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By GreenCom CoCEO, Peter Müller-Brühl
Recently, we’re seeing all kinds of ownership models in the automotive industry. Everything from full ownership to pooling. And I wonder: How long until the energy industry will see a similar change?
The concept of “renting” your electricity supply appears so counter-intuitive that the inverse quotation marks seem entirely justified. After all, how can you rent electricity? You spend it in greater or lesser quantity according to the time of year, immediate needs or changes in lifestyle.
The only way for the energy business to work, says the traditional paradigm, is that you pay for the kilowatt-hours you spend. I would argue, however, that this is the old 20th century, pre-internet, pre-smart grid, pre-decentralised renewables business model.
The time has come to take off those quotation marks and throw them on the scrapyard of history! It actually makes sense to think of an energy rental – not just for the consumer, but also for the energy companies. Lease agreements, energy-as-a-service deals and energy subscriptions will start replacing the old account-based customer model, as they answer specific customer needs arising from the adoption of new technologies, lifestyle requirements and financial incentives.
Take this example: to become an energy independent prosumer you might need solar panels, a battery storage system, a smart connection to your boiler, and a smart energy system management app. The cost could be €12,000 or more – a significant upfront sum. For many, an energy rental system would be the only option.
As a consequence, we are already seeing companies moving into this energy “evolutionary niche”. DZ-4 bills itself as Germany’s first decentralised electricity supplier (hence DZ from the German word dezentral meaning decentralised), and – according to its website – already has over 3,000 customers. It offers three energy rental options: from the “Easy” PV solar package that reduces your electricity costs, to the “Autark” which promises “maximum self-sufficiency” and includes a PV solar system and battery storage.
Other German energy companies such as RheinEnergie, Enteg, Yello Strom, JES, Stadtwerke Schwedt and Enviam also offer PV rentals. They fall into three categories: municipal utilities (so-called Stadtwerke companies), independent energy suppliers and companies that specialise in equipment rentals. The latter is also sometimes white-label companies that help utilities offer PV rentals.
As original equipment manufacturers (OEMs) and suppliers of energy devices enter this new energy ecosystem they are becoming, in many aspects, energy service companies (ESCOs). This is where my company, GreenCom Networks, has a crucial role. Our service platform can connect and control the majority of the 140 million-plus installed distributed energy assets out there. Without communication protocols, it is impossible to harness the full systemic power of PV solar panels, storage batteries, charging points and other distributed devices.
It is clear then that an energy rental is technologically viable. But, how might this rent-a-watt business model work? The key to the success of energy supply rentals, I believe, is the careful pricing of each individual benefit a distributed energy system brings both to the consumer and the system as a whole.
Obviously, there is the yearly production of kilowatt-hours. Then there are system benefits such as energy storage and grid balancing. Yet, surely, increasing system efficiency and resilience, while decreasing its environmental footprint is also essential. A progressive public policy could incentivise distributed energy by putting a figure on savings in transmission losses, improvements in air quality and CO2 reductions. These could then be calculated in the overall rental price. Here energy data is vital.
Let’s take this simplified example: a household consuming 7,000 kWh per year wants to generate this amount of electricity from PV solar panels, store some of it in batteries, and manage the system via a smart energy app. In our example, the cost of the system is €12,000, which includes not just the hardware and installation costs, but also insurance, cost of borrowing and O&M.
The first and most tangible benefit of this system is that – according to current electricity prices in Germany – it generates around €2,100 worth of electricity per year. Then there is a potential second benefit: selling electricity at times of peak demand. Let’s say that this generates €400 a year for the household. Companies such as the UK’s Octopus Energy already offer this trading model to customers.
And then there are the socialised benefits of decreasing CO2 emissions, reducing air pollution, and improving transmission grid resilience and performance. A progressive social energy policy could quantify these benefits, and for the sake of our example, we will put them at €250.
Adding all these benefits together, we get a system that could generate around €2750 in value per year or about €230 per month. The system would pay for itself in just over four years. Hence, in this example, renting your energy supply at about €230 per month might make sense. Especially if after four years the householder would have an option of owning the home energy system outright and generating electricity for free – plus retaining the benefit of selling surpluses at times of high electricity demand.
Of course, this is where data becomes crucial to the pricing up of energy rental contracts, as it can help us understand the variables such as daily household changes in energy use, spot market price fluctuations and energy production forecasts.
Over the years, in my articles and presentations, I have been saying that the energy industry can learn much from internet platform businesses. Since then, the industry is learning that data will be inherently critical to the energy business. It will enable energy companies to understand not just consumer energy usage habits, but also the interaction between the distributed asset and the system as a whole.
And once you start taking into account data coming in from both sides of the smart meter, it might be wise for the energy industry to understand how car manufacturers structure contracts, to enable automotive ownership and access. After all, this is an industry that has grappled with the same problem for the last 120 years: how to sell a product perceived as essential to a modern lifestyle, that increases your independence but costs a significant percentage of your annual salary. Incidentally, at around €12,000, the cost of a home energy system is similar to that of an entry-level family car.
The take-home point for the energy industry: there is no one-size-fits-all solution. There are many ways you can get behind the wheel. Why, then, shouldn’t there be several ways to contract your energy use? Models of access to automotive transport are adapted to lifestyle, budget, special requirements and type of use. As we move towards a digitalised, decentralised and low-carbon energy network, could our industry learn something here? If we do, I believe we will unlock further growth.
For instance, you can purchase your car outright. You can also pay for it through lease-hire. If you need it for shorter periods, you can go to a rent-a-car company. On the other end of the ownership spectrum, through a car-sharing company such as Zipcar, you can even rent a car for a few hours. And even further, there are car-pooling companies such as BlaBlaCar, facilitated by advances in internet technology and smart telephony.
As part of the CIO team at DaimlerChrysler, I realised that large commercial vehicles require a sales strategy and payment mechanisms that will be different from those for private cars. Sounds familiar? With a sizeable renewable power plant comes a carefully worked out, often government-backed long-term payment scheme, such as a power purchase agreement or contract-for-difference, the terms of which run to hundreds of pages.
But, what about someone who is not after a 200 MW equivalent of a motor car? In other words, what about someone who is not looking for a 16.5 meter, 20-tonne articulated lorry, but needs a four-door estate big enough for the family, the dog and a few bags of shopping.
This is why the energy industry needs to start looking at subscriptions, as well as energy-as-a-service contracts. There will be many types of customers for energy from decentralised devices. Some will rent, others will be homeowners, and there will be those in energy communities, or running their own businesses.
As we have seen, decentralised systems will produce value beyond the value of kWh delivered to customers. They could store electricity and balance the grid. They could convert electrical energy into heat on-site, for instance, by using hot water storage systems, thus increasing overall system efficiency. By being decentralised and geographically spread, they will increase system resilience.
This value can be expressed in cash terms, and overall savings passed on to customers. A service or subscription contract recognising this value would work well for both customers and energy providers.
Take an example of a person renting an apartment within an energy community, which is a virtual power plant. The energy community generates and stores some of its energy while topping up usage through a long term supply agreement with a municipal utility. The renter might not be interested in any of this, but might be interested in a subscription-type contract where for a fixed amount the community would cover his standard electricity needs, including hot water usage.
Similarly, an energy subscription model, based on a fixed monthly payment, could work for those customers whose lifestyles are suited to a predictable electricity spend. Companies coming out with subscription offers, such as Australian energy retailers Mojo and Amber, emphasise the set monthly price, flat rates and no lock-in contracts. Subscriptions eliminate unpleasant “bill shocks” and allow for detailed household budgeting. In keeping with subscription models in other sectors, such as the entertainment industry and mobile telephony, electricity subscriptions are prepaid.
Imagine an automotive business where all private car owners had only one financial model to get behind the wheel. That business would very quickly cease to exist. Outright purchases, leases, rentals, car-sharing and car-pooling, exist to answer specific customer needs.
Now think about the widely publicised news that in April of this year the UK’s power system generated electricity for 18 consecutive days without coal, for the first time since 1882.
As we move to a power system technologically much more advanced than the one over the last 100 years, customers will want to be energy producers, managers and early adopters. By answering specific customer needs new business models, such as energy-as-a-service, rentals and subscriptions can hasten that technological transition. I would subscribe to that!
Want to discuss energy rental or management of decentralised energy assets? Visit our Home Energy Management use case page or get in contact.