PARIS/FRANKFURT With better insulation, triple glazing and frugal boilers, new houses can cut energy use by up to 90 percent, which is good news for consumers but bad for utilities that vie with energy services firms for their efficiency euros.
An unstoppable efficiency drive spurred by EU regulations and national targets poses a dilemma for utilities.
Do they look for a profitable way to help consumers save energy or try to defend their traditional business model?
Products that reduce heating bills and therefore utilities' profits include heat pumps and condensing boilers from firms such as Germany's Vaillant or Viessmann, super-insulating materials from Belgium's Recticel or Ireland's Kingspan, and heat-retaining triple glazing from France's Saint-Gobain.
Bain & Company estimates that German households spend about 5 to 7 percent of their income - about 2,500 euros ($3,250) per year in today's money - on energy.
It's a percentage little changed since the 1970s but how the money is spent is changing, as consumers look to lower their gas or power bills through one-off investments in efficiency and small-scale, independent power generation such as solar panels.
"Total household energy spending has not changed. It just goes to different suppliers," Bain consultant Berthold Hannes said.
Bain estimates that in Germany, the big four utilities will lose about a third of their annual operating profits from generation, or about 2.5 billion euros, by 2020, due to the shift in spending.
Hannes believes new profits from independent energy generation sources and energy efficiency will amount to three to four billion euros per year by 2020, but utilities are likely to capture less than a third, with the rest going to energy service specialists. Utilities association Eurelectric makes similar estimates for Europe.
NO SCIENCE FICTION
But it is not all bad for European utilities as McKinsey expects their earnings before interest and tax (EBIT) to grow to 138 billion euros by 2020 from 118 billion last year despite conventional generation profits sagging to 49 billion from 55 billion.
That's because utilities are expected to earn more from utility-scale renewables (14 billion euros), new energy services (10 billion) and smart grids (6 billion).
"Utilities need to move away from selling megawatt hours, to selling full energy services, that is the only solution for them," said Eurelectric energy policy head Susanne Nies.
Among new services, McKinsey includes mini-combined heat and power generation (CHP), battery storage, electric vehicle charging stations, and "demand response" services that reduce demand during peak times.
These are all businesses now dominated by non-utility players, meaning utilities will have to make alliances with these firms or acquire them.
Some of that is already happening. French gas giant GDF Suez's unit Savelys has more than 1.5 million contracts for maintaining heating systems for individuals and businesses.
German utilities E.ON and RWE work with boiler makers to sell CHP systems to households and Italy's Enel has teamed with Italian firm Echelon and IBM to become Europe's pioneer in smart meters.
"By 2020, and using technologies that are not science fiction, new homes could use 10 percent of the power they consume today. This requires utilities to develop new business models if they want to remain competitive," said McKinsey partner Giorgio Busnelli.
As yet few utilities are branching out into energy services, and while CEOs try to figure out who is eating their lunch, entire new industries are springing up.
Bank of America Merrill Lynch (BAML) said in a study energy efficiency is a global megatrend and listed 113 stocks in sectors including transportation, industry, IT and lighting.
"We believe that improved energy efficiency in the building sector offers the greatest potential of any sector to make cost savings and reduce energy use," it said.
It quotes McGraw-Hill Construction data saying that the U.S. energy-efficient building market grew from $10 billion in 2005 to $85 billion in 2012, and is expected to reach as much as $248 billion by 2016.
It said global stocks placed to benefit included heating systems maker Ingersoll Rand, meter maker Itron, switches maker Legrand, building materials maker Owens Corning and insulation materials maker Saint-Gobain.
"New regulations will increasingly require companies to improve their energy efficiency - creating significant investment opportunities," BAML said.
The bank favors sectors such as building automation, efficient HVAC (heating, ventilation, aircon) systems, insulation materials, high-efficiency lighting and appliances, multiple glazing and building materials firms. Utilities are conspicuously absent from the list.
Bain's Hannes said that energy efficiency affects electric utilities less than those which supply gas, adding many of the new efficiency tools use electric power.
Analysts say despite the challenges, utilities have no choice but change and there are some signs of them doing so.
RWE's "Effizienz" unit helps customers save energy and RWE last month agreed a deal with Prosol Invest Deutschland to sell batteries that let clients store the solar power they produce.
RWE is also working with Vaillant and German tradesmen to offer micro combined heat and power plants, as well as "virtual power plants" that pool energy produced by thousands of small-scale plants in customers' basements.
Such examples remain rare, but they show that some utilities have understood it is better to work with the efficiency specialists than against them.
(Editing by Jason Neely)