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Energy as a service
The transition from the traditional energy system to a service model
In a nutshell, energy-as-a-service is a shift in the business models around how energy is produced and consumed, from paying per unit, to paying a monthly subscription for consumption. Think of cell phones: most people pay as a fixed-price package for data and calls, instead of per call or per text as in the early days.
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- The energy ‘trilemma’
- Energy-as-a-service in smart cities
- Embracing the three trends of decarbonisation, decentralisation and digitisation
The energy ‘trilemma’
In the current model, the interests of energy providers that charge by the kilowatt are not aligned to those of customers, who want a reliable service at a reasonable price. This tension is greater when you consider the full energy ‘trilemma,’ which includes reducing overall consumption for sustainability benefits, too. The energy-as-a-service model aligns these interests. By offering a tariff for an all-in service, power providers become a lot more interested in ensuring that customers are as energy-efficient as possible, match use to when renewables generation is at its peak, and store energy for use when rates are high. For large commercial and industrial customers, an outcome-based service that incorporates a diverse and renewable range of energy sources and management at a lower and fixed cost would be an attractive option.
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Energy-as-a-service in smart cities
A catalyst for this energy-as-a-service transition has been awareness. As consumers, we have become more aware of our own usage and the available sources of energy. A trend, also within the Netherlands, are ‘Smart meters’ which give the consumer more information than ever before. Connecting this information to ‘Smart devices’, allows for instance a washing machine to run during off-peak hours. Putting the consumer in control of their energy consumption and thereby providing energy-as-a-service is a disrupting innovation. A similar trend can be seen on a global level. Urbanisation is a world-wide trend that causes increased focus on energy consumption in cities. Cities take up about two-third of the current world’s energy consumption and therefore are a large contributor to the global carbon footprint. Energy is one of the acute challenges cities are facing in managing rapid urbanisation. A response to this are the so-called ‘Smart cities’. These cities leverage data and digitality to improve fundamental functioning, including sustainable energy management. Thinking about energy-as-a-service, the possibility to use a more local and energy efficient distribution system instead of the current centralised system is consumer-oriented. When looking at these ‘Smart’ solutions, a challenge that will need to be faced is grid parity.
Next to increased transparency of energy usage and better demand management, the growth in renewables and developments in energy storage make the implementation of energy-as-a-service in smart cities for consumers a likely future scenario. With this business model energy-as-a-service providers can combine saving energy, producing energy and storing energy into a competitively-priced package for commercial, industrial or residential customers. The opportunity varies by segment: business-to-business customers are looking for efficient consumption that is balanced with microgeneration management. Business-to-consumer focuses on the energy needed to power smart homes and the rapidly growing market in electric vehicles.
We are starting to see movement in this direction. In our recently published report, Widening the lens: Big-picture thinking on disruptive innovation in the retail power sector, we cite a number of examples of how energy providers are using increasingly sophisticated technologies to spur innovation in all areas of the business: the back-of-house, the product offering and the customer experience. Energy providers are partnering with companies in different sectors (automotive, insurance, telecommunications) to create new ways of working, new products and services, and enhanced value for customers.
For example, utilities and power retailers work with auto companies to improve home generation and storage, and use advanced analytics to facilitate smart use of electricity. The result is improved reliability and more transparent prices for consumers. Turning battery packs into storage as a service means B2B and B2C customers can shift energy use away from the most expensive times. In another case, one power company worked with a telecoms company to offer customers bundled home services across their power, gas, phone and internet, and the convenience of a single bill. Firms are taking advantage of new technologies, such as blockchain, to create local peer-to-peer markets in renewable energy.
Another sector in which energy providers and stakeholders are working together to create enhanced value for consumers is real estate development. When residential units are constructed the buyers of these units need to individually choose an energy supplier. A response to this inefficient procurement is the investment of the real estate developers in a decentralized energy systems such as a heat pump or solar panels. The developers offer the buyers of the residential units the option to contract an energy facilitator that will carry the initial capital expenditure and subsequently charge the buyers for the exploitation of these energy systems and offer a performance guarantee. As it is in everyone’s interest to provide an energy system with the lowest expenditure costs and/or maintenance costs, the total life cycle costs of energy systems are found to be significantly lower than when buying the energy systems individually.
Embracing the three trends of decarbonisation, decentralisation and digitisation
Energy firms are embracing the three trends of decarbonisation, decentralisation and digitisation to do something new that brings value to customers. The use of smart technologies on both the generation and consumption side permits a wider, and greener range of energy sources into the mix. Self-generation allows for the creation of microgrids and more efficient use. And the latest Internet-of-Things technologies permit a level of transparency and data-driven understanding of use that improves energy management for suppliers and customers alike. In all the examples we cited, the results speak for themselves.
These novel approaches are being rolled out around the world in small-scale trials and pilots. But we expect to see increasing momentum in the coming years among the big players, with a shift from energy as a commodity product to services that include energy.