McKinsey’s Winning the battle for the home of the future is a fresh publication of October this year. They argue that, should today’s technology be fully developed, a new house built in Europe 10 years from now might consume 10% of the energy it would today. If this were true, utilities and retailers face a gloomy perspective of reduced revenues, including margins dropping by 10-30%, according by McKinsey’s scenarios.

The report includes 4 scenarios of EE adoption rates, technology development and regulation on greenhouse gas emissions’ reduction in Europe. They combine data from four countries (Germany, UK, Italy and Sweden) to create a proxy for the European status quo on the residential sector. Among the most interesting findings, I highlight:

1.        50% of the EE-related interest (i.e. in terms of investments) will likely be in insulation and central systems, 30% would go to EE white goods, with microgeneration at a 10% level of expenditure

2.       Electric vehicle supply infrastructure is seen as a post-2020 need

3.       Despite the fuss, smart meters do not appear to stimulate much interest

4.       To 2020, it is possible that utilities and retailers cover their lost revenues with new income from energy efficiency-related sales.

Interestingly, the authors consider that the most likely way for utilities and retailers to cope with this new market paradigm is to diversify towards adjacent emerging businesses, under the following lemma: Value created > Value lost from reduced energy consumption:

·         building materials (insulation)

·         energy-efficient home appliances, or white goods

·         central systems (heat pumps, lighting)

·         smart applications (energy storage)

·         smarter metering

·         microgeneration (small wind turbines, solar panels for homes)

·         financing for the above etc.

But in-house development of such branches if business can be daunting, so the best way to go at it appear to be partnerships, as that of British Gas and Sainsbury, a chain of supermarkets where customers can buy solar panels, which British Gas ulteriourly installs or like RWE’s partnership with Microsoft and EQ3, for centralized control of appliances.

Consumers would be triggered to make such investments on a market where the European Commission is urging for supply and demand-side measures to achieve its 20-20-20 goals. On the supply side, carbon reductions can be achieved by installing lower-emission generation. But, renewables are costly and technologically impossible to integrate with grids that don’t cope well with intermittence, natural gas is a generally-acknowledged transitions fuel and nuclear energy is politically sensible in Europe. So it makes sense that some consumers decide to invest in consumption-improvement measures. But are they going to do so in such a number as to give their emerging producers scale?

For most residential consumers, the sole incentive to invest in energy efficiency (EE) is purely financial. Unless energy becomes sufficiently expensive or, to put it another way, if payback-periods and investment costs remain high, I doubt consumers will afford give priority to EE investments anytime soon. As far as appliances (white goods) are concerned, McKinsey’s report suggests that functionality, simplicity of use and design are often primary criteria of purchase, while EE comes in second. And this is natural in a market where the costs of carbon emissions are not generally reflected in the prices of goods and services not only in Europe, but especially in its trading partner countries.