Experience from the liberalised UK energy market shows that it will be necessary for Energy Companies to make radical changes in their operations and seek advantages from technological innovations if they hope to survive in an aggressive competitive environment. The change from central control and monopoly to private ownership and competition has had a strong impact on the energy industry in the UK. The first response to competition was to radically reduce operating costs to meet the immediate demands of new shareholders by:

• Reducing manpower, in many cases by over 40%
• Minimising capital expenditure
• Reducing or eliminating routine maintenance
• Reduced marketing

Substantial cost reductions have been possible by the above measures due to earlier gross over-manning, over-capacity in generation and network assets and unnecessary revenue expenditure. However, there is a limit as to how long it is possible to obtain benefits through cost reductions and most Energy Companies in the UK are now considering more creative ways of improving their competitiveness. Experience has shown that it is not possible to continue with existing business and assume that your competitors will not take over your customers due to customer acquisition costs or customer loyalty or inertia. The reality seems to be that if you do not take over your competitors’ customers, they will take over yours. In the initial trial area in the South West of England that was opened up for competition, the local gas supplier (British Gas) lost over 25% of their customers in the first two years. It is estimated that between 25-50% of the consumers will switch energy suppliers nationally over the next five years, and that many Energy Companies will fail or be absorbed by more aggressive competitors.

Customers demand some tangible benefit in order to be motivated to change supplier. So how have the Energy Companies attempted to do this? Essentially they have become smarter in operational efficiency, customer service and marketing. UK experience indicates that there are three potential routes to success:

1. Price reduction
2. Added value services
3. Branding/affinity marketing

As far as price reductions are concerned, customers can in the future (as cost cutting eventually will reach its limits of practicability) only be profitably acquired if there is some technological or commercial edge over competitors. In this respect Micro CHP may be a very powerful tool. It provides Energy Companies with very high value kWh (based on generation profile and point of generation) and enables them to be sold to customers at a lower price, whilst simultaneously giving a higher profit margin. Moreover, it makes it easy to brand the energy (especially the electricity) that is sold to the customers as it is produced on-site and possibly through equipment owned by the Energy Company. Also, if the Energy Company owns the Micro CHP systems, it will obtain added value services by performing installation and maintenance. Finally, Micro CHP is the cheapest form of new generating capacity particularly if infrastructure costs are included in the calculations. Therefore, from an investment and operational perspective, Micro CHP offers significant competitive advantages. The competitive advantage it confers on the participants is however, seen from the outsider’s perspective, a significant threat to existing and future business. It can result in loss of customers and stranded assets.

Any viable market for Micro CHP requires an existing natural gas infrastructure and an installed base of natural gas fired domestic central heating systems (boiler + hot water distribution system). Viability is also determined by the ratio of the prices for electricity and gas, and is particularly enhanced by a high electricity price.

It is generally accepted that micro CHP in one form or another, will become established within the next 2-3 years, although the specific technology to be implemented (fuel cells, Stirling Engines, etc.) remains a matter of debate.

Whichever technology is adopted for micro CHP, Energy Companies need to understand the commercial and operational implications of its introduction. They should, therefore, undertake detailed studies and trials of appropriate systems in order to evaluate the consequences of micro CHP and formulate their own approach to succeeding in the face of this radical concept. Those Energy Companies who do not acquire the necessary competence at an early stage may face a powerful threat from aggressive micro CHP competition.