In response to climate change and natural resources scarcity, governments have decided to take action. Shifting towards a more renewable mix of energy and reducing energy consumption are the main strategies to tackle these new issues.
Improving energy efficiency is one possible solution to reduce energy consumption. In Europe more than 50% of the residential buildings were built before 1970 and have poor insulation properties. In this context, renovation has become a hot topic in Europe. The European Commission established in 2012 a set of binding measures to help Europe to reach its 20% energy efficiency target by 2020. This is why European governments started implementing different measures and incentives to reduce the energy consumption of residential buildings and to encourage renovation activities. Following these commitments, opportunities, for both new and existing businesses, were created. Existing energy suppliers saw this as a chance to broaden their existing business portfolio and started to position themselves within this new market.
This article focuses on the domestic home renovation market across Europe based on a Belgian, Dutch, French, German, and UK case study. Renovation is a broad topic which entails many different aspects, but this article concentrated on two main topics: services that enhance the energy efficiency properties of houses (walls, ground flours, roof insulation windows replacement etc.) and the installation and maintenance of heating systems (condensing boilers, heat pump etc.).
The objective of the analysis is twofold. First, it aims to provide a bigger picture of the current situation in the different countries, pointing out similarities and differences using a country by country approach. Second, the article investigates the position of energy suppliers on this changing market with a similar methodology as mentioned above.
The Belgian market for home energy efficiency renovation is characterized by a relatively high potential demand, a fragmented landscape of actors and decreasing incentives from the government.
In 2014 nearly 28.000 permits for renovation were submitted according to 53.000 planning permits (new houses). Compared to previous years, the renovation activity remains at the same high level. One important market driver is the lower VAT for energy efficiency improvement activities to existing residential buildings, 6% instead of 20%. The Belgian government published in 2013 its 2020 target for energy efficiency: “18% reduction of primary energy compared to the projected gross inland energy consumption”.
The market potential is fuelled by the combination of:
Regarding its actors, the renovation market is fragmented and dominated by small firms mainly active in the installation and maintenance, while large corporations supply the different components.
Besides the fact that renovation activities are still very popular, the following two main barriers are still existing:
As far as the legal context is concerned, efforts to improve the energy efficiency of buildings focus primarily on implementing the EU Directive on the Energy Performance of Buildings, strengthening building code standards and increasing monitoring and enforcement. Moreover, financial incentives have been introduced by the government of each of the three Belgian regions. However there is a trend in decreasing and reviewing these schemes towards more efficient ones, adding to the lack of clarity and visibility from the customer point of view.
In the coming years, the Flemish government aims to introduce additional policies to improve energy efficiency performance of heat boilers and the replacement of old heating infrastructure
Renovation is an important market in France estimated at €7 billion. Among the 33.4 million residential buildings, 55% were built before 1975 and 20 million have bad insulation properties.
The French government has set challenging targets such as reducing the total energy consumption of the buildings by 38% by 2020. In accordance, renovation has become a hot topic in France. In 2007 the French government passed the “Grenelle” laws that are targeting an amount of 400,000 renovated homes per year, by 2013. At the beginning of 2015, a new law on the “energy transition” reinforced the previous measures and the interest for the renovation market. In addition, the government is promoting renovation activities through a broad range of incentives (bonus, zero interest loan, tax relief, green loan…).
The government is not the only actor interested in renovation; 87% of the landlords are keen on investing in energy savings measures. Besides this, energy suppliers are also changing their organization (partnership, joint venture etc.) to be able to face a rising demand for home improvement.
Although renovation has gained interest, many barriers remain. Most surveys point out that customers are lacking guidance on their renovation journey. More concretely they would like to receive more help on:
According to these surveys, professionals still lack a real expertise on a coherent renovation solution and often provide inconsistent or incomplete diagnoses.
The renovation market remains rather fragmented and mostly dominated by small and local players:
Quote aggregator websites such as 123devis.com or etravaux.com are other important new players. They propose quotes from different players located in an area chosen by the customer. These websites provide visibility to local players and disintermediate the relation between customers and companies.
Renovation has been a hot topic in Germany for a couple of years. The German government supports building projects, which plan to exceed energy standards in new or renovated buildings, with about €2 billion each year. In 2013, this support generated private investments of more than €4 billion.
The objectives of the German Government are:
The Market for Home Energy efficient renovations in Germany is significant since 40% of the energy consumption comes from the buildings and 75% of buildings in Germany were erected before 1979. This significant amount of old buildings constructed before the First Thermal Insulation Ordinance, underlines the need of energy-related modernization in Germany. As a consequence, almost 3 million apartments and more than 1,400 municipal facilities have been renovated or energy-efficiently rebuild since 2006.
Nevertheless, the development of this market suffers from certain barriers: Germany’s regulations seem relatively strict compared to the other countries: the performance requirements applying to each “refurbished elements” are particularly high. Despite various efforts, at different levels and among various players, to provide information and to raise awareness of energy efficiency. The end-consumers are still lacking knowledge on:
Besides the end-consumers, even the professionals are missing expertise in this field, especially when it comes to diagnosis. Apart from a lack of information in some areas, there is often no incentive to invest in energy efficiency measures.
Approximately 60% of the Germans live in rented accommodation and thus support the energy costs. Therefore, the owners of these accommodations see no “economic” need to invest. The implementation of measures is often blocked by a lack of financing options or an over-long return on investment. Low price expectations prolong this period until the differential investments in efficiency technologies pay for themselves in comparison with the baseline technologies.
The uncertainty about future developments is also a hindrance to implement energy efficiency measures. Volatile energy prices and the accompanying expectations may have a major influence on the deployment of energy efficiency measures.
Alongside the challenges described above, there are legal aspects (such as the tenancy regulation of energy-related modernization projects in balancing financial incentives for landlords against protection of social housing tenants), planning laws and energy management conditions affecting the generation and distribution of energy.
The market for home renovation has a potential of 1.44 billion euro if all viable houses were to be converted. This market is not developing rapidly on its own and therefore the government is a large stimulator for consumers to renovate. Measures are hence being set up such as low interest loans and value added tax relieve (15%) on renovations. This lower VAT rate for renovation counts only for houses older than 2 years, but this measure has been reversed since the 15th of July 2015. Moreover, the rate stays to exist for only painting, stucco and isolation jobs. These measures are influencing consumers’ decisions toward renovation. On the other hand, there are also barriers such as price distortions by subsidies, a lack of consumer potential awareness and legal issues concerning financial constructions.
In conclusion many Dutch houses have a high energy savings potential. This, in combination with the European measures for reducing energy consumptions, creates new market opportunities. In the last few years new legislation and new business models have emerged. However the market remains challenging e.g. due to lack of consumer interest, information transfer and complicated technological aspects.
The following three drivers are responsible for the current renovation market situation: The housing stock, the legislation and the market actors:
The market is still subjected to several factors:
Natural gas is the primary source of energy used in domestic dwellings in the UK, accounting for 67% of total domestic energy consumption in 2013, primarily due to its use for space heating. Natural gas use has therefore been the focus of UK domestic energy efficiency policy. This focus has led to the fall in mean (weather adjusted) domestic gas consumption of 12% between 2008 and 2013, whist dwellings have, on average, become warmer.
This reduction in gas consumption has been achieved primarily through the tightening of building regulations, incentivizing homeowners to make energy efficiency improvements and placing obligations on energy suppliers to reduce the consumption of their customer base.
The Building Regulations 2010 require that energy efficiency standards be adhered to in most newly constructed domestic properties, as well as most domestic properties undergoing extension. This therefore requires homeowners to undertake domestic renovations to their property when building extensions, improving the energy efficiency of the existing housing stock. The energy efficiency requirements of building regulations are wide reaching, covering areas including the efficiency of boilers, the insulation of pipework and the efficiency of electrical devices, such as lighting. Incentive schemes, such as the Green Deal can be used to meet the requirements of the Building Regulations, reducing the costs incurred by homeowners.
The Green Deal acts to incentivize home owners to undertake one or more of the 45 named domestic renovations, improving their energy efficiency. The Green Deal consists of two components: Green Deal Finance and The Green Deal Home Improvement Fund.
Green Deal Finance was launched in January 2013 and offers homeowners loans in order to make renovations. Renovations are eligible if the loan repayments, which are recouped directly from the customer’s energy bill, are projected to be less than the value of energy efficiency savings thereby saving the customer money. However, high interest rates of around 7%, when commercial loans were typically available to homeowners at lower cost, has led to a low uptake of this scheme. Therefore, The Green Deal Home Improvement Fund was introduced.
The Green Deal Home Improvement Fund provides a prescribed discount or ‘cashback’ on home renovations. These renovations must be carried out by a registered installer, paid for by the homeowner and then the cashback claimed by the homeowner. For example, a homeowner upgrading to a condensing boiler can, from December 2014, reclaim £270 (€380). Registered installers include all the major energy suppliers, large builders, home renovation specialists and even local tradesmen.
Domestic renovation is a promising market in Europe. A large majority of buildings were built before the 70s with bad energy performances. While all countries included in the analysis have been making efforts to promote this market, there are still discrepancies.
Table 1: overview of the main policies and measures impacting the domestic renovation market
The main drivers of the domestic renovation market in Europe have been the energy policies supported by governments (listed in Table 1). European governments saw in the domestic renovation one of the solutions to meet their carbon targets. They set long term strategies for this specific emerging market and started to incentivize it through loans, low interest rates… French and German governments appear to be the most involved but the German one has been imposing stricter regulations than its neighbours.
On the company side, small entities are mostly dominating the domestic renovation market. Larger companies have started to invest on installation and maintenance of heating systems (apart from Germany) but struggle to enter the insulation market. Every country lacks professionals with strong expertise on renovation; they often produce incomplete or inconsistent diagnoses. With the exception of Germany, in every country, energy suppliers have shown interest for renovation.
Table 2: quantitative data on residential buildings and expenses
Sources: USP Marketing Consultancy, European Home Improvement Monitor & Ministry of the Interior and Kingdom Relations, Housing Statistics in the European Union
In terms of demand, Germany and Belgium seem to have the largest potential. They are the two countries with the most significant share of buildings erected before 1970. Looking at the average expenses €/households, Germany and Belgium had also the highest expenses in 2013 (see Table 2). Nevertheless French and UK customers showed a similar interest; only Dutch customers showed a lower interest. However from a general point of view, there is still a lack of involvement from customers in every country. The main barriers are the same for the countries analysed and are related to the customers’ journey. They often require more guidance and struggle to find coherent information on a renovation solution for their home. Besides, most customers are insufficiently aware of the potential gains of saving energy.
Table 3 presents a general comparison on the domestic renovation situation of each county included in the analysis.
Table 3: qualitative overview on domestic renovation
Under the yoke of governments, every country has shown an increased interest in domestic renovation. There are still some barrier to address – especially by facilitating the customer journey with easier and wider access to information and more coherent renovation solutions. However each country has its own specificities and there is no single way to address these barriers.
A key factor for promoting domestic renovation is the implication of companies on this market. Many companies have seen in renovation a new attractive market. This is especially the case for some energy suppliers who are looking for new business opportunities.
The following chapter of the article orients the analysis towards the position and the role of energy suppliers on the domestic renovation market.
While there are no specific laws or regulations targeting solely energy suppliers regarding home improvements, an interest from their part in energy efficiency topics has emerged over the last few years. However, their involvement in that area differs, with smaller energy suppliers taking the lead as the following examples show:
On the one hand the potential for energy efficiency home renovations is relatively high (due to the average age and energy efficiency of buildings, ownership rate, etc.), but on the other hand that market is: different in terms of expertise required and activities performed, very fragmented in terms of actors and on top of that the incentives from the government are decreasing.
Although the energy market is dominated by the historic player Electrabel, with two challengers emerging for some years (EDF Luminus, Eni Gas & Power), the smallest players are the ones that are the most active on the energy efficiency renovation market (Lampiris and Essent).
The model developed until now is focused on partnerships. More concrete, an intermediary company takes up the role of “Single Point of Contact” for the clients and this for a wide diversity of energy related topic, from energy supply to energy efficiency renovation. For the execution of the construction works, partnerships with construction materials suppliers (e.g. Knauf) and numerous small construction contractors are established. One major advantage of this strategy is that, compared to setting up a network of construction contractors, the necessary investments are relatively small.
The POPE Law, passed in 2005, is the main driver of energy supplier’s growing interest in the renovation market. This law compels energy suppliers to encourage customers to invest in energy saving solutions. Energy suppliers can be both, technical expert and financial investor. Energy suppliers can propose technical support, guide their clients towards the right partners or propose funding for renovation measures. In return of the proof of the customer’s investment, they receive certificates which enable them to pay reduced carbon taxes. Each energy supplier can choose its own approach to encourage customers investing on home improvement.
Energy suppliers started to promote renovation in France at the end of the 90s with the historical players EDF and ENGIE. With the liberation of the energy market in 2007 new energy suppliers entered the French market and some of them have chosen to enter the renovation market. Table 4 shows it is mainly gas suppliers which are focusing on the domestic renovation market.
Table 4: French energy suppliers with involvment on the home renovation market
Most of energy suppliers only provide information about renovation on their website – sometimes with an online energy performance assessor – or provide funding through low interest loan for renovation service (see Table 5). Some suppliers help the customer defining its project and put him in contact with professionals. However, only EDF and ENGIE who are holding more than 90% of the power and gas market shares in France, have subsidiary companies acting on the renovation market:
Table 5: renovation services proposed by the different energy suppliers
There are real barriers for small energy suppliers to enter the renovation market. It requires a strong capital position but also legitimacy which they often lack, unlike EDF and ENGIE. These elements partly explains why only the two historical players have been proposing renovation services directly through subsidiary companies.
In Germany, leading Energy Providers such as EON, RWE or EnBW don´t significantly promote domestic renovation, which is mainly due to a lack of credibility for utilities in the market of home renovation actors (single households) and to the missing sales channel to reach out to customers for such projects – finally the decision for which kind of project (vast variety of fundable project types and techniques) depends on the single household.
There are a variety of funding opportunities from the KFW-Bank, from the Federal Office for Economic Affairs and Export Control (BAFA) which is a superior federal authority subordinated to the Federal Ministry for Economic Affairs and Energy (BMWi), and also from the states and municipalities. However, due to the German market situation, the regulatory framework, the limitations and market barriers, there is unfortunately no significant support from Energy Providers, who seem to evaluate the Home Energy Efficient Renovations as a not very lucrative market niche.
As a result, the main actors in the insulation market in Germany are small and medium-sized regional enterprises. Utilities would have to build skills and sale channels as well as reputation to start investing on the domestic renovation market. Moreover, one of the biggest barriers to enter the efficient renovation market remains the cost structure of a Utility, which considerably has higher proportions of fixed costs compared to a private and more flexible handcraft that doesn’t have to invest that much.
Currently large energy suppliers are losing customers and so are obliged to look for new opportunities and market offers. One of these new business models that energy companies are exploring, is offering loan constructions to consumers to renovate their houses. The idea is for consumers to payback these loans through their energy bills. The benefits for the supplier largely concern lower customer retention, as there is a very high severance fee preventing the customers from switching suppliers. From the consumer perspective, they are enabled to contribute to overall energy goals and get their house renovated.
The market of energy suppliers (both electricity and gas) is quite scattered. Approximately 75% of the market share is owned by three suppliers. Only one of these three is currently looking into possibilities to offer the loan construction. Smaller suppliers do, however, have similar constructs for consumers and businesses. If energy suppliers would become (small) financial institutions, they are entering a challenging, heavily regulated market and therefore have to partner with existing financial firms, which in turn lowers the margins. Additionally the suppliers lack the capacity to perform these renovations and they therefore collaborate with local home insulation companies and their overarching organizations (e.g. ‘Na-isolatie bedrijven’/VENIN).
Independent from the energy suppliers, and therefore in direct competition, many (third) parties have teamed with the VENIN (Vereniging van Erkende Na-isolatiebedrijven in Nederland) to independently provide services and energy suppliers have to incentivize consumers to engage them for a long term relationship. Therefore suppliers are offering (simple) wall insulation services.
Despite the estimation of the market size, construction companies/energy suppliers have not tapped its full potential yet. Current regulations also insure the quality of renovation advice from third parties. Entities providing advice to consumers about their energy label have to be BRL 9500-01 certified.
In the UK obligations are placed on energy suppliers with over 250,000 customers to improve the energy efficiency of domestic consumers. Historic schemes, such as CERT (Carbon Emissions Reduction Target) led to energy companies offering customers free loft insulation and energy efficient lightbulbs.
The current scheme, known as ECO (Energy Companies’ Obligation) is composed of three strands: CERO (Carbon Emission Reduction Obligation), CSCO (Carbon Saving Community Obligation) and HHCRO (Home Heating Cost Reduction Obligation). Each of these obligation requires suppliers to target a specific customer group, such as customers on certain benefits, in ‘hard to treat’ postcodes or those without access to mains gas.
Whilst energy companies have specific delivery obligations, based upon their domestic market shares and performance in historic schemes, the way in which delivery is carried out is left to the energy supplier in order to encourage them to find innovative and efficient methods of delivery. Brokerage therefore exists to auction the contracting out of suppliers’ obligations to independent installers and suppliers also carry out work directly.
Estimates of the cost of ECO, vary greatly but in 2013 DECC (Department for Energy and Climate Change) suggested a cost of £1.3bn per year or £50 per year per domestic customer which is then passed onto customers’ bills. This was one of the lowest estimates available at the time, but led to the extension of the scheme from its original end date of March 2015 to March 2017 (a period sometimes referred to as ECO2) with revised obligations and revised measures eligible in each of the three strands. These changes will have reduced the cost of ECO during the 2015 – 2017 extension. DECC is currently consulting on future obligations beyond 2017.
In addition to reducing carbon emissions, these same large Energy Suppliers are obligated to participate in schemes intended to promote micro-generation of renewable energy, including the FiT (Feed-in Tariffs) and RHI (Renewable Heat incentive) schemes. These schemes provide payments to customers for generating electricity or heat from renewable sources. Payments are administrated by energy suppliers and the cost passed onto customers through their bills.
The role of energy suppliers within the home renovation ecosystem differs significantly between countries in Europe. However, it seems that all suppliers are giving attention to this topic. Looking at the market share of energy suppliers, most of the countries where the analysis is conducted, are dominated by 2 or 3 suppliers for both gas and electricity. Also regulations per country has impact on whether an energy supplier is interfering with domestic renovations.
For example in Belgium the conventional supplier is raising awareness and providing advice to consumers about heating systems whereas smaller suppliers are acting more as intermediate parties between customers and construction/renovation companies. They offer administrative services to customers.
Germany seems the only country where energy suppliers are not actively promoting home renovation. Suppliers lack central funding and no sales channel to propose any offerings towards customers. However conventional financial institutions such as banks but also local municipalities are providing funding.
Energy suppliers in France encourage customers to invest in home energy saving by offering technical support or redirection to one of their construction partners or even propose funding. This last approach is also being explored in the Netherlands, consumers are (not yet) able to receive funding from one supplier. To pay back the loan to the supplier, it is due discounted bills for energy. Since the supplier will act as ‘financial institution’ where funding is provided, other regulations apply. It is interesting to see that in France this is not specifically the case and implies a competitive advantage.
The United Kingdom shows direct interference from the (local) government by obliging energy suppliers with over 250.000 customers to support energy efficiency. Also they have been involved through a carbon emissions reductions target, to supply customers with these measures. It seems that delivery of these obligations encourages the energy suppliers to find innovative ways to deliver added value.
All energy suppliers in analysed countries seem to understand the potential value of offering secondary services directly towards consumers, which are not directly beneficial because they are different from selling energy (e.g. electricity or gas). Therefore suppliers have to look into business models that are different from their current. In the end, they seem to understand that there is money to earn and try to gain a piece of the pie.
According to the analysis carried out, governments have often been the first responsible for the interest in the domestic renovation market in the last past years. They started promoting renovation in accordance to their environmental strategies. They used different drivers such as regulations – compelling in some countries energy suppliers to promote domestic renovation – or subsidies.
In addition, domestic renovation is a promising market. Many houses were built before the 70s and have bad insulation properties. Some companies have seen an opportunity in this market and new players are proposing renovation services. Encouraged by subsidies customers have also started investing on a renovation solution for their home.
However, despite the potential of this market, some barriers slow down its growth. On the customer side, they are mainly related to the level of information available and the difficulty for end-consumers to access it. On the companies’ side, professionals often lack of expertise and struggle to propose a consistent diagnoses to customers.
Among the country included in the analysis, Germany is the only one in which energy suppliers are not actively promoting domestic renovation. In the other countries, energy suppliers have been taking action to propose renovation services to end-consumers. The reasons differs. For instance in France and in the UK governments compel energy suppliers to promote domestic renovation.
Most of energy suppliers in Europe have not yet dedicated a full part of their activity to the renovation market with a subsidiary company for instance. The renovation services they propose mostly include raising awareness, providing advices, acting as intermediate parties between customer and constructors or providing funding. Overall, putting aside the case of Germany, it looks like most energy suppliers show interest for the domestic renovation market but there is still room for improvement in term of their implication.
Emmanuel Autier, Associé
Marion Schulte, Associée
Isabelle Viennois, Senior Manager
Bopha Jumelet-Sok, Senior Manager
Vincent Boumier, Mananger
Obbe Verheul, Senior Consultante
Julien Bos, Consultant
Eva Van Isterdael, Consultante
Chris Mutsaerts, Consultant
Roel Stijl, Senior Consultant
Hassan Megdiche, Consultant
Henry Abbot, Consultant