EDF group has launched a global innovation awards programme called EDF Pulse and I am the UK “sensor” – which is the person who identifies suitable entrants and encourages them to enter – a sort of “hunter gatherer”. The purpose is to highlight the importance of innovation and help move EDF towards a more open innovation model.

The awards are for early stage businesses in the three areas of: home, mobility and health – each with a €35,000 prize.

Home – This category is for projects that contribute to making homes more intelligent, more communicative, more energy efficient, and more eco-friendly, whilst increasing everyday comfort and wellbeing.

Mobility – This category is for the most innovative solutions and services that meet our growing transportation needs: chiefly, projects based on sustainable development, communications, sharing, and multimodal transport, with the aim of easing travel, and better including people who are isolated and/or who have reduced mobility.
Health – This category is aimed at the most promising innovations to improve our health and quality of life. Issues include new “intelligent medicine” technology to discover more about the body and its environment, and connected health services.

The criteria are:

• companies with less than 50 employees
• innovations that are close to launch or have recently launched
• use some aspect of electricity – this is widely interpreted, particularly in the health category.

There are two additional awards:

• research on electricity storage from a University or research team (€150,000 prize)
• Access to electricity projects in developing countries (€50,000 prize for NGOs)

As well as prizes the programme offers the potential of global publicity, access to EDF’s R&D team and access to EDF’s venture funds (both only if the entrant wants it).

Entry is relatively pain free and part of my job is to help companies enter.

Entries have to be in by 31st December. Then there will be a period of selection leading to a short-listing by an international panel chaired by Henri Proglio, Chairman and CEO of EDF, followed by a public vote. The winners will be announced in Paris on 25 March 2014.

So, if you are a company, research group or project that might fit the criteria, or know of suitable companies, please put them in touch with me or let me know who they are ASAP. Although I am the UK sensor I can enter companies from any country.

The Pulse programme also has a website that features innovations of all kinds. I can also pass on suggestions for content for the web site.

steve@onlyelevenpercent.com
+44 (0) 7702 231995

http://pulse.edf.com/en/invent/
http://pulse.edf.com/en/edf-pulse-award/
#EDFPulse

For something different and for the first time I have a guest blog on onlyelevenpercent.  An earlier post of mine talked briefly about the problems facing traditional energy suppliers and we have recently seen news of RWE adopting a radical change in strategy.  This excellent piece by Gerard Reid of Alexa Capital goes into detail about Eon’s problems and was first published in Germany.  For obvious reasons it caused considerable comment.   Gerard can be contacted on: GReid@alexa-capital.com.

As stock markets across much of the Western world hover around five year highs it is worth noting that an investment in the Dow Jones European Utilities index would have caused you to lose 50% of your money over that same period. The sector, which was always considered a safe haven for investors with strong dividend payments and solid defensive business models, has been out of favour for many years and the question is whether now is a good time to get back into this sector or not.

At first glance you might say that valuations look very reasonable with Enel, Iberdrola, GDF Suez, EON and RWE all having market capitalisations below the levels of equity on their balance sheets.  However, first glances can be deceiving.

In the world of utilities much focus is put on what are called clean spreads and dark spreads (which are the differences between the wholesale power price and cost of gas and cost of coal respectively). Until recently, utilities have been very good at controlling the wholesale power price. When power prices fell they would simply close capacity to keep prices up. However, this was only possible because they had strong positions in the market with virtually no competition.

The first nail in this coffin was the extra competition caused by the liberalisation of the EU energy market and the interconnection of the continental European power markets. But the real game changer has been the proliferation of distributed renewable generation, owned by millions of individuals across the continent, who unlike utilities are incentivised to produce as much electricity as possible. This additional competition has reduced not only the baseload price, but more importantly the highly profitable peak prices. The impact has been huge, with both baseload and peak power prices currently at seven year lows across the German/French/Benelux region.

Still that being said utilities have been somewhat protected from these falling prices by their power hedges. Power generators generally sell forward a proportion of their power at agreed prices which protect them from the volatility of the market. These hedges enable them to sell power to their customers at prices above that market price.

Utilities can take different views on this. Take for example the Austrian utility Verbund; with its low cost fleet of hydro power stations, it has always taken the view of not needing to hedge its power sales, thereby giving it the flexibility to sell at higher prices if the market price goes up. Verbund has currently hedged 23% of next year’s power volumes. This is in contrast to say, EON, which is close to being 100% hedged. Verbund’s limited hedging strategy means that its average hedged price of €44.9/MWh for next year is well below EON’s €53 which is reflection of EON having signed more customers up on long term contracts when the power price was higher some years back.

The issue for both these companies is that German forward power prices (€36.55 for 2014) do not look like they are going to go up anytime soon which means that anyone signing a new long term contract with these utilities is doing so at much lower prices. The end result will be that, come 2016, the average hedging price will be very close to the current market price. These price falls will hit someone like Verbund first because they are much more exposed to the wholesale market price than a company like EON. This can already be seen playing out in Verbund’s recent results.   Not only did they making an operating loss of €89.3m in the first half of the year but they also announced impairment losses amounting to €659m for their combined cycle gas turbine power plants in Austria and France, as well as a further write-down totalling €371m on an investment in an Italian power business. EON has suffered less so far, but if prices stay low then they will face a much worse situation. Reductions in their average power selling price could mean that by 2015 the company will be generating little or no money from their currently expensive generating fleet. That could be worth circa €1bn in annual lost earnings for the company and would require a much higher asset write-down.

The problem with EON

EON’s problems are larger than most across the European power market. They have made large strategic blunders and have not understood the changes taking place in the wider energy markets, let alone the technology changes, such as cheap solar power, which are directly challenging their business models.

The picture was very different a decade ago. They were on the acquisition trail expanding across Europe with one of the most modern and clean power generation fleets in Europe. They embraced nuclear and invested heavily in new cleaner more efficient gas plants as well as pumped storage power stations and large scale renewables.

So where did it all go wrong? Well for one thing they did not understand, despite having an oil and gas exploration business within the group, the impact that shale gas would have on their business.  The huge shale gas finds in the US have caused gas prices in the US to fall but have had near zero impact on European gas prices. What is has done is have an impact on coal prices which have fallen as the shift from coal to gas in the US causes the demand for US coal to fall, and in fact Europe has been the major beneficiary of this cheap American coal.  Add to this the fact that most European utilities have long term power purchase agreements for gas with the likes of Gazprom that are tied to the oil price (which has now decoupled from gas prices), meaning that the European utility industry is now paying over twice for their gas than the US.

The results of the above are clear; in the first seven months of the year there was a 19% reduction in gas used for power production in Germany while hard coal usage was up by 8.5%. With the CO2 price collapse and the coal price drops, dark spreads are now positive, meaning the only fuel that companies like EON can make money with is coal. And they are closing plants like the two and a half year old combined-cycle gas power plant in Malzenice, Slovakia which has only operated 5,600 hours since it was opened.

Even pumped storage activities at EON are at best break-even. Their whole business model was based around taking cheap night-time nuclear power, pumping it up the mountain and then letting it down during the day when prices were at their highest. But now with all the extra solar capacity on the grid, peak prices have collapsed, peak power needs are almost all met by solar and the power price is often lower during the day than at night.

But EON did embrace renewables, but what it has not done is embrace the decentralised revolution that we are particularly seeing in Germany but instead large centralised renewable projects. They have thus heavily invested in offshore wind and wind in the US where the projects tend to be on average over 100MW in size. In the US, EON currently owns 2.7GW of wind assets. Meanwhile back in the domestic market, EON owns 196MW of non-hydro renewable power. Whats more they are also reducing their hydro portfolio in Germany which at the start of this year was 1GW in size.  But EON recently sold 8 run of the river hydro assets in Bavaria to Verbund in return for Verbund’s 50% interest in the Turkish utility Enerjisa Enerji A.S.

To add to these issues EON like all other European utilities is dealing with at best flat growth in electricity volumes going forward, when one of their basic business assumptions was that power demand would increase in line with the growth in the economy. This has clearly changed and demand across Europe fell by 4% between 2008 and 2012. Of course it was argued that this was all recession led but the reality is that the two strongest economies in Europe the UK (7%) and Germany (2%) have both seen demand reductions. Energy technologies as well as energy efficiency measures are and will continue to have an impact on demand.

One persistent problem that EON shares with almost all utilities is their relationship to their customers, seeing them as licensees rather than customers.  EON is trying to change but it is a slow process and the customer backlash against the large utilities is clear for all to see. This will probably only intensify as customers begin to engage more with energy be it through having solar on the roof or using energy management systems.

What does it all mean?

The utility business model is dying. Selling electricity at controlled prices is a thing of the past, and the problem is the likely write-downs that are coming the way of many utilities including EON which will weaken already stretched balance sheets, which will then push up the cost of capital thereby making new investments more expensive and the implementation of new strategies difficult.

That said, the financial market is somewhat already assuming that when you look at the valuation of the EON. The market capitalisation of the company is currently €23bn (down from €86bn five years ago) with equity on its books of €37bn so the financial markets are pricing in that the company cannot generate a significant enough return to keep its shareholders happy. It is also assuming a write-down of €14bn in value. Is that too much or not enough? Currently EON’s power generation portfolio is valued in its books at circa €25bn and if it will generate no money on those assets going forward then a very large write-off is a serious possibility. And these write downs are already happening amongst other utilities most notably Vattenfall and Verbund in recent months

Assuming such as write-down, EON would need a new injection of capital and would probably need to restructure some of its debt. Is that something to be afraid of?  In the US, Enron went bankrupt, and the lights stayed on but before that happens the German government is most likely to bail EON out by introducing a capacity payment mechanism which will enable them to generate money from assets they rarely use. But why should German tax and rate payers bailout a company that has made serious strategic mistakes, who has not committed itself to the German government goals of the Energiewende and who has instead committed its future strategy to investing in far off places like South America and Turkey ?

That’s the real problem with programmes like the UK Green Deal here and around the world. Energy efficiency is usually seen as one of those worthy things we should do for our own or the common good – but usually don’t – like eating the right food and exercising more.

Secondly, energy efficiency is all about technologies such as controls and insulation, all of which are pretty dull.

Thirdly, energy efficiency professionals tend to be technical types who are not good at marketing or developing winning customer propositions.  Often they have come into energy efficiency for good reasons based on doing something that is environmentally and socially beneficial – even the non-technical ex-investment banker types who have discovered the subject in recent years!

On top of all that energy efficiency is really abstract – energy itself is abstract enough but energy efficiency is SERIOUSLY abstract – savings are hard to measure.  All in all there is no way getting round it – energy efficiency is dull.

I had been thinking about how to highlight this point and outline what we need to do when I came up with the concept of the Energy Efficiency Cool Wall – which had its world premier at the Smart Buildings Conference in London on the 15th October and had a second outing the next day at Ecosummit London.

It was inspired by the Cool Wall that used to be on the hugely popular TV show Top Gear – (350 million views a week in 170 countries according to Wikipedia!). Jeremy Clarkson and usually Richard Hammond argued about whether a particular car was either Seriously uncool, Uncool, Cool or Sub Zero – and then placed them appropriately on the Cool Wall.

So here is my first take on the Energy Efficiency Cool Wall.  Everyone will of course have their own opinion as to what is cool – responses and suggestions are welcome.

 I was struck by a recent on-line headline; “utilities facing 50% reduction in demand”.  The origin of this was an excellent piece of research from Citi called “Energy Darwinism” which covers all forms of energy but the most eye-catching conclusions were about electricity.  The report notes how there is still a link between electricity demand and economic growth and population but in developed markets this link is weaker than it has been historically.  In addition, and to quote the report: “it is rapidly becoming evident that the potential for demand reduction is substantial and overall electricity demand could decline by more than 20% across Europe through energy efficiency” (my emphasis).  The combination of energy efficiency and distributed generation could reduce the addressable market for electricity by 50% over the next two decades.  This may be a surprising conclusion to some but it must be one that must be worrying utility CEOs everywhere.

 Here in the UK the energy suppliers are under attack from all sides and although I would never feel sorry for them (the pay and conditions are pretty good) being a utility CEO at the moment is a difficult job – those that are in charge in the next five to ten years have to face a massive set of interlocking challenges.   

 Firstly they are being asked by governments to invest massive amounts in decarbonizing the electricity system.  At the same time the effect of intermittent wind power makes it more difficult (impossible) to justify investment in flexible new gas-fired generating plant.  If we had cheap shale gas that might change but the availability and price of shale gas in the UK is far from assured – I don’t think we will really know how that story is going to play out for at least five years.   

Secondly, energy prices have gone up faster than inflation and continue to do so, leading to consumer complaints and the threat of direct political action to freeze prices from Ed Milliband.  The drive to decarbonization and the need to invest works against the political ideal of low energy prices.  In the UK at least, the existing main utility companies have completely lost the trust of consumers – a loss that will be near impossible to recover from. 

Thirdly, the organization of the UK electricity market is changing fundamentally and Electricity Market Reform (EMR) is finally coming.  EMR itself however, makes the investment environment even more uncertain – working against the basic idea which was to put in place the conditions that would allow the much needed investment to flow into new generating plant.  EMR also effectively gives the government the choice of technology.

 Fourthly, we have a technology revolution starting in energy efficiency, distributed generation, storage and new downstream markets.  I say starting because we still have a long way to go but new efficiency, solar, combined heat and power and storage technologies, possibly coupled with an increase in electric vehicles, all wrapped in a world of connectivity and big data, are all working together to increase the pressures on utilities.  This revolution is rendering their old business model obsolete by cutting the addressable market in half.

 Given all these forces the utility companies are looking more and more like wide-eyed dinosaurs looking up at the giant meteor or asteroid impact that sparked the Cretaceous-Paleogene extinction that killed them off – doomed to extinction. 

 Of course, the key to survival at a time of change is to evolve and evolve quickly – in business terms to innovate.  However, utilities are not traditionally good at innovation or moving quickly.  Even if the need for change is accepted, and the recent PwC utility industry survey suggests that 94% of executives surveyed predict “complete transformation or important changes to the power utility model”, the problem of how to get there from here is very real.  The fundamental issue is the age-old problem of changing the direction and culture of large organizations.  Since the advent of the large-scale electricity industry (starting in the 1930s) the organization of utilities, their systems and their skills sets have been based on building large centralized generating plants coupled with retail organizations with customer service and billing functions.

 The generation side of all utilities has a very high level of technical and project management skills based around the particular type or types of generating assets in the portfolio, be it coal, nuclear, gas turbines or renewables.  The people on the generating side are used to the problems of designing, building, commissioning, operating and maintaining large-scale generating plant which are very different skills to those required in energy efficiency or distributed generation work.  On the retail side energy suppliers have a mix of skills including, marketing, advertising, billing, customer service and meter reading – where this falls within their remit.  For energy suppliers the missing skill sets are those which are required to go beyond the meter and into the consumers’ premises to identify, implement and where appropriate finance energy efficiency and distributed generation projects.  These are skills that either need to be built in-house, bought in through corporate acquisition, acquired through appropriate partnering or outsourced to third parties. 

 Senior management in utilities has grown up in the old world of utilities which were stable and the objective was to maximize supply volumes. They are not so familiar with the technologies, techniques, contracts and risks concerning demand-side projects.  Senior managers of publicly quoted utilities also have to consider the opinions of their major investors and the impact of any change of strategy on shareholder value.  Utility investors are traditionally interested in relatively low but safe returns and, whatever the facts, they may not consider a switch into different services with different issues and risk profiles as something they want to see.  Any proposed change has to carry major shareholders with it. 

Even if the companies are ready to innovate, the question still remains – how should they innovate?  New business models are required that integrate; improvements in energy efficiency (building and industrial retrofits), distributed generation, storage, access to grid electricity, connectivity and financing.  All of these need to be wrapped up into propositions that are attractive to customers – relying purely on cost savings is not enough.  Despite the fuss about energy bills for most people saving money on energy is desperately dull – it is not “cool” – the new energy services have to be cool to attract a mass market.

 The ultimate model held out by energy efficiency enthusiasts is the true energy service company, a company that only provides services such as set standards of illumination or thermal comfort and is not selling energy in the form of electricity, gas or oil.   Such a company would be motivated to invest in the most efficient methods of delivering energy services.   To date there have been no real examples of true energy services companies and it represents a massive leap from where most energy suppliers are and a real departure from their core skills.  However, it does represent a more radical alternative than just bolting-on energy efficiency services to an existing energy supply model, but reaching this ideal – or any other new model – raises a number of questions for a utility such as:

•  Should it start new businesses, or acquire existing businesses? 

•   Should the new business models be within existing organizational structures or outside in some kind of incubator?

• If it acquires existing businesses, in which sub-sectors of energy efficiency markets and distributed generation should these be?

•   How should these different businesses be integrated into a holistic customer offering?

We have seen examples of utilities going on spending sprees to acquire companies in different areas of energy efficiency such as Building Management Systems and home automation, possibly without any coherent plan for how these can be knitted together.  As well as the questions above there are the normal business acquisition problems such as how do you integrate dynamic, entrepreneurial small to medium sized companies with the typical, safe, slow, bureaucratic structures and systems found in utilities?  Initiatives such as community energy companies can raise even more difficulties as they often require a transition from a mind-set of “we have all the answer” to facilitating other groups to find multiple and diverse solutions.

 Of course the existing energy companies may not be left to choose whether or not to innovate – the industry is ripe for disruption from new entrants.  Personally I wonder if the existing companies can innovate in time before new entrants come in and disrupt the market entirely.  New entrants could include well-known brands that do still have customer trust, multiple “touch points” with the customer and advanced technology around the internet and communications – without all the technological and social baggage of the existing companies.  New ownership models including community ownership may also be disrupters.

 In the next few years we will see utilities split into two groups – the majority run by CEOs who basically, whatever their public relations utterances, try to defend the existing model – the followers  – and the real leaders, those that have CEOs who having recognized the need to radically change the business model have the courage and skills to actually try to implement those changes.  Changing the existing companies will require strong leadership from the top or the existing companies will disappear, disrupted out of business by exciting new entrants who, unburdened by history, seize the massive opportunities of efficiency, distributed generation and energy services.

As I have mentioned a few times over the last year I have written a new book, “Energy Efficiency, the Definitive Guide to the Cheapest, Cleanest, Fastest Source of Energy”, published by Gower.  Well I am glad to announce that the book has now been released for sale and so it is now available in hard copy and e-book (possibly with a few weeks delay).  The link to the Author’s Network form, which gives a 35% discount on the sale price is here.

The book is a wide-ranging introduction to the subject of energy efficiency covering;

• What do we mean by energy efficiency?

• The global energy system, stresses and strains

• A systematic view of the benefits of energy efficiency

• The Jevons paradox

• Managing for energy efficiency

• Technologies for energy efficiency

• Designing for energy efficiency

• Financing energy efficiency

• Energy efficiency policies

• Energy efficiency and energy suppliers

It designed for professionals and policy makers with an interest in the subject who perhaps are coming at it for the first time, as well as those already active in the field who want to move beyond a single dimension approach to the problem.  There are many fine texts which go deeper into some of the individual aspects of energy efficiency but very few, if any, which give the wide overview.

One of the main messages of the book is that we have a choice over how efficient our organisations and our societies are, it is not pre-ordained.

Thank you to all those that have been involved in the long process of book writing, especially all those who wrote endorsements, and to Greg Barker, Minister of State at DECC, who wrote the foreword.  Also a big thank you to all the energy efficiency and finance professionals around the world with whom I have interacted over the last couple of years.  They have all contributed to the book in some way.

I hope that you find it interesting and useful and if you do that you spread the word about it.   If you can write a review for a journal, magazine or website let me know as we can get review copies sent out.  I am always happy to receive feedback on it and discuss ideas for the next one.