September 28, 2018 / 6:09 AM / in 20 days

E.ON targets innovations for smart energy future

FRANKFURT (Reuters) - Germany’s biggest power supplier E.ON wants smart homes to be smart business in a world of decentralized, low-carbon energy markets.

FILE PHOTO: E.ON headquarters in Essen, Germany, March 15, 2017. REUTERS/Thilo Schmuelgen/File Photo

That’s why it teamed up this week with U.S. tech giant Microsoft to produce a digital dashboard of all the electrical devices in a home, from heating systems to solar panels to battery storage systems to electric cars.

Set to go on sale next year, E.ON’s home energy management system will be one of a range of products on offer from big German utility companies desperate to increase profits from their networks of millions of electricity and gas customers.

Faced with the prospect of flat earnings from just selling power, German utilities are offering products from smoke alarms, electronic door locks, EV charging kits, broadband and even the Amazon Prime delivery service to generate higher returns.

They’re also trying to get as many new customers as possible on board now to build brand loyalty for when complex smart homes become the norm rather than the exception - and need cutting-edge technology to run efficiently.

Since E.ON announced plans in March to merge with rival Innogy, it has stepped up a race with Vattenfall, EnBW and smaller utilities to persuade German customers to switch providers, offering signing bonuses such as iPads, washing machines or hundreds of euros in cash.

“The value of customers today is different from three to four years ago because customers have become more active,” said Victoria Ossadnik, chief executive of E.ON’s retail division Energie Deutschland.

WAKING UP

A study by consultants McKinsey & Company www.mckinsey.com showed that pre-tax earnings before interest and taxes (EBIT) from downstream power activities in the European Union will grow by a third to 20 billion euros in the 10 years to 2025.

But none of the increase will come from classic power supply, said McKinsey's Tiziano Bruno, one of the authors of the study here published in May.

Bruno said the increase will come from a 5 billion euro ($5.9 billion) rise in the value of energy efficiency services to 9 billion - and that’s why utility companies are set on ring-fencing customers now and coming up with new products.

Investors welcome the shift after years of underperformance by utilities when low wholesale power prices led to operational losses and fossil-fuel plants were driven out of the market by renewable energy in Germany’s drive towards low-carbon energy.

"German utilities have woken up and are working hard to ensure the customer side does not slip through their fingers," said Thomas Deser, a fund manager at Union Investment union-investment.com/home.html which holds 1.4 percent of E.ON's shares.

“If they manage to combine software, hardware and services, there is a great chance they’ll keep working with the customer.”

E.ON already has 6 million private residential accounts in Germany - besides companies, municipalities and cities - and its drive for new clients helped it add 50,000 in the first six months of 2018.

Once it combines forces with Innogy next year, it will command a customer base of 50 million retail clients across Europe in countries such as the United Kingdom, the Netherlands, Sweden, Italy, Czech Republic, Hungary, Slovakia and Romania.

Engaged in a similar offensive, Vattenfall, which has 3.5 million German household power accounts, has added 100,000 power and gas customers so far this year, German chief Tuomo Hatakka told Reuters this month.

EnBW has 5.5 million household customers in Germany.

BRAND LOYALTY

One of the challenges for big utility companies is to ensure they can hang onto new customers to make the cost of acquiring them worthwhile - and to develop brand loyalty for the future.

Germany's Bundesnetzagentur here, the regulator for several sectors including electricity and gas, said 4.6 million people switched power accounts in 2016 while 2.4 million negotiated improved terms with their existing supplier.

Ralf Kurtz, a partner at PricewaterhouseCoopers www.pwc.com, estimates that power companies will need to keep new clients for at least two years for the exercise to become viable.

The utilities then need to ensure they are the ones offering products that will let people manage their energy supplies in an efficient way - rather than allowing disruptors with experience of consumer data and digital market places to steal the show.

Announcing its deal with Microsoft to create a digital dashboard of electrical devices, E.ON said the market for home management systems in Europe was 40,000 a year, but this could rise to at least 200,000 within three years.

“Digitisation, Internet of Things and Artificial Intelligence provide us with new opportunities to offer customers increased efficiency and convenience,” said E.ON board member Karsten Wildberger.

‘UTILITY-IN-A-BOX’

State-owned development bank KfW www.kfw.de/kfw.de-2.html said in a study last month that while only 11 percent of German households use smart energy devices to optimize electricity and heat consumption, 57 percent can imagine using them.

Digital smart meters, which monitor consumption and feed data back to power suppliers, have yet to take off in Germany, unlike other EU countries such as Italy and the United Kingdom.

The expected demand in Germany for more smart energy devices is why the big power companies are scouring the market to snap up promising startups to ensure they stay in the driving seat.

“An organization that has to involve itself with its daily business is unlikely to simply be able to produce disruptive innovation,” said Uli Huener, head of innovation at EnBW.

It has adopted a three-pronged strategy: it lets employees develop ideas in an internal “incubator”, it has put 100 million euros into the EnBW New Ventures fund to buy minority stakes in startups and it also has set up an internal company builder to help get innovative ideas up and running.

A division of E.ON called :agile said on Wednesday it had chosen six European startups with energy related products for a three-month sponsorship program with a view to starting pilot schemes that could lead to commercial products.

E.ON already cooperates with companies such as tado www.tado.com and Nuki nuki.io/en offering smart products like thermostats and electronic door locks and last month it also joined EnBW and Berlin's investment bank IBB here in a financing round for startup Lumenaza www.lumenaza.de/en.

The German software company has developed a system it calls utility-in-a-box that monitors renewable power production, manages groups balancing supply and demand, links renewable producers to customers and organizes billing.

Creating digital marketplaces for renewable energy suppliers from a wind farm to a home is seen as a significant opportunity in Germany where there are already 1.7 million private households with solar panels.

“The realization that the energy future is green, fragmented and decentralized has now arrived at the highest management level,” said Lumenaza’s managing director Christian Chudoba.

Additional research by Tom Kaeckenhoff in Duesseldorf; editing by David Clarke

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