One sector for on-site power with considerable potential for growth is the residential energy services market in Europe, where micro-CHP, PV and small wind projects could thrive. Jon Slowe summarizes the results of a study to assess this potential, and the role of utilities in moving it forward.

What market are you in? Most readers of this magazine would answer that they are in the cogeneration market. Some, more narrowly, may define their market as internal combustion engines – or perhaps even more narrowly, oil for internal combustion engines. Whatever their definition of their market, all readers will have one key question in common – how will their markets grow in the future?

To answer this question, we need to define the ‘market’ you are in differently. Taking the buildings-based cogeneration market – then perhaps the market you are in is the wider ‘energy in buildings’ market. How big is this market and how is it defined?

The International Energy Agency (IEA) has one perspective. In Europe, the IEA forecasts that US$500 billion will be invested in end-use efficiency on the customer side of the meter between 2010 and 2030. This amounts to about one third of all investment required (including large generation assets and transport) if Europe is to cut greenhouse gas emissions by 20% from 2007 levels.

Even this definition – and impressive size – doesn’t capture the whole size of the market. Most investments in energy in buildings are not energy efficiency investments. They are ‘conventional’ heating and cooling investments – boilers and chillers – as well as ‘low carbon’ investments such as cogeneration, photovoltaics, building energy management systems and heat pumps.

New research by Delta has dug deep into these markets. In this article, we will show that conventional heating (and cooling) dominates these markets today, and the big future winners will be low carbon heating technologies (perhaps including micro-CHP) and, to a lesser degree insulation. PV is a wildcard – but a potential winner in the second half of the decade.

Our research has been prompted by a question many European energy companies are struggling to address. Their business has, largely, focused on selling units of energy up to the meter. They, like the IEA, see large investment in energy assets on the customer side of the meter. But how large – and, more importantly, how profitable – are these markets? And how can energy suppliers play in them?

These questions are hardest to address for the residential market – large numbers of small energy users, offering very different challenges to the landscape of small numbers of large assets that energy companies are used to.

DEFINING RESIDENTIAL ENERGY SERVICES MARKETS

Energy services is a widely used term, but is often loosely defined. For the purpose of this research, Delta has categorized residential energy services into six segments. The key segments for on-site power generation are:

• Low carbon heating – micro-CHP is part of this sector, along with non-power generating technologies such as heat pumps, solar thermal, and biomass heating.

• Distributed generation – comprising photovoltaics and on-site wind.

THE SIZE AND NATURE OF MARKETS

Figure 1 shows how these energy services markets in Germany and Spain are broken down by the different types of energy services.

In Spain, the market is dominated by ‘conventional’ heating and cooling, and associated maintenance services. On-site distributed generation – mainly PV – only makes a very small contribution, as the Spanish PV market is mostly large ground-mounted systems and systems on large commercial buildings. While the Spanish wind energy market has boomed, the market for on-site, small-scale wind turbines is tiny. The situation in Germany is very different. Here, residential PV comprises about one quarter of the market. Low carbon heat also makes significant contributions. Heat pumps, solar thermal and biomass heating make up nearly all this market today, with micro-CHP just establishing itself on the market.

Overall, markets for residential energy services in Europe are worth around €8 billion of gross margin today, and Delta forecasts they will grow to over €10 billion in 2020.

Low carbon heat is a major growth area in all markets – a combination of heat pumps, solar thermal, biomass heating and micro-CHP. In the majority of markets studied, this sector will contribute more than one third of available energy services gross margins. In one national market, low carbon heat becomes the single largest part of the residential energy services market.

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Figure 1. Gross margin shares by technology in Germany (left) and Spain (right). Heating (and in Spain cooling) installation and services comprise just over half current gross margins in Germany, and over three quarters of current gross margins in Spain. Low carbon heat is an important contributor in Germany, but only makes a small contribution in Spain. Source: Delta Energy & Environment, 2011

DRIVERS FOR CHANGE IN ENERGY SERVICES MARKETS

Four key drivers are responsible for this forecast growth:

• Policy and regulation – we expect a growing policy focus on reducing carbon emissions in the residential sector. In the short term, hard incentives will be thin on the ground as governments reign in their spending, but over the decade we expect energy efficiency and low carbon heat to be major beneficiaries of government policy – both through hard incentives, regulation and obligations on energy market players. For example, in parts of Germany, regulations push homeowners away from simply replacing a gas boiler with a gas boiler – in many cases they are also obliged to increase levels of insulation, or install a solar thermal with their gas boiler.

• Technology – PV and micro-CHP in particular have big opportunities to reduce costs and improve performance, opening up more of the market and reducing their (currently high) dependence on policy support.

• Availability of finance – residential customers are notoriously averse to making discretionary capital investments in energy efficiency or heating and cooling. We expect to see more creative packages – in some cases underpinned by legislation such as the Green Deal in the UK – for example, with finance in return for a share of energy savings or incentives.

• Customer attitudes – growing awareness of energy (partly in response to rising energy prices) will help to facilitate growth in the residential energy services market.

OPPORTUNITIES FOR ON-SITE POWER GENERATION

The relevance of this growth in future energy services markets for distributed generation is as follows:

Photovoltaics
Solar photovoltaic installations are still largely subsidy dependent and we don’t expect strong growth for this technology in European residential energy services markets over the next five years. There are many lower-hanging fruit in the form of low carbon heat and energy efficiency. PV markets today are almost completely incentive driven. Where incentives are in place, markets such as Italy, Germany and the UK have shown that very rapid growth is possible. But many governments are reining in incentives, or placing caps on the total quantity. In the second half of the decade, cost reductions may see rapid growth, particularly in southern European markets.

On-site wind
On-site wind represents a niche market today – but a growing niche. We expect to see continued growth in this market, but compared to the wider residential energy services market it will remain an insignificant contributor.

Micro-CHP
Micro-CHP is a potential large winner by 2020. It plays in the large, established heating market – on one hand giving it access to a very large market with strong policy drivers emerging, but on the other hand it faces the challenges of entering an established, conservative and calcified market. If – and it is still a big if – micro-CHP can establish itself as a cost-effective competitor (economically, and in the eyes of the customer) to gas boilers, and also to heat pumps, solar thermal and biomass heating, it has the potential to gain significant shares of the growing European energy services market.

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Figure 2. Energy supplier shares of 2011 energy services markets. This figure shows, for four different EU countries, the share that energy suppliers currently have of energy services gross margin. Source: Delta Energy & Environment, 2011

AN OPPORTUNITY FOR ENERGY SUPPLIERS?

Many electricity and gas suppliers across most of Europe arguably haven’t had customers in the past – they have had meters that they read and bill. These companies – and this is a big generalization (there are a number of exceptions) – have had little insight into the customer side of the meter. Energy on the customer side of the meter has largely been the domain of local installers. Figure 2 illustrates the small share that the energy supply industry has of the residential energy services market in four European countries.

Examples of energy suppliers – such as Centrica in the UK, Nuon in the Netherlands and Enel in Italy – that have started to capture significant shares of the energy services market are show in Table 1. But most energy suppliers are at best gingerly peering round the corner to see what is on the customer side of the meter, and have yet to define clear strategy and tactics for these markets. In most European markets energy suppliers have less than 10% of the energy services market, and are on average earning just a few euros per household of gross margin from energy services.

CENTRICA NUON ENEL
An established heating business, with ~10% of the UK market A nationwide heating business installing and maintaining boilers Has around one quarter of the Italian roof-mounted PV market.
Aggressive acquisition of low carbon heating, insulation and distributed Offers solar PV and insulation Operates a franchise business model to give scale and national coverage.
  Has a stake in a PV company and undertakes extensive micro-CHP testing.  
Table 1. Examples of energy suppliers generating significant energy services revenues

By 2020, we see clear opportunities for energy suppliers to double or triple their shares of energy services markets. As well as earning direct revenue from sales of product and services, they will be able to exploit value from two additional areas:

• Using energy services to help make customers ‘stickier’ – reducing the switching rates to competitors, as well as using energy services to attract new energy supply customers.

• ‘Smart demand’ – using energy services to shape the timing of customer electricity demand (or dispatching distributed generation according to electricity market power prices).

The values of these two areas varies by market, but in summary we see clear opportunities for energy suppliers to be earning €20–€40 gross margin per household from energy services by 2020. Winning energy suppliers will already be developing the right strategy and tactics to make significant contributions to their retail market earnings.

Jon Slowe is a director at Delta Energy & Environment, Edinburgh, Scotland, UK. Email: jon.slowe@delta-ee.com

This article is based on Delta Energy & Environment’s multi-client study, ‘Mass Market Energy Services: Strategies for Success’.

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