Heat and the connected home

In the second of a series of connected home insights, Susan Furnell explains how energy services businesses can be much more profitable if they are redesigned for a connected world.

Utilities across Europe often look enviously at British Gas’s residential margins. Parent company Centrica’s 2014 annual report reveals that British Gas’s £439 million operating margin from residential energy was achieved with the help of a £270 million contribution from services, mostly related to gas boilers (See more on Centrica’s annual report and new strategy on p14).

This is a business that benefits from scale. Many utilities have tried to enter but have withdrawn partially (such as RWE Npower) or completely (such as Eon). Several that tried to use an internal field force could not scale fast enough, while several that outsourced could not maintain sufficient quality control.

However, utility boards should re-evaluate the opportunity because connectivity can now fundamentally change the economics of the energy services business. Those utilities still in heat services such as SSE (UK), EDF Luminus (Belgium) and Eneco (Netherlands) are also strongly focusing on connectivity.

Smart connectivity can transform the efficiency of the quote, installation and repair processes. It can also facilitate the aggregation of a network of high quality field force agents with deep quality assurance. Furthermore, the data and relationship enabled by the connectivity can be used to build relationships, and to up-sell.

“There is likely to be a race to operate a wide, but high quality network of independent heating engineers and to do it well.”

Several companies are eliminating the field force from the heating system quote process, removing a significant cost of sale. British Gas has been trialing a final binding online quote system for replacement of a condensing boiler. Thermondo, a German start-up, goes further and is able to provide a binding online quote for any heating system configuration.

Cost is also being taken out of the maintenance and repair processes. Boiler company Remhea (part of BDR Group, which owns Baxi), can alert an engineer of a heat pump problem automatically, tell them what part to order and place the order. Several pan-European boiler manufacturers, such as Vaillant and Bosch in Germany, are starting to offer these services.

Such automation presumably improves customer satisfaction, reduces the callout frequency needed on a boiler insurance or warranty service, and increases the number of jobs per man per day.

It is also possible for utilities to mitigate high level problems with a heating system by partnering with companies like Netatmo and Quby, which have developed analytics of frequently sampled temperature.

Detailed fault monitoring, however, requires access to the boiler data and error codes. In the Netherlands, third parties can access the data over the Opentherm standard. In the UK, most data and error codes are still transmitted over the boiler manufacturers’ proprietary data buses but this barrier can be overcome through partnership. For example, Vaillant has partnered with Netatmo to develop a smart thermostat able to communicate with Vaillant boilers through its proprietary bus.

Alternatively, smart thermostat provider Tado claims it is compatible with the data bus interfaces of nearly every boiler manufacturer and that a utility which partners with it can have manufacturer-independent diagnostics – though it is not clear what degree of support this has from the boiler manufacturers.

It is fairly well known that UK installer quality is reliable for “standard” boiler installations but is less consistent across engineers when it comes to optimising the whole heating system and ensuring maximum efficiency. This is a challenge for UK utilities that want to outsource heating services to an external field force.

There is likely to be a race to operate a wide, but high quality network of independent heating engineers and to do it well. In the US, internet giants Amazon and Google have entered home delivery with a smart phone app that allows a callout within the hour of anything from a nanny to a plumber or handyman, all with Amazon-style consumer ratings of the service provided.

Bizzby is among companies offering this in the UK. Some smart thermostat vendors like Nest, Tado, Passiv and Netatmo provide recommended installers with a degree of quality assurance and in time could seek to extend their brand to become trusted aggregators of quality heating engineers. Thermondo already aggregates installers in Germany and plans European expansion.

In addition to aggregating good engineers, one mechanism for improving average job quality is to reduce the decision making left to the engineer. Thermondo’s online quoting system achieves this by centralising the expertise, while vendors’ installer apps can prompt for the right process to be followed.

Another means of controlling quality is to collect data post-installation such as when the boiler was installed (connected boilers can report when they come online), whether the boiler is struggling to reach set point or is switching on and off too frequently, and whether or when the user has used the controls. Suppliers can monitor this either with standalone hardware (such as from Quby) or using algorithms built into a smart thermostat (such as from Netatmo or Tado).

A third mechanism is to introduce Amazon-style consumer ratings of the installation and strike-off installers that do not get a rating of at least four stars.

The data and customer engagement interfaces on connected heating systems can be used to upsell services including boiler cover policies and photovoltaics – or potentially energy, which is a threat to utilities if new entrants start offering combined heat and energy services in high volume (I will look more closely at this in the next article).

British Gas is not standing still with its £270 million profit from heat services. It recently announced sales of 3,000 Hive thermostats a week, and smart boiler diagnostics to be launched later this year. Other utilities should use best practice benchmarking and an externally facilitated innovations process to analyse the opportunity to catch up by using connectivity to transform the traditional heating sales, installation and maintenance processes.