Customers change their heating system every 12 years or so, and when they do, it is often as a distress purchase of more than £2,500 when the boiler fails. Outside the warranty period, they can also be hit with expensive call-out fees when their boiler breaks down.
There is extensive evidence that many customers would prefer to amortise unpredictable lump sum heating costs and to reduce the likelihood of inconvenient heating breakdowns. The maturing market for boiler insurance policies (British Gas alone has more than four million of them) is a direct illustration of this trend.
But the appetite to amortise costs extends to assets, too. Delta-ee’s low-carbon heat market research shows that of those UK owner-occupiers interested in a renewable heat solution, 40 per cent are interested in a financing package for the asset. The financing packages that scored the highest appeal were free at source to the customer, had a monthly fee for a fixed term and included maintenance over the term of the agreement. Delta’s connected home research also shows interest of more than 50 per cent when products are free, compared with as low as 5-15 per cent when priced at cost-plus.
Heat cost amortisation is undergoing three phases of evolution. It started with financing of heating assets, is moving to heat bundled with other services (aided by smart technology), and will finally move to heat priced at a fixed monthly fee.
Phase 1: Financing the heating appliance, often with the illusion of “free”
Suppliers have been offering heat as a simple financial service for some years. The largest UK boiler installer, British Gas, is believed to have a meaningful take-up of financed packages among its more than 100,000 boilers a year. The second-largest UK boiler installation company is estimated to install around 35,000 boilers a year and advertises at a headline price of £17 a month. The implied launch proposition was “don’t bother with an insurance product when you can have the peace of mind of a completely new boiler”.
Phase 2: Bundle appliance with financing and one or more of: local generation, heat fuel, energy efficiency or demand response
The second phase is to bundle heat with energy and to allow smart technology to play a role in reducing the total cost of ownership to the customer compared with phase 1.
For example, Flow Group offers a “free, fully installed, new CHP boiler on a seven-year contract”, providing the customer takes the competitively priced dual-fuel energy contract from Flow Energy. The micro-CHP unit in Flow’s boiler allows the customer to reduce their reliance on electricity from the grid – and hence their energy bill. Excess electricity is exported to the grid and Flow collects the feed-in tariff. The model holds further opportunity to improve efficiency, customer engagement and arbitrage by adding smart thermostat and smart boiler technology.
Another pre-funding start-up advertises that it plans to offer a “free heating system with new boiler, radiator valves and smart thermostat”. This also presupposes a bundled energy contract in which monthly payments increase with the fuel efficiencies generated by the new heating system.
Phase 3: Selling heat for a fixed price for a contracted level of comfort or for new units of heat
The final phase is to offer heat priced per unit or by outcome (for example, 21°C during waking occupancy hours). Thermondo is starting as “the Amazon of heating systems” (smart e-commerce and e-value chain for buying heating systems), but plans to evolve to heat as a service.
People have dismissed this vision as impractical. But is it? In the wholesale mobile market, BT Wholesale offers mobile carriers a fixed price for data capacity despite the growth in data: it assumes over time that it can replace the underlying technology with more efficient technology. In the business lighting market, Phillips has offered fixed price lighting for a contractual level of lumens, per area, at prescribed times. Volkswagen is partnering with Ecotricity to offer an electric car, bundled with an energy tariff and 1,000 miles of free (electricity) fuel.
All it takes for this market to materialise fully is desire, a willingness to hedge some risks, the data to understand those risks and a level of automation for the delivery of contractual outcomes for a fixed price. Utilities need to recognise the lucrative opportunities that heat as a service can unlock and deliver boardroom leadership for smart technology investments. Otherwise the potential will be ceded to smaller, more nimble start-ups.
Susan Furnell is a freelance consultant specialising in connected home technology