’s ability to reduce consumption compared to actually reducing the cost of energy management solutions.
From these results, it can be seen that both the reduction in solution costs and the increase in a customer are currently underestimating the impact of the Climate Change Levy on their energy costs. When this is realized, the drive for energy management solutions will cause customers to rethink where they source these solutions from, especially if they are presented with alternatives to the energy management companies.
What customers want
It has traditionally been thought that there is little demand from customers for energy management services from their energy supplier. However, according to a parallel Datamonitor survey of industrial and commercial customers, over half of the respondents believed that their energy supplier should be more involved in the energy management function.
Energy suppliers are currently not exploiting this requirement; nearly 55 per cent of all industrial and commercial customers have not been offered any energy management services from their supplier even though over 90 per cent of suppliers say they offer some services as part of the supply contract. It is this gap between customer requirements and current product availability that will drive the energy suppliers to develop more services.
The future size, shape and internal structure of the energy management market will be determined by the relative forces of the drivers on the market. The drivers come from different sectors, the energy management companies, the energy suppliers and the customers. Some of these drivers are similar and overlap; however many run at tangents to each other and a few oppose each other completely.
In order to determine which of these factors are going to have the greatest impact on the market, it is necessary to return to absolute basics.
In a competitive market environment, markets are driven by demand and supply. The demand for energy management by consumers is very real and is most definitely going to increase in the future. The supply of energy management provisions is also present but the level of penetration of these products from specialist energy management companies suggests that the approach that has been taken so far has been of limited success.
As such, there is a gap between the demands and the availability or deliverability of these products and whenever there is a gap, it is only a matter of time before it is identified and filled. Who is going to fill this gap? There are two main options: either the current energy management companies can become more effective at servicing these customers; or energy suppliers can step in and use the fact that they already service the customers as a stepping stone to further service requirements.
What are the barriers to each of these scenarios? Energy management companies do not currently have sufficient coverage of the UK industrial and commercial sector, they also have to build their customer bases, in most cases, from scratch. As well as this, the energy management market is highly fragmented, and energy management companies do not have the critical mass that energy suppliers could bring to the market place.
The problems faced by energy suppliers are that the investment required to develop a credible energy management service package is substantial, whether this is built internally or obtained through acquisitions. In addition, energy companies may well believe that customers are reluctant to use their energy supplier as their energy management partner but as has been discovered, this in general is not the case.
It seems that there is a distinct correlation between the requirements of customers and the role that their energy suppliers can play. How the energy suppliers fill this niche is very much dependent upon the attitudes of the energy management companies.
Initially, as has been found, there will be great resistance from the energy management companies to enter into partnerships or joint ventures with energy suppliers. However, as the market develops and consolidates it may well end up as “who is left out in the cold?”