The smart move is to act now

In the first of a new series exploring the connected home and consumer engagement, Susan Furnell discusses the business case for suppliers jumping ahead of the smart meter rollout.

By 2017 retail energy competition will look very different. By then, some European utilities will have 50 per cent of their customers on smart energy insight and heat controls.

Even in the shadow of the UK’s imminent national smart meter rollout, energy suppliers must keep in mind that smart meters are not the only form of smart data-driven customer engagement device for energy and heat that can exist at scale. In fact, connected home devices can be even more effective.

While British Gas leads Europe on absolute volumes of connected home technology deployment, Dutch energy supplier Eneco is leading Europe on penetration of its customer base and is set to have half its energy customers using a connected home platform by 2017 for heat and energy insight.

The evidence so far is that its technology and engagement platform builds a customer relationship, cuts churn and drives net promoter score.

I believe this will give Eneco a major competitive advantage in its core energy retail business. Other utilities are failing to seize this opportunity in the same way because often their boards fail to provide leadership and vision. The business case for scale deployment of connected home devices is not obvious (though it is possible, as I will show), and there is no plan for the culture and brand change that is required to support connected home customers.

Most UK utilities have some type of data-driven customer engagement around energy cost, comfort and control.

For example, Eon has partnered with engagement platform provider Opower and British Gas has built its own energy report. The benefits of these services increases with the frequency of the data obtained, with the lowest benefits seen in association with estimated reads and maximum benefits in association with smart meter data where the customer can opt-in for half-hourly reads.

Opower and its competitors have shown they can improve customer service cost, net promoter score, churn, cross sell, bad debt and much more through insight, behavioural science and segmentation. But with other burning platforms, utilities sometimes downgrade such engagement projects from urgent to important, particularly as the national smart meter programme – needed to deliver the frequent data that drives the deepest relationship – hits more delays.

The mass market smart meter rollout is now due to start in 2016, four years later than originally planned. This is due to many things, not all complementary, but it is in part a function of the sophistication and ambition of the programme and the collaborative approach taken by the Department of Energy and Climate Change.

What if there were a way to engage a high proportion of the customer base on their energy today, without the need to wait for the successful realisation of the national smart meter rollout. and to do so daily?

There is, and it demands a priority reassessment in the boardroom.

Eneco has done just this by rolling out more than 100,000 smart thermostats. The number in itself is not earth shattering. What is attention grabbing is that Eneco has publicly announced a three-year ambition to have one million installs with its platform partner Quby. This means that by 2017, 50 per cent of its retail energy customer base will have a smart thermostat.

Uniquely, the proposition isn’t just a smart thermostat. As Eneco found the incremental cost to be negligible of adding sensors to the thermostat to also electronically read the dumb gas and electricity meters, it chose to create a combined bundle of smart thermostat and pseudo smart meters.

I use the term “pseudo” smart meters because the dumb meter sensors provide energy usage but lack support for some key attributes of full smart metering.

For example, they don’t support time-of-use or dynamic tariffing or grid integration, which will be needed to balance renewables on the grid, and at least in the UK the data wouldn’t be permissible for the contractual bill.

However, the pseudo smart approach is also more than a gimmick. There is no reason why, in principle, such data can’t be used to reduce bill shock and bill dispute, and therefore reduce customer service enquiries, bad debt and churn – three of the benefits usually claimed of engagement based on smart meters.

So, while we wait for smart meters there is an opportunity for some innovative companies to alter energy competitive dynamics profitability using pseudo smart solutions at relatively low cost.

Eneco added engaging insight and advice to the thermostat data and electricity and gas consumption data through a living room screen and apps. On average, Eneco says consumers engage with it daily via its connected home offering – a plausible claim because another pure European thermostat platform (with no pseudo smart meter component in the offering) says 60 per cent of its customers interact daily in winter.

Eneco customers save an average of 10 per cent of their total energy gas and electricity bill, which is good when compared with other smart thermostat providers and adjusted for widely differing definition of “saving”.

By 2017, Eneco’s penetration of thermostats (with pseudo smart meters) will be at sufficient scale to make an impact on its market share of retail energy contracts. At that point, half its energy customer base will stay with the company longer (since precedent shows that first-year churn halves), while new customers will be easier to acquire (again, precedent shows that net promoter score and willingness to recommend the supplier improve).

The benefits don’t stop there. By providing boiler remote diagnostics and integration with solar photovoltaics, Eneco is able to look at models to upsell energy services and to create innovative new models. With economies of scope and scale it will presumably be able afford to roll out the thermostat to a wider and wider audience in and beyond the energy customer base – subsidising it if it needs to.

British Gas’s Alert Me-based solution isn’t yet on the same penetration trajectory of its (much larger) customer base as Eneco, but it is the European leader by volume and was rolling out 4,000 Hive thermostats sales a week by the end of 2014.

Many people in the smart world claim that most sales leads for BG’s Hive smart thermostat come from the boiler sales and boiler cover part of the business. Like Eneco, it has been trialling boiler diagnostics too.

What if British Gas figured out a business case like Eneco to get to 50 per cent of its customer base using synergies from the energy services business? Given the impact of the thermostat on energy churn and acquisition, if British Gas could reach high penetration of thermostats, it would change energy competition and be difficult for other utilities to copy because they lack a large energy services division.

For now, the biggest barrier separating market leaders like Eneco and British Gas from the rest of the pack is that although most utilities have partnered to provide a smart home solution, usually starting with the smart thermostat, they don’t have scale.

According to Delta-ee’s Connected Home research service there are just 700,000 smart heat devices installed in Europe, and this includes the large skewed German market for radiator valves. The conundrum for most utilities is that the business case for smart products is not straightforward. If you start with the costs, add some margin, and test how many users will take it at the resulting price, the answer is not many.

If you provide the device free with fixed-price energy tariffs, take-up improves but you still can’t get to 50 per cent of the customer base. So the boardroom loses interest, perked up occasionally by a story such as Google buying Nest for £2.7 billion, but unable to see the bottom line impact for their utility.

To respond to the opportunities demonstrated by Eneco and the threats looming from outside the industry, the business case needs to be written the other way round, with a mindset of “out of the box”.

I recently collaborated with specialist European energy and smart home consultancy Delta-ee to come up with 20 profit drivers that utilities can leverage in a smart energy and heat business case which we have used as the basis of a methodology to help a number of clients.

Eneco and British Gas both demonstrate the importance of leadership from the boardroom so that siloed departments work together on creative solutions, which makes possible so new culture (British Gas launched a start-up-like separate division), new brands such as Eneco’s “Toon” and British Gas’s “Hive”, and above-the-line TV campaign promotions.

Innovative solutions also benefit from innovative partners. Players like GEO (whose Cosy thermostat is promoted by First Utility), Alert-me and Quby pride themselves on their partnership approach. In GEO’s case this might include building upsell engines or making the gateway double as a smart meter consumer access device or a host of other things.

Vision is also needed to decide whether to pursue a self-learning thermostat like Nest or Tado that seeks to reduce engagement with customers or to pursue a utility-branded engagement strategy – or a mixture. The vision of the wider connected home has to be decided too with Netatmo, Google/Nest, RWE, Quivicon, Quby and many others all offering very differing roadmaps.

Eneco has shown it is possible for a utility to reach meaningful scale in the connected home space, but it requires boardroom vision and leadership, an innovative business case, supplier partnership and a new approach to culture and brand.

About the author

Susan Furnell is a freelance consultant. She specialises in smart home energy.