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Make a game-changingimpact – before the others doThe impact of digitalization indistrict heating12/2016

© 2016 Deloitte & Touche Oy, Group of Companies. 2Source: Customer interviews

Major actor inreal estate

-We introduced a major 5-year energy changing project, andwe achieved a 6-year payback period- What role did heating companies play in the project?

-None whatsoever.

- Why not?

-Good question... It did not even cross our minds that theywould have the knowledge or interest to help us saveenergy...

© 2016 Deloitte & Touche Oy, Group of Companies. 3

Digitalization is speeding up the transitionSummary

The role of digitalization in the operating environment of district heating suppliers

The changes currently taking place in the operating environment present district heating companies with both opportunities and threats. One ofthe trends affecting the district heating business is digitalization, which will change the ways of workingbusiness models, services and productsas well as the customer experiences. Besides digitalization, the operating environment and business operations of district heating suppliers areaffected by the improved energy efficiency in buildings and better access to alternative heating methods, both of which continually reduce thedemand for heating energy. The major wave of modernization, which will shake the basic structures and business models, is yet to come.

Change in customer behavior

Changes in customer behavior will drivechange in the way businesses work –digitalization will bring new methods tomeet the changing needs.

The impact of digitalization

digitalization affects the value chain in thedistrict heating business every step of theway – competition in the field will becomestiffer

Opportunities created by digitalization

digitalization will createa broad rangeofopportunities from improved efficiency tocomplete transformation of the businessoperations

• Above all, customers value easy solutions and aretypically not interested in actively communicatingwith the energy supplier.

• Customers wish for a professional partner whocan offer easily accessible overall solutions

• Other key motives behind customer behavior arereliability of operations, securing requiredoperating conditions and the clarity of servicecontent and pricing

• The unmet needs of district heating customerscreate a vacuum which can be filled by variouscompeting operations, such as energy efficiencyconsultants or providers of alternative heatingmethods

• digitalization will speed up the ongoing transitionin district heating – a key role in the competitionbetween different methods of heating will beplayed by the actors’ capacity to leverage theopportunities presented by digitalization

• The amount of knowledge will increase withdigitalization, and so will customers’ awareness ofavailable options and the likelihood of customersseeking higher energy efficiency and switching toanother method of heat production

• Highly developed technologies are withineveryone’s reach and real-time data related tothe supply and consumption of heating will bemore readily available than ever

• Blockchain technology and AI enable thedevelopment of smart, distributed networks

• digitalization can be leveraged in– the development of customer experience

and in engaging the customer– the creation of new business models,

products and services– improving the efficiency of and optimising

the core business– Improving the efficiency of and optimising

the support functions• digitalization supports the emergence of new

roles and business models with district heatingcompanies, other operators in the field andexternal third parties

• District heating companies must select theirdigitalization strategies to drive the change –listening to the customer, the company’s cultureand an experimental approach are key

District heating companies must decide on their role as the demand for heatingenergy decreases and the availability of alternative heating methods improves


Digitalization as thedriver for changeWhat does digitalization meanin general?


Digitalization

Digitalization refers to development powered bytechnology. Digitalization changes the way we behave andoperate, the way the customer experience is formed,business models, services and products. Digitalizationaffects the competitive positions and breaks downtraditional barriers between business segments.

Digitalization makes things easier and faster. More andmore tasks can be automated thanks to technology,without the need for human, manual input.

Source: Deloitte analysis


“There is no doubt that new servicesare on their way in.

We need to cannibalize our own business by offeringenergy saving services. If we don’t do it,

somebody else will.”

Source: Expert interviews

District heating company


Digitalization is one of the strongest trends affecting thedistrict heating business

Digitalization driving change

Digitalization

Rising environmental values

Regulation concerning new constructionproduction and renovation

Improving energy efficiency

Regulation on district heating industry

Availability and price of alternative heating systems

Climate change and carbon-free future

Distributed generation

Changes in the business environment… …create challenges and opportunities fordistrict heating companies

How can digitalization help to addressthese challenges?

• Where we can find growth in the future? Have weinvestigated all relevant options?

• What do our clients really need now and in the future?

• Are we able to improve our competitiveness? Arewe able to maintain our current clients?

• What should we prioritize?

• What won’t we need in the future?

• Who are our main competitors? Will there benewcomers or substitutes in the market?

Urbanization

Developing energy technology



Utilities are still a little way off the pace in digitalizationDigitalization driving change

MediaDigital has changed the way media are produced, distributed and consumed, and how theconsumption is monetized – e.g. Spotify and Netflix.

RetailLarge players, such as Amazon, have broadly utilized digitalization, and generally onlinechannels have become a must-have for retailers. Fresh products’ e-sales are increasing.

Telecom, Financial and Professional ServicesIn addition to IT, Telecom has been a major enabler in digitizing other sectors. Financialand Professional services rate digital high on their agendas, not least because of disruptingstartups.

LogisticsSupply chain optimization is developing, powered by connected vehicles and goods, butautonomous means of logistics and crowd platforms are still at a very early stage.

HealthcareThe industry has digitized some core operations, but e.g. new business models are stillemerging. Some promising startups have gained publicity.

UtilitiesVery few steps taken towards extensive digital business. Some ‘smart’ meters are installed,but the utilization of the data and customer relations is still narrow. Focus on internaloperations.

Public ServicesBecause of the non-competitive scene, not much effort is generally made in digital.However, the cost saving potential has driven some services to be digitized.

Digital impact

Digital maturitySources: Deloitte University Press, Deloitte analysis


Long-term success may prove a hindrance to development –the energy sector has its own cross to bear

Digitalization as the driver for change

District heating operators mayhave qualities ...

...that have proved a disadvantagein other sectors...

...when disrupting startups relying ondigitalization have entered the markets

High switching costs have prevented a rapid loss of customers in the districtheating business – the stagnation of district heating companies will, however,

create a vacuum asking to be filled by (digital) disrupting startups

Good resources

Market leadership

Decades-long planning periods

Good, controlled profits

Natural monopoly

Internal rigidity

Slow innovation



The needs of district heatingcustomersWhat do district heating customersvalue and need?


The change in customer behavior drives business sectorstowards change – digitalization provides a tool to respond tothe changing behavior

The behavior of district heating customers

The make-or-breakcustomer experience

An interactive customer experiencemay either consolidate a customer

relationship or destroy it

Tailored servicesCustomers expect clearly packaged

service experiences that are aspersonalized as possible

The importance of impressionsPurchase decisions and customer

loyalty are increasingly strongly basedon image and impressions

Shift in powerThe power is being shifted to an

increasing degree to the customers(e.g. ownership and use

of customer data)

Emphasis on the social aspectThe selling of products and services has

gained a strong social dimension

Blurred boundariesExpectations of the level and quality of

services are constantly increasing –comparisons are made

across sector boundaries

digitalization not only affects customer behavior and expectations, but also provides tools for the development of thecustomer experience, business models and service offering.

In the development work based on opportunities offered by digitalization, three issues are vital:1. The product/service must be desirable from the customer perspective.2. The product/service must be technically feasible.3. The product/service must be financially profitable.

District heating companies must be aware of their customers’ everyday lives and identify the thingsand activities that customers are genuinely interested in and prepared to pay for.



Segmenting is based on the motives related to customers’heating service preferences, such as reliability and price

The segmentation of district heating customers

In the analysis of customer needs, district heating customers are segmented according tothese motives. The question asked in this analysis is, “What key motives* does the customerhave regarding district heating? And how should these needs be prioritized?”

Energy seller(the traditional

role of a heatingsupplier)

Building managers,management companies,

property service businesses

Businesses,industry,entrepreneurs

Housingcompanies andsingle-occupanthouses

The elements of the communication between energy seller and customer in the current situation

*) Motive = the reason or rationale behind an action. Sources: Customer interviews, Deloitte analysis

Publicorganizations

In a typical set up, a heating serviceoperative stands between the energy seller

and the end user, whose role hastraditionally been to make sure that

heating is supplied without problems.

The end user is normally not interested in actively engagingin dialogue with the energy seller

End users (district heating customers)

The steering of theheating service operative(e.g. buildingmanagement company)mainly takes placethrough commissions andsanctions

The heating serviceoperative (e.g. buildingmanager, managementcompanies) also hold aconsultative role


KEY FINDING FROM THE INTERVIEWS:

Customers want a professionalpartner who can offer easily accessible

overall solutions.

Individual digital services, such asusage monitoring, are interesting butdo not provide significant added value

to the customer.

Source: Customer interviews


Summary of the identified needs by segmentThe needs of district heating customers

CUSTOMERS ARE PARTICULARLY INTERESTED IN: CUSTOMERS DO NOT WISH TO BE INVOLVED IN:

• Securing reliability – customers are prepared to pay tominimize risks to their business operations

• Securing health and safety – customers approach (businesscritical) operating conditions as a whole, and heating is just onefactor among many

• Open communication and true partnership – customers areprepared to invest time in optimizing the heating supply, butneed the assistance of a professional and profitable partner inthis

• Securing health and safety – customers approach (businesscritical) operating conditions as a whole, and heating is just onefactor among many

• Professional consultation on the status of propertiesbased on benchmarking – customers are interested incomparative data for facilities and properties

• Manual adjustments & optimization – customers are not preparedto spend time on heating optimization

• Heating method – instead of heating methods, customers need todiscuss what the different heating operatives can offer them throughtheir services

• Raw consumption data – customers are interested in finalconclusions


• Individual solutions – customers want clear and easy solutions thatinclude the entire property stock under their management

• Provider-dictated pricing – customers want more influence over theuser costs of heating services

• Transparent overall solutions – customers want to see theirheating services presented in concrete, plain language

• Overall economy – customers want to understand the effectof the services they have selected on the annual userexpenditure in the long run

• Flexible solutions – customers are concerned about vendorlock-in and want to reserve the right to reorganize their heatingservices in a different way in the future

• Overall responsibility for heating services – customers want apartner to assume the responsibility for the implementation andoptimization of the heating services

• Decision-making & competitive tendering – customers are notprepared to make decision on heating services without the necessaryknowledge about the field


Sources: Customer interviews, Deloitte analysis

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The impact of digitalization ondistrict heatingHow will digitalization change theoperating environment for districtheating suppliers?


Actors

Examples ofthe key

effects ofdigitalization

Key trends indigitalization

Sources: Customer interviews, expert interviews, Deloitte analysis

District heating consumption District heating distribution District heat production

Sales Consumption

District heatingand cooling networks

District heatingand coolingproduction

Fuel productionand transport

The generalvalue chain

in DHCustomerservice

Analyticsand big data

IoT(smart cities,

connected homes)

AugmentedrealityAI Blockchain

technology RoboticsMobile devices

and user-orientedmobile services

Network management, designers,contractors, housing companies andcomponent suppliers

Fuel and district suppliers, logisticspartners, facility designers, contractorsand component suppliers

Customers (households, housing companies,business premises, industrial facilities, publicorganizations), building managers, technicalbuilding services providers etc.

• Customers’ increased demands forservices (personalization, added value)

• The increase in the demand and use ofdigital self-services

• Increased transparency andcomparability of prices

• Lower threshold for switching heatingmethods and suppliers

• The increasing amount of data to becollected and utilized, more complicateddata management and higher demandfor knowledge-based services

• The greater importance of customerexperience and customer engagement

• Modelling and analytics in networkdesign, investments and contracting

• Remote control and monitoring of thenetwork and substations

• Predictive servicing and maintenancethrough sensors and analytics

• The introduction of mobile systems inmaintenance management

• The optimal management of networkload including local heating supplies

• Optimized fuel deliveries and supplybased on consumption and weatherforecasts

• Predictive servicing and maintenancethrough sensors and analytics

• Leveraging data and analytics in thescheduling of investment

• More efficient energy trading• The development of new revenue

models, products and services• digitalization of all support functions

(incl. invoicing, payment collection,payroll)

Digitalization affects the value chain in the district heatingbusiness every step of the way

The impact of digitalization on district heating


Digitalization increases competition between heating methodsand the growing service business operations within the field

The impact of digitalization in district heating

Sources: Expert interviews, Deloitte analysis

Technology productioncosts will grow smaller

Customers are offered several alternativeproduction methods and better possibilities for

optimizing their consumption of heating

Information about alternativesis more readily available

The threshold for switching productionmethods,

suppliers and service providers becomeslower

AI and blockchain technologyenable smart distributed networksCustomers will benefit from easier pricecomparison, purchasing distributed energyproducts and smart meters

Expectations for customerexperiences come as a given todistrict heating companiesThe level of customer expectation is based oncustomer experiences

Ecosystems and networks havemore to offer to customers andheating suppliersThe operating model typical of the digital eraenables the expansion and new optimizationof the business operations of district heatingcompanies

Real-time data ismore widely available

Accumulating the awareness of customerneeds using analytics, fulfilling customer

needs using analytics (service content, timingof service offering)

= alternative heating methods = services available to users (district heating service business operations)

New products and servicesService and product portfolios will continue to expandbeyond traditional heat supply and sales, competitionwill no longer be limited between different forms of

heating


Opportunities created bydigitalizationWhat type of opportunities doesdigitalization open up for districtheating companies?


The four interrelated areas with digital potential for districtheating companies – focus on customers, enabled by digitaloperations

Customerexperience &engagement

New businessmodels, products

and services

Core operationsand costs

Back officeoperations

“Broaden the view” “Enhance the performance”

Source: Deloitte insight

digitalization enables the building ofa fully digitalized service path and apersonalized multichannel customer

experience

digitalization enables a deeperunderstanding of customers’ needsand changes in the earning logicand pricing models in business

operations

digitalization enables a moreefficient optimization of productionand the distribution network as wellas a better timing of investments

digitalization enables processesbased fully on electronic data

management and a higherautomation rate


Digitalization will create a broad range of opportunities fromimproved efficiency to complete transformation of the businessoperations

Opportunities created by digitalizationIM

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WIDER PERSPECTIVE – developing customerexperience and service offering

Full transformationChanging the operating environment and role of the company.Lateral thinking when envisaging services, products and revenuemodels and superior operative efficiency through leveraging theopportunities offered by digitalization.

First steps towards the newIdentification of new business opportunities and the ongoingstreamlining of current business activities. The margins in a newbusiness operation may be high, and the volumes lower, comparedto traditional business operations.

Controlled developmentImproved efficiency and profitability through the digitalization ofsupport and core functions. Serves as a basis for more broad-based development of operations. Profitability may improve, butnew business is not created.

Accelerating changeThe fullest possible automation in business operations and use ofdata in all company activities (insight driven organization). Thecannibalization of traditional business operations will speed up andnew revenue models become established.

Sources: Deloitte analysis

Limited development Full transformation


The identified needs of DH customers serve as an incentive forcompanies to undertake a complete development of theirbusiness operations


Transparency, overalleconomy

Digitalization of core andsupport functions,

electronic datamanagement, transparentpricing in the tenderingprocess, real-time andreliable reporting to the

customer

Overall solutions,professional partners,

true cooperation

Expansion into newservices and fields,

responding to an everwider range of customer

demands with thecompany’s own service

portfolio

Desire to expand therole of the consumer ofheating to include the

supply of heating

Identification of the newrole and new business

opportunities in adistributed digital multi-

supplier network

Clearly defined,accessible added value

services

Customer-orientedservice development,leveraging data-based

customer analysis,understanding customer

needs, packaged services,CRM

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Digitalization creates development paths that DH companiestowards new roles in a changing operating environment


Using individual remotely read meters for each dwelling/facility. Collection ofcustomer and consumption data. Leveraging technology in support functions.1

District heating offered as a turn key service by expanding business operationsinto maintenance and servicing.3

2 Data is collected from systems, customers are offered reporting andautomated notification services. Collected raw data are sold to third parties.

Added value created for customers through forecasts and dynamic occurrencereporting and the possibility to make comparisons with other properties.5

4Data sourced from the network, production, usage and weather conditions arecombined, which helps achieve superior efficiency and predictable propertymanagement and maintenance.

Consumption data are used for consultation in energy saving though systemoptimization and structural repairs.6

Sell to customers what they care about the most: the operating condition. Anoperating condition may be priced with a flat monthly rate.

7 Serve as operators in a dynamic multi-supplier consumer network based ondigitalized optimization and contracts

8

Create a service platform for housing with service providers offering their ownapplications and services.9

1

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4 7 9

SUPERIOREFFICIENCY

SELLING FACILITYCONDITIONS

SMART LIVINGECOSYSTEM

MANAGEMENT

digitalization OFKEY FUNCTIONS

AND SELLINGDATA

TO EXTERNALPARTIES

PROGRESSIVEDIGITAL SERVICES

DYNAMIC DIGITALHEATINGNETWORK

CONTROLLEDDEVELOPMENT

ENERGYEFFICIENCY

CONSULTATION

DISTRICTHEATING AS A

TURNKEYSOLUTION

Development trends supported by digitalizationLimited development Full transformation


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WIDER PERSPECTIVE – developing customerexperience and service offering


Digitalization emphasizes the change in the roles of differentoperatives and the new opportunities now available to newproviders


Digitalization supports the emergence of new roles and business models with district heatingcompanies, other operators in the field and external third parties

End users will serve asheating suppliers andsellers to an increasingextent.

Customers are looking for partners whocan give them an easier everyday life,more stable conditions and better cost-efficiency. The role of the service provider(e.g. energy efficiency, heatingmanagement) may be taken by serviceproviders with expertise (incl. somebuilding management companies) orheating companies.

The role of the technical operatives(those concentrating on energy systemmanagement) will reduce. Variousplayers will increasingly be taking theoperative role. Larger operatives (e.g.building management companies) candevelop their expertise if they so wishto be able to offer a wide range ofbuilding technical services.

Heating suppliers can freelychoose their future role: theymay remain pure heating energysuppliers or expand their serviceoffering into new servicesegments and enter into closerinteraction with end customers.


Energy sellerBuilding managers,

management companies,property service

businesses

Businesses,industry,entrepreneurs

Housing companiesand single-occupanthouses

The elements of the relationship between energy seller and customer in the future

Publicorganizations

End users

Specialized serviceproviders


Sources

Customer interviews Sector and expertinterviews Public sources Deloitte’s experience

• The customers of districtheating companies

• Consumers and businesseswho have selected anotherheating method

• District heating and energycompanies

• Component suppliers fordistrict heating networks

• Big data applicationproviders

• Energy management expertcompany

• Energy expert, adjunctprofessor

• Company websites

• Sector reports

• Academic studies

• Deloitte studies

• Deloitte analysis

• Deloitte’s expertise andexperience in other fields

Contact detailsJenni Männistö Anne GrönbergManager, Deloitte Partner, [email protected] [email protected]

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In Finland, Deloitte & Touche Oy is the member firm of Deloitte Touche Tohmatsu Limited, and services are provided by Deloitte& Touche Oy and its subsidiaries. In Finland, Deloitte is among the nation’s leading professional services firms, providing audit,tax, consulting, and financial advisory services through 450 people in 3 cities. Known as an employer of choice for innovativehuman resources programmes, Deloitte is dedicated to helping its clients and its people to excel. For more information, pleasevisit our website at www.deloitte.fi.

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© 2016 Deloitte & Touche Oy, Group of Companies.

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