As Australia struggles with the inherent contradictions in its electricity pricing policy, many European countries are putting in place policies which reward energy utilities for reducing customer demand.
Australian distributors and retailers are required by the Australian Energy Regulator (AER) to encourage the usage of renewable energy sources like solar PV cells and reduce demand through demand side response (DSR) mechanisms. In practice they do little to encourage such practices, because their revenue and profitability is tied to increased energy consumption.
Many observers have pointed out the inherent contradictions in these perverse incentives, but little is being done about it. In Europe, things are different. McKinsey & Company, in its most recent McKinseyQuarterly, entitled “Winning the battle for the home of the future”, explains what is happening.
The report looks at changes in three factors: technology, regulation, and consumer behaviour, which it says will transform the residential energy market in the coming ten years. “To succeed in this new environment, utilities must place fine-grained bets on the segments where they can best create value for themselves and develop winning capabilities beyond their traditional business, often by seeking partnerships with companies from other sectors.”
McKinsey conducted research across four countries: the UK, Germany, Italy and Sweden. The report explores three scenarios, where each of the three factors is implemented incrementally, aggressively, and to the extent that homes become energy-neutral. These are then quantified.
The analysis shows that most of the potential energy savings will come from better building materials and the use of centralised systems such as heat pumps that will handle all heating and cooling in the home, including refrigeration. Smarter appliances are another important factor, with changed consumer behaviour through such technologies as smart meters comparatively unimportant.
But an important aspect of the analysis is McKinsey’s observation that utilities have a conflict of interest in promoting energy efficiency – which is exactly the case in Australia today. That calls for new business models, which are already being developed. The report gives some examples:
“Developing or acquiring new capabilities will be essential for utilities as they move beyond their comfort zones. They must, for example, help customers overcome the investment barrier by providing financing options through partnerships with banks or by creating internal financial units. Many players also realise that they have to join hands with other new entrants to cover the value chain effectively. The pan-European utility RWE, for example, has announced partnerships with a range of players, including Microsoft and EQ3 (for a central control unit linking all appliances) and Renault (to test the performance of electric vehicles in Germany’s commuter traffic). British Gas collaborates with the UK grocery retailer Sainsbury’s. Under their partnership, consumers can purchase energy-management products (such as solar panels and insulation) in a supermarket and British Gas installs them.”
The transition will not be easy. But it is necessary. Australian utilities should act now to pre-empt regulatory coercion that will force them to help consumers reduce energy consumption – which is bound to happen. Those that move early will reap the biggest benefits in the long run.
