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UTILITY WEEK | 12Th - 18Th SEpTEmbEr 2014 | 21 Finance & Investment S eptember brings the latest round of announcements by the consumer technology companies, which are now looking to develop smart homes. Should the energy utilities see smart thermostats, smart meters and smart appliances as a threat or an opportunity? The conditions for disruption in the retail energy sec- tor are obvious. Energy retail price structures are poorly aligned with costs and there is little information on or control over home energy use. In the next few years, information about usage will come via mandatory smart meters, while many homes now have Wifi networks and smartphones to co-ordinate appliances. Savings from heating or lighting rooms only when occupied or running appliances only when they provide a useful function could be considerable. But who will capture the value? Pricing structures and business models seem to favour the consumer tech firms. Energy utility revenues are collected mainly through unit prices, with the standing charge account- ing for less than a fih of the bill. If smart thermostats and appliances cut energy usage by 20 per cent, the con- sumer might cut 15 per cent from their bills, perhaps saving £200 a year. A £400 spend on smart tech could be paid back in two years. This could be a disaster for the utilities since most industry costs are fixed – they would lose 15 per cent in revenues but a fraction of this in costs. However, smartphone companies are unlikely to become energy retailers, given the regulatory hurdles, procurement challenges and risks of being exposed to volatile power and gas prices. The incumbent retailers have control over tariff structures, smart meter rollout and more capability of monetising consumer appliance load shiing as a form of peak capacity or balancing against intermittent renewable generation. The more important these factors become, the big- ger share of the value-added can go to the utilities and a partnership model might become more likely. Even then, branding and marketing remain a challenge for utilities – queues outside energy retail stores for product launches may be some time coming. Martin Brough, utilities equity analyst, Deutsche Bank "Should the energy utilities see smart thermostats, smart meters and smart appliances as a threat or an opportunity?" Investor view Martin Brough a 30-year deal to supply 38 billion cubic metres of gas annually. Eyebrows have been raised about some commercial aspects of this contract, but the price issue was also central to Gazprom's recent problems when gas spot prices fell well below long-term oil-indexed gas prices – in 2008, the discount was almost 50 per cent. The combination of the recession, cheap US shale production and recycled LNG – destined originally for the US – gave rise to much lower gas spot prices. With the majority of its shares held by the Russian state, it is no surprise that Gazprom's shares reflect prevailing political trends. Whatever the precise reasons, Gazprom's current share price has fallen to around one-third of its 2008 peak. And although the company has countered shareholder concern by highlighting the recent $300 billion (£190 billion) valuation of its energy reserves by renowned consultancy DeGolyer and Mac- Naughton (a figure broadly similar to Royal Dutch Shell's current market capitalisation), this formidable asset valuation is offset by a substantial net debt figure. Ironically, despite these figures, Gazprom's UK activities are decidedly mod- est, but it does run a business-to-business energy supply operation. In any event, stock markets are now more likely to focus on Gazprom's export business – and Russia's enigmatic politics – rather than rumours of any aggressive intent to buy a UK utility. Nigel Hawkins, director, Nigel Hawkins Associates 17% Share of the world's known natural gas reserves 13% Share of global gas production 30% Share of the European natural gas market 168,900 Kilometres of gas trunk pipelines in russia 659.4 billion cubic metres of gas transported in the trunk network in russia 38GW Installed generation capacity in russia thE biG nUmbErS natUral GaS SUppliES to EUropE, 2010-13 Supplies by major gas exporters 2010 2011 2012 2013 Gazprom (under long-term contracts) 138.6 150.0 138.8 161.5 Algeria (including LNG) 57.3 52.4 46.5 37.9 Libya (including LNG) 10.3 2.5 6.7 6.2 Qatar 32.9 43.9 31.3 24.8 Nigeria 13.5 18.1 12.1 7.5 Supplies by major European producers Norway 115.4 109.4 121.4 115.4 Netherlands 76.5 72.9 43.8 40.9 UK 64.5 51.1 72.6 81.5 other supplies 100.8 56.6 73.5 62.5 total 609.8 556.9 546.7 538.2 Gazprom SharE of EUropEan GaS markEt, 2010-13 2010 23% 27% 25% 30% 2011 2012 2013 Source: Gazprom Smartphone companies are unlikely to become energy retailers, given the regulatory hurdles