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The domestic energy supply business model: why it should sell services rather than commodities

Panel: 3. Local action and national examples

This is a peer-reviewed paper.

Authors:
Charlie Morris-Marsham, London - Loughborough Centre for Doctoral Research in Energy Demand, United Kingdom
Steven K. Firth, Loughborough University, United Kingdom

Abstract

The prevailing energy supply business model for single unit domestic properties is the utility company model which relies on utility companies selling units of energy to domestic households. In this model household and energy supplier interests are misaligned as households do not pay directly for the services they want but instead for the commodity (i.e. units of energy) that provides those services. For example householders want a warm home but instead pay for units of energy to fuel a heating system to deliver the required warmth. This business model creates a number of barriers to investment in domestic energy efficiency measures, including asymmetrical information, high perceived risk and split incentives, which culminate in householder inertia to energy efficiency measures. Firstly this paper presents a holistic review of the techno-economic and socio-cultural barriers to domestic energy efficiency, secondly it proposes a novel business model - the Domestic Energy Service Company (DESCo) - as having the potential to mitigate some of these barriers and thirdly it summarises the results of a household energy and finance model which tests the viability of the DESCo business model. The analysis explores the relationships between risk, householder savings, contract length, rate of return, baseline energy consumption level, comfort take-back, transaction costs and energy prices. The results of the model, which uses the UK as a test case, suggest that the DESCo business model could viably finance certain domestic energy efficiency measures, in addition to mitigating some key householder barriers and delivering adequate rates of return to investors. Using these results the paper draws conclusions on the feasibility of the DESCo business model. The paper concludes that the DESCo business model has the capacity to align the interests of consumers and suppliers and so mitigate inertia towards investment in domestic energy efficiency in the domestic energy supply market.

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