Market view: The death of the energy bill

The falling price of microgeneration and advances in battery technology are changing the relationship between energy suppliers and customers, says Gareth Morrell.

Is the energy industry going back to the future? The falling price of micro­generation and storage technology means an increasing number of people can now afford to generate their own electricity and potentially escape electricity bills altogether. That was the view of a former government adviser who we spoke to as part of Madano’s Pathfinder project: “We are now reaching a stage where microgeneration technology allows me to generate my electricity in much the same way that Victorians did in the late 19th Century when they had a generator in the basement.”

This growth in domestic generation could even see new electricity producers become energy “landlords”, removing themselves from the traditional supply model and renting out spare power to their neighbours.

That could leave established suppliers competing with their former customers. However, even among the remaining pool of customers, the traditional energy bill faces attack on a second front. New and nimble technology and data-driven market players with novel business models could offer the consumer a simpler, more straightforward “service agreement” to provide energy. Much in the same way that Uber and Airbnb have disrupted the model in their sectors – new suppliers could do the same to the energy market.

The microgeneration revolution could be closer than we think. While all forms of renewables attract majority support from the public, solar power is overwhelmingly backed by consumers. According to the latest Business, Energy and Industrial Strategy (BEIS) survey, more than four in five of us support or strongly support solar energy developments. While all types of renewable energy enjoy majority support, comparatively only 64 per cent support the least popular renewable generation type in the survey, biomass.

As well as being the most trusted source of renewable energy, plummeting PV costs, combined with anticipated similar decreases in the costs of battery storage, mean we are approaching a tipping point in affordability. Current trends show that home generation may be able to stand alone without need for subsidies as early as 2022.

A further driver will be significantly faster realisation of the financial benefit from home generation. As uptake of the existing government feed-in tariff scheme has shown, personal or local energy production that makes money for owners or communities can be popular. We can expect this to become more popular still as the payback period for the initial investment is dramatically reduced.

Consumers are already able to pick up solar panels while browsing for furniture at Ikea. Beyond that all it takes is a Tesla Powerwall inside the home and you are set up as a producer-consumer. This might currently be a niche activity reserved for the affluent Grand Designs demographic and tech-savvy early adopters, but with the predicted tipping point as close as five years away it will have many in the energy industry examining their business models.

This energy devolution has potential benefits for consumers, however it is not without its challenges. There will be winners who can afford the upfront costs, with property and space to install the equipment. These early adopters will become self-generating landlords while many others still face long-term costs. As with the dynamics of the UK housing market that has produced Generation Rent, these trends could produce a similar and largely overlapping group of power renters that use the spare electricity of their better-off neighbours or remain tied to larger suppliers.

However there is hope for those left behind. The new Generation Rent could benefit from greater competition and a move to a more service-based model, where they pay energy companies a fixed fee based on the kind of home they live in rather than for consumption. This paying-for-comfort model would fundamentally change the relationship that consumers have with their supplier. The company would be responsible for reducing energy use through retrofitting of smart meters, efficient boilers and appliances, making profits through these savings.

Another possibility is that energy is included in housing rent by generating homeowners, meaning lower overall costs to renters while property owners receive a larger fee at the expense of energy providers. Combining this approach across many homes – for example through a housing association – could be of particular benefit to the urban poor who live in areas of high population density.

These trends present a serious challenge to traditional suppliers. As national production is superseded by local generation, the pool of potential customers shrinks and long-held consumer relationships are questioned. Some are already developing models that will see them become energy management companies rather than producers.

To adapt, suppliers will need to acknowledge their consumers are a rapidly changing audience and have a clear strategy in place. If established players do not move quickly, the gaps left will be rapidly filled by start-up companies catering to emerging new models. Flexibility and a wider range of offers will be needed to maintain market share, while a smarter grid will also be required to make this a reality.

Whatever happens, these trends point to a fundamental change to the supplier-consumer relationship that has stood for decades. The energy bill as we know it may soon be a thing of the past.