The role of large incumbent energy utilities in promoting energy saving

Rearranging Utility-driven Demand Side Management (DSM) to respond market conditions: a Finnish case study

The role of large incumbent energy utilities in promoting energy saving

Apajalahti, E-L., Lovio, R. & Houtbeckers, E.Aalto University School of EconomicsOrganization and ManagementCorporate Environmental and Social Responsibility Research

“Why would Energy Companies want us to save energy, the very product that it gets profit from?“

Source: NCRC –survey 2009

Why energy efficiency?• Improving energy and electricity end-use efficiency 40-63% of the

solution (IEA WEO 2008).

• Transition to renewable energy sources is a long process • Energy efficiency improvements may be faster and more cost-

effective.

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Eeva-Lotta Apajalahti 10.6.2011

63 %

40 – 50 %

Policy obligations on energy utilities

• EU Directive (2006/32/EC) on energy end-use efficiency and energy services (ESD)

– Indicative national 9 % energy saving target 2008-2016. – Minimum requirements on reducing energy end-use of its clients.– Directive will be revised (and tighten) in 2013.– In Finland implemented through renewed voluntary Energy Efficiency

Agreement system, obligate 80 % of energy utilities

• National, ESD complimenting law on energy efficiency services, obligate all energy utilities (1211/2009).

• Remote reading, billing must be based on verified energy use by 2014.

• EU 20-20-20 targets – Obligate energy utilities through different ways e.g. City of Helsinki

engagement to carbon neutrality by the 2050.

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Energy utility as an energy saving promoter• Role of energy utility...

– has been traditionally strong but reduced since market liberalisation.– has been decreasing since new intermediary organisations, energy

saving companies (ESCOs) have taken the task (Breukers et al. 2009, Heiskanen et al. 2009, Bertoldi et al. 2006).

– is not natural in implementing energy saving (Demand Side Management, DSM) initiatives because it does not gain monetary benefits of doing so (Didden & D’haeseleer 2003).

– in developing new energy-efficient products and services in liberalised and privatised energy markets is uncertain (Vine et al. 2003).

• Past DSM efforts often led to negative business experiences.– Past experiences and learning outcomes of load shifting and DSM

initiatives/programs introduced in 1980-1990 in US. (Strbac 2008, Gehring 2002, Eto 1996, Vine 1996).

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Electricity retailers operating environment in Finland

• Energy Market Act (1995/1998) – Large energy users (1995) and small energy users (1998).– Unbundling electricity trade operations from other trade operations. – Separating electricity network operations from other business operations.

• Operating environment of electricity retailer

Power generation

Electricity retailer

Electricity network

District heating trade and distribution

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NordPoolSpot – Nordic power exchange

Energy end-use:HouseholdsIndustry

Energy delivery

Energy trade

Motives to improve end-use energy efficiency of Finnish Energy Utilities vs. case utility (n=7)

Main motives Case

1 Complying the EU ESD. “Complying the EU ESD is challenging for energy utilities [but not for the case company].”

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2 Differentiation of the product portfolio. “The only thing matter [in competition] is the price and production type. We have extent product portfolio, but so have others. All the electricity retailers have somewhat the same products.”

++++

3 Improving customer benefits and attracting more clients. “Advising service backup long-term customer relations...some product that could reward the customer and he/she could experience being beneficial for himself and for environment.”

+++

4 Market positioning and reputation. “To be Finland’s leading energy utility in energy saving issues.”

+++

5 Strategic motive to respond the climate change challenge. ”Energy saving campaign was part of the company strategy on how to respond climate change.”

+


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Current energy saving activities by Finnish Energy Utilities vs. case utility


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• Energy utilities have long and active role in energy saving advising.• Next step is utilizing hourly basis metering in load shifting and energy saving.

Electricity retailers activities in complying EU ESD and improving end-use energy efficiency and saving (n=35) 2008-2009.

Share of

utilities

Case utility

Case electricity retailers activities in improving end-use energy efficiency and saving (n=7)

Advising Lending energy consumption meters 54% yes from energy centre and library

Energy saving advising by e-mail and online 51% yes Energy saving advising in energy centre since 1973 Energy saving advising by phone 40% yes

Communication Writing about energy saving in customer magazines 60% yes Own customer magazine

Energy saving communication online 60% yes Own EnergyAdvisor webpage

Participating Energy saving week 49% yes Active campaigning during the week.

Feedback Energy consumption feedback yearly 46% yes Yearly basis feedback on reference consumption, in 1990s first in Finland.

Possibility to follow consumption online 43% yes Renewed web based reporting service on real-time electricity, water and heat consumption, (first version early 2000s) in 2010.

Use of hourly and remote reading metering 34% yes Half of the customer’s meters have been switched, all by the 2012.

Billing Billing the clients by verified consumption monthly basis 49% yes

Why promoting electricity saving further is challenging? Household perspectives (n=289)


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Basic energy saving advising is wanted from own energy utilitybut...

Basic energy saving advising

Selling energy saving services

energy saving contract model

... sceptical perspectives emerge when integration level increases.

“Energy utilities are listed privately owned companies, why would them want to save energy, the very product that they get profit from?“Source: NCRC –survey 2009

Why promoting electricity saving further is challenging? Case utility’s perspectives

• Unbundling the business operations: reduced flexibility of sharing the costs

between the units.


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• Pricing problems of contract model: How electricity providing, saving incentives, advising and services are combined? Energy saving -> absolute reduction or reduction from trend consumption? Is the product interesting?

• A production utility becomes an energy service provider Is there willingness to pay for services?

operating environment narrow -> slim profit marginal

Energy utilities are motivated and active ... but• Energy market privatisation have had some negative side-effects

energy end-users mistrust towards energy utilities have increased: whose benefits energy utility is driving for?

stresses the business logic of offering energy saving business solutions. which in turn create more uncertainty in developing business.

• Unbundling business operations responsibilities between different business units are unclear. the past DSM principles work poorly for electricity retailer.

• Growing pains: energy producer becomes energy service provider.

• Pricing difficulties: energy end-users are not ready to pay for services fear of unprofitable business operations


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Implications

• To decrease mistrust, new strategic reorientation towards energy saving is needed?

• Competing with energy saving products and services might fit better: For publicly owned utilities who have strong traditions in advising. For those who cannot compete with production: strong carbon lock-in.

• But if they success, it might be copied elsewhere.

• Remote metering advances provide new possibilities for energy use load shifting.

• If/when energy prices rise, the demand for energy saving business solutions might increase.

• New ideas and innovations often follow new entrants - new retailers focusing energy saving might emerge?


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The role of large incumbent energy utilities in promoting energy saving

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energy savingapajalahti

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energy enduse efficiency

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