Crisis-hit European utilities square up to technological revolution

February 14, 2014 5:15 pm

Crisis-hit European utilities square up to technological revolution

By Guy Chazan

Faced with a grim present and an even grimmer future, Europe’s utilities are being forced to reinvent themselves – and adapt to a technological revolution in home energy services.

Once unassailable incumbents are under pressure as never before, squeezed by the explosive growth of renewables and low wholesale energy prices.

The European utilities have underperformed the broader European equity market by 80 per cent since the start of 2009. In the words of Peter Terium, chief executive of German power group RWE, they are experiencing the “worst structural crisis in the history of energy supply”.

Some are retrenching, cutting costs and divesting assets. Others are expanding internationally, diversifying into new, more profitable markets: and all of them are trying to transform themselves from mere suppliers of gas and electricity to providers of increasingly exotic “energy services”.

That has involved a big bet on the business of energy efficiency. Companies that for most of their history barely engaged with customers are entering into people’s homes, installing smart technology and advising them on how to reduce their fuel bills.

“We are now providing customers with solutions, rather than just cubic metres of gas,” says Fulvio Conti, chief executive of Italian utility Enel.

GDF Suez, the French gas and power group, has the same message. “In classic generation we’re closing down lots of plants, but we’re hiring in the energy services business, and growing rapidly,” says Gérard Mestrallet, the company’s chief executive.

But will this new incarnation work? The utilities have always dominated power generation, distribution and supply. But in the burgeoning realm of energy services they face competition from nimble new entrants, some of which are backed by the biggest names in technology.

“It’s a much more competitive market, because the barriers to entry are very low,” says Sofia Savvantidou, a utilities analyst at Citigroup. “That’s a big contrast to thermal generation, where only a few companies can do it because the capital costs are so high.” And energy services will only ever make a relatively small contribution in the medium term to the utilities’ business, she says.

Nothing better encapsulated the new threat to the incumbents than Google’s $3.2bn acquisition last month of Nest Labs, a four-year-old start-up that makes “smart” thermostats and smoke alarms for the home.

Nest’s first creation was the $250 Learning Thermostat, which learns what temperatures homeowners prefer, builds a personalised schedule, and turns down the heating to conserve energy when they are away. It relies on a smartphone app for remote control, even far away from home.

Some industry experts say that, in the future, tablets and smartphones will connect up to new kinds of devices that could end up bypassing the traditional utilities’ infrastructure entirely. It’s still unclear where companies such as RWE, EON and EDFfit into such a brave new world.

“The question is, can they provide the value-added services that allow them to capitalise on their position as the incumbent provider?” says Jim Long, a partner at Greentech Capital Advisors. “Or will they lose that advantage to new entrants like Google or Schneider that come at energy from a services and technology angle, and see it as just another technological application?”

Some are making more progress than others. British Gas, a subsidiary of FTSE 100 power group Centrica, recently launched a product called Hive Active Heating, a service that lets people control their heating and hot water remotely from a smartphone, tablet, SMS or via a website. The company says it can save households up to £150 a year.

However, British Gas is something of an outlier, Mr Long says. Most of its rivals have so far failed to take advantage of perhaps the greatest asset they have: their enormous customer base. “They have not yet developed a dynamic relationship with those customers,” he says.

Wherever the future lies, one thing is clear: the present is a disaster. “The energy sector in Europe is really in danger,” says GDF Suez’s Mr Mestrallet. “Power generation is under a lot of pressure.”

UK-based utilities have an additional headache: a big rise in political uncertainty. Ed Miliband’s promise to freeze energy prices if Labour comes to power sent a chill through the industry. A round of recent price increases prompted calls for greater regulation of the “big six” utilities. Recently, the energy secretary, Ed Davey, railed about British Gas’s market dominance, hinting that it might have to be broken up.

But some industry figures think Europe’s utilities could be turning a corner. “There are headwinds – the economy is against us,” Mr Conti says. But he expects slightly higher energy demand this year compared with last. “The situation isn’t rosy, but it’s not as bleak as it used to be,” he says.

But others are more pessimistic. For the utilities to survive, a fundamental change in approach is needed, Citi’s Ms Savvantidou says. “They need to focus on services, look at renewables, smart grids and new technologies like battery storage, rather than clinging to thermal generation, which will really struggle to get back to the high returns of 2006-08.”