Smart home market 'worth billions' to energy companies, but beware blockchain

In their battle against price caps and as they search for new areas of growth, energy companies could be on the verge of tapping into a huge source of new revenue by accessing the 'smart home' market.

While utilities' retail business often gets overlooked by analysts and investors as it represents less than a fifth of operating profits and is felt to be relatively unexciting - as the most utilities really do with their 225m customers is sell them electricity and gas - analysts are starting to see the potential for a lucrative spreading of companies' tentacles further into the home.

British Gas owner Centrica, for example, could be eyeing an opportunity worth 23% of its market cap, according to the base case of analysts at Berenberg, or up to 37% on its 'blue sky' scenario.

This British Gas having already launched its Hive smart thermostat and formed a partnership with Amazon’s Echo, the company appears to have a first-mover advantage.

"We see the smart home as an opportunity to participate in additional revenues," said Berenberg, "we do not see it as a threat to cannibalise existing revenues. If played correctly, the smart home could also enhance customer stickiness with corresponding savings, none of which we have modelled as potential upside."

"In terms of current smart home products and services, we think that Centrica’s proprietary smart home products sees it relatively well prepared to capitalise on opportunities here."

While it is difficult to envisage energy companies moving into home entertainment, home security and the relaxing-sounding 'ambience-assisted living', the most obvious addressable parts of the smart home market for European utilities market would be energy management, worth around €4.7bn, and the €7.5bn home-automation segment.

Energy management encompasses any hardware designed to save on energy bills in the home, with the most obvious being smart thermostats such as Nest, while products can allow users to remotely control or reduce energy use such as by turning off lights or through automating heating control, or automatically adjust use via sensors monitoring temperature, sunlight or rain. This does not include smart meters, which are just concerned with automating the billing process.

Similarly home automation includes devices that are primarily for the automation or remote control of household equipment, more geared towards increasing comfort or efficiency, such as by connecting all the other smart home segments like automated control of blinds or curtains, dimming or turning on lights or heating, and including such devices, even down to connected plugs.

As well as Centrica, Berenberg saw big potential gains elsewhere, including RWE (with 15% of market cap in the base case and 24% blue sky), ENEL (14% and 20%), E.ON (13% and 21%), innogy (11% and 18%) and EDF (11% and 17%), while the least exposed to the theme are felt to be Verbund, Fortum, ENGIE, EDP, Iberdrola and Gas Natural.

BEWARE THE BLOCKCHAIN

While on the subject of utilities and technology, Berenberg made sure to note that the blockchain software platform "has the potential to vaporise the retail business".

Ultimately, energy companies' retail businesses are little more than a middle man, putting the consumer in touch with the producer of electricity.

"Blockchain has the potential to massively undermine this relationship, turning today’s retail business into a mere shell of its former self by putting consumers and generators in direct contact. There may always be a need for someone to call and complain to, but if blockchain has its way, customer complaints will be down significantly.

Energy customers will not have to worry about tariffs as blockchain will automatically source the right energy, such as a preference for green energy, at the right price without the need for intermediation by a call centre agent.

"However, before we reach this customer utopia, there are significant barriers to widespread adoption of blockchain technology; smart meter rollout, a smarter grid, legal and regulatory issues as well as trust, to name but a few."