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Nick Beaumont-Jones

The Gas Man Cometh…

04 Dec 2009 | Filed under: Industry Comment

‘Don’t worry, we’ll take care of everything’

The man who runs British Gas wants to sell less gas, but a new world will bring new opportunities

Copenhagen 2009 promises to be many things — watershed, breakthrough, disappointment, a chance for the world to protect its environment or merely to pay lip service to it — but Sam Laidlaw believes that, in one regard at least, it will mark the end of an era. The man who runs Britain’s largest energy supplier believes that the United Nations Summit on Climate Change will signal the death of the traditional utility company.

In a carbon-constrained world, he argues, energy companies must reinvent themselves. No longer can they thrive simply by offering consumers an “all-you-can eat buffet” of cheap gas and electricity, with scant regard for emissions. Instead, they will focus on offering consumers packages of “energy services” that satisfy their daily needs for heat, power and light — while minimising the use of polluting fossil fuels and keeping a tight rein on emissions.

“In future, we will sell you a warm, well-lit home and take care of everything else,” Mr Laidlaw, who joined Centrica in 2006, said. “We may sell less gas, but we will sell more energy-efficiency products — insulation, heat pumps, solar panels … And we will add valuable margin and pick up more customers along the way.”

For a company still known by many customers as simply the “gas board”, it sounds revolutionary, but Mr Laidlaw claims that this transformation is already well under way in Centrica, which, as well as owning British Gas — one of the UK’s Big Six power companies — owns Direct Energy, the American retail energy business, and three other wholesale energy production and storage businesses.

Mr Laidlaw’s plan was to transform this band into the shock troops of a green revolution. He would capitalise on the strong British Gas brand while training the engineers to conduct home “energy audits” and to install a range of other products, from solar panels to smart meters. The strategy is reaping results already. “If you look at the revenue stream between selling energy and services, there is a change under way,” Mr Laidlaw said. Between 2006 and 2008, profits from the British Gas Home Services division roughly doubled to £195 million — contributing more than 10 per cent of total group profits of £1.9 billion last year.

The strong growth trend is continuing, according to Mr Laidlaw, and will be reflected in the group’s 2009 results in February. Indeed, he predicts that soon services, which also include boiler insurance, will contribute more than half the profits of the group’s flagship British Gas business, exceeding earnings from its traditional core activity of retail sales of gas and electricity. The company recently announced plans to hire a further 3,000 engineers.

Mr Laidlaw’s timing appears to have been shrewd. Over the past year, UK gas demand has fallen by 7 per cent. Although Mr Laidlaw acknowledges that some of this — two or three percentage points — is because of the recession, he estimates that the bulk of the decline — about four or five percentage points — has arisen from changes in consumer behaviour and improved energy efficiency.

Better insulation is one factor. Moreover, 600,000 new condensing boilers are installed every year in the UK and the gradual phase-out of older models is driving down energy demand.

“We are starting to see some of the potential benefits from that,” Mr Laidlaw said, adding that this was only the start. He believes that UK gas demand could fall by up to 15 per cent over the next five years, making a big contribution to the Government’s drive to cut carbon emissions by a third of 1990 levels by 2020. “You could get nearly half of those cuts simply from energy efficiency,” he said.

Far from being a threat to utility companies, energy efficiency, Mr Laidlaw believes, represents a vast untapped business opportunity, one that could be worth up to £150 billion in the UK alone if the Conservatives win power and launch their Green New Deal plan to help to finance home energy improvements. “UK energy consumption is one of the highest in Europe because of the poor quality and age of our housing stock,” he said. “So, there is a huge opportunity.”

With a market value of £13 billion, 33,000 staff and 15.7 million customers, Centrica is applying the same strategy to Direct Energy, which sells energy to five million customers in the United States and Canada. And while Centrica’s traditional businesses of producing and selling gas and power still generate the lion’s share of group profits, Mr Laidlaw believes that services will be increasingly important. New technology will broaden the opportunity and the company is preparing to launch a home-based fuel cell that generates electricity, as well as heat. “You will have a boiler that will also generate electricity and you can export that to the grid and get paid for it,” Mr Laidlaw said.

Yet the real key to unlocking the opportunity will be the rollout of “smart meters” in all 26 million homes in the UK, plans for which the Government is expected to unveil this week. Smart meters, monitoring household energy all day, will allow for more sophisticated services, including systems that allow people to control home appliances remotely or to turn the heating on automatically when their mobile phone indicates that they are near home.

Most importantly, they will let utilities control demand by giving discounts for off-peak energy use. By encouraging people to run their dishwashers and tumble dryers at night, utilities will be able to ease overall demand, allowing Britain to get by with less electricity and fewer emissions. “Consumers will not have the agonies of estimated bills and we won’t need to build as many power stations,” Mr Laidlaw said.

Of course, there is more to his strategy than a focus on services. He has bolstered Centrica’s access to gas and electricity supplies, with two big acquisitions in the past year — Venture Production, a North Sea gas producer, and a fifth of British Energy, the nuclear generator. These have helped to make Centrica, traditionally a retail-focused energy business, more balanced and have reduced its exposure to volatile wholesale gas and electricity prices.

Nevertheless, Mr Laidlaw believes that Copenhagen is crucial if energy groups are to know how to invest. He believes that Europe needs to tighten its target for cutting emissions from a 20 per cent to 30 per cent reduction by 2020.

“It is very important for us as a business and as a country to get that certainty,” he said. “It will change the way that we use energy.”

The above extract appeared in timesonline on 30th November 2009

Industry Tags: Electricity, Energy, Fuel, Gas, Green Energy

One Response to “The Gas Man Cometh…”

tonie says:

January 5, 2012 at 5:23 pm

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