Rearranging Utility-driven Demand Side Management (DSM) to respond market conditions: a Finnish case study The role of large incumbent energy utilities in promoting energy saving Apajalahti, E-L., Lovio, R. & Houtbeckers, E. Aalto University School of Economics Organization and Management Corporate Environmental and Social Responsibility Research

“ Why would Energy Companies want us to save energy, the very product that it gets profit from?“ Source: NCRC –survey 2009

Why energy efficiency? Improving energy and electricity end-use efficiency 40-63% of the solution (IEA WEO 2008). Transition to renewable energy sources is a long process Energy efficiency improvements may be faster and more cost- effective. 3 Eeva-Lotta Apajalahti % 40 – 50 %

Policy obligations on energy utilities EU Directive (2006/32/EC) on energy end-use efficiency and energy services (ESD) –Indicative national 9 % energy saving target –Minimum requirements on reducing energy end-use of its clients. –Directive will be revised (and tighten) in –In Finland implemented through renewed voluntary Energy Efficiency Agreement system, obligate 80 % of energy utilities National, ESD complimenting law on energy efficiency services, obligate all energy utilities ( 1211/2009). Remote reading, billing must be based on verified energy use by EU targets –Obligate energy utilities through different ways e.g. City of Helsinki engagement to carbon neutrality by the Eeva-Lotta Apajalahti

Energy utility as an energy saving promoter Role of energy utility... –has been traditionally strong but reduced since market liberalisation. –has been decreasing since new intermediary organisations, energy saving companies (ESCOs) have taken the task (Breukers et al. 2009, Heiskanen et al. 2009, Bertoldi et al. 2006). –is not natural in implementing energy saving (Demand Side Management, DSM) initiatives because it does not gain monetary benefits of doing so (Didden & D’haeseleer 2003). –in developing new energy-efficient products and services in liberalised and privatised energy markets is uncertain (Vine et al. 2003). Past DSM efforts often led to negative business experiences. –Past experiences and learning outcomes of load shifting and DSM initiatives/programs introduced in in US. (Strbac 2008, Gehring 2002, Eto 1996, Vine 1996). 5 Eeva-Lotta Apajalahti

Electricity retailers operating environment in Finland Energy Market Act (1995/1998) –Large energy users (1995) and small energy users (1998). –Unbundling electricity trade operations from other trade operations. –Separating electricity network operations from other business operations. Operating environment of electricity retailer Power generation Electricity retailer Electricity network District heating trade and distribution 6 Eeva-Lotta Apajalahti NordPoolSpot – Nordic power exchange Energy end- use: Households Industry Energy delivery Energy trade

Motives to improve end-use energy efficiency of Finnish Energy Utilities vs. case utility (n=7) Main motivesCase 1Complying the EU ESD. “Complying the EU ESD is challenging for energy utilities [but not for the case company].” + 2Differentiation of the product portfolio. “The only thing matter [in competition] is the price and production type. We have extent product portfolio, but so have others. All the electricity retailers have somewhat the same products.” Improving customer benefits and attracting more clients. “Advising service backup long-term customer relations...some product that could reward the customer and he/she could experience being beneficial for himself and for environment.” +++ 4Market positioning and reputation. “To be Finland’s leading energy utility in energy saving issues.” +++ 5Strategic motive to respond the climate change challenge. ”Energy saving campaign was part of the company strategy on how to respond climate change.” + Eeva-Lotta Apajalahti

Current energy saving activities by Finnish Energy Utilities vs. case utility Eeva-Lotta Apajalahti Energy utilities have long and active role in energy saving advising. Next step is utilizing hourly basis metering in load shifting and energy saving.

Why promoting electricity saving further is challenging? Household perspectives (n=289) Eeva-Lotta Apajalahti Basic energy saving advising is wanted from own energy utility but... Basic energy saving advising Selling energy saving services energy saving contract model... sceptical perspectives emerge when integration level increases. “Energy utilities are listed privately owned companies, why would them want to save energy, the very product that they get profit from?“ Source: NCRC –survey 2009

Why promoting electricity saving further is challenging? Case utility’s perspectives Unbundling the business operations:  reduced flexibility of sharing the costs between the units. Eeva-Lotta Apajalahti Pricing problems of contract model:  How electricity providing, saving incentives, advising and services are combined?  Energy saving -> absolute reduction or reduction from trend consumption?  Is the product interesting? A production utility becomes an energy service provider  Is there willingness to pay for services?  operating environment narrow -> slim profit marginal

Energy utilities are motivated and active... but Energy market privatisation have had some negative side-effects  energy end-users mistrust towards energy utilities have increased: whose benefits energy utility is driving for?  stresses the business logic of offering energy saving business solutions.  which in turn create more uncertainty in developing business. Unbundling business operations  responsibilities between different business units are unclear.  the past DSM principles work poorly for electricity retailer. Growing pains: energy producer becomes energy service provider. Pricing difficulties:  energy end-users are not ready to pay for services  fear of unprofitable business operations Eeva-Lotta Apajalahti

Implications To decrease mistrust, new strategic reorientation towards energy saving is needed? Competing with energy saving products and services might fit better:  For publicly owned utilities who have strong traditions in advising.  For those who cannot compete with production: strong carbon lock-in. But if they success, it might be copied elsewhere. Remote metering advances provide new possibilities for energy use load shifting. If/when energy prices rise, the demand for energy saving business solutions might increase. New ideas and innovations often follow new entrants - new retailers focusing energy saving might emerge? Eeva-Lotta Apajalahti