Businesses are dramatically changing the way they buy energy in Britain and beyond as new technology makes it easier and cheaper to generate their own power.
Home furnishings giant Ikea Group now gets almost half of its U.K. electricity from renewables, while Toyota Motor Corp. taps solar energy to build engines in Wales. Australian bank Macquarie Group Ltd. will unveil on Wednesday a service to help businesses cut energy costs and pollute less, competing with existing suppliers including Centrica Plc.
More and more British businesses are seeking to save money by using locally sourced power, sidestepping utilities and sparking a global market for decentralized energy that’s expected to expand more than 50 percent to $110 billion by 2021. That shift threatens to cut revenue at the biggest traditional power providers, which typically control everything from generation to distribution.
“The Big Six are going to have to significantly change the way they operate,” said Nick Boyle, chief executive officer of Lightsource Renewable Energy Holdings Ltd. in London. “It’s going to be a challenging time for them. They are aware they need to reinvent themselves.”
In so-called distributed generation, power plants are connected to a local network, cutting the costs associated with using the main grid. Companies can also reduce expenses through energy efficiency measures, which can save business consumers 3.9 billion pounds ($5.2 billion) a year in the U.K. alone, according to the Policy Exchange research group.
Macquarie, which bought the U.K. government’s Green Investment Bank Plc in August, will offer companies financing for new generation and energy saving equipment under supply contracts that may be as long as 15 years and have no up-front costs, said Richard Braakenburg, senior vice president of the energy unit. Traditional energy supply agreements usually last one to three years.
Providing the capital up front entices companies to embark on measures they might otherwise put off and the bank’s willing to work alongside traditional utilities, said Braakenburg. “You can bring forward a whole chunk of the investment program rather than having it drip fed.”
Distributed energy and consumption savings go hand-in-hand with efforts to tackle climate change. In Britain, the government is legally obliged to reduce emissions by 80 percent from 1990 to 2050 using a succession of five-year “carbon budgets.”
In Europe, renewable-energy developers are being forced to find new customers as lower subsidies from governments squeeze their profit. The cheaper green technology has encouraged more companies to invest in their own generation and efficiency programs.
In the U.S., a key driver of the trend has been companies like Google and Amazon.com Inc. seeking to demonstrate their shift to cleaner activities, said Bruno Brunetti, head of power strategy at S&P Global Platts. Enel SpA, Europe’s biggest utility by market value, started work earlier this month on a wind farm in Nebraska to power a new Facebook Inc. data center.
“Back in the days a utility had absolute control from generation all the way down to retail,” Brunetti said. “Things are changing as end-users are getting more proactive.”
Globally, the market for distributed generation will expand by 9.5 percent a year through 2021 from about $70 billion in 2016, according to a report by BCC Research LLC, an energy analysis company based in Wellesley, Massachusetts.
Ikea plans to be “energy independent” by 2020 and globally plans to spend about 2 billion euros ($2.4 billion) to achieve that target, said Hege Saebjornsen, U.K. and Ireland country sustainability manager. The retailer is already selling energy solutions to its own customers.
But all isn’t lost for Britain’s existing utilities, according to Centrica, the biggest household energy supplier. The utility, which issued a profit warning last week, has responded to the changing market with longer-dated contracts to satisfy customers insisting on bigger cost savings than they’ve enjoyed in the past, including help with finance for new equipment and generation.
Utility profit margins for decade-long contracts can be closer to 10 percent than the near-zero level on some traditional supply agreements, said Gab Barbaro, managing director of Centrica’s British Gas Business unit. And that’s after the energy supplier and business or government customer share cost savings between them, he said.
“It’s all about volume and energy efficiency,” Barbaro said. Traditional contracts have been “done to death.”