1

OCT OB E R 2 0 11
Winning the battle for the home
of the future
European utilities may soon have to earn a growing share
of their profits by helping households save energy rather
than consume it.
Giorgio Busnelli, Venkie Shantaram, and Alice Vatta
s u s t a i n a b i l i t y & r e s o u r c e p r o d u c t i v i t y p r a c t i c e
2
Energy consumption Is growIng more sIowIy In Europe us energy eIhcIency meusures
begIn Lo Luke IoId-und LIuL`s jusL LIe begInnIng. Our reseurcI IndIcuLes LIuL II seIecLed
exIsLIng LecInoIogIes were depIoyed Lo LIe IuIIesL by zozo, u new Iome couId consume
uround qo percenL Iess energy, wIeLIer gus or eIecLrIcILy, Irom LIe grId LIun IL does
Loduy. TIe opporLunILy Ior exIsLIng Iomes, wIIcI Iorm LIe mujorILy oI IousIng sLock, Is
subsLunLIuI Loo: cuLs oI Lo qo percenL couId be ucIIeved. (or more on wIuL LIIs enLuIIs,
Lour LIe InLerucLIve exIIbIL, TIe Iome oI LIe IuLure-demundIng Iess Irom LIe grId).
Energy uLIIILIes wouId LIus be IIL by Iower revenues und prohLs, boLI In reLuIIIng und
generuLIng power. or LIe IuLLer, murgIns couId IuII by o percenL In u scenurIo In wIIcI
new Iomes becume uImosL energy neuLruI. MurgIns wouId sLIII drop sIgnIhcunLIy-by cIose
Lo 1o percenL or more-In our Iess uggressIve depIoymenL scenurIos.
BusIness us usuuI wIII noL be un opLIon Ior mosL energy uLIIILIes. To cope wILI LIIs
dIsconLInuILy, LIey musL seek new sources oI revenues und prohLs In emergIng energy-
reIuLed busInesses. TIese IncIude buIIdIng IubrIcs (Ior exumpIe, rooI und wuII InsuIuLIon),
cenLruI sysLems (IncIudIng IeuL pumps und IIgILIng), uppIIunces und eIecLronIcs (energy-
eIhcIenL wIILe goods), smurL uppIIcuLIons (Iome ureu neLworks und energy sLoruge
devIces), udvunced meLerIng InIrusLrucLure, mIcrogeneruLIon (Ior InsLunce, smuII-scuIe
wInd LurbInes und soIur puneIs), und LIe deIIvery oI power Ior cIurgIng eIecLrIc veIIcIes, us
weII us hnuncIng, Insurunce, und consuILIng servIces.
Energy uLIIILIes, wILI LIeIr LecInIcuI compeLence In munugIng neLworks, see LIemseIves
us nuLuruI owners oI LIe meLerIng und InIrusLrucLure Ior cIurgIng eIecLrIc veIIcIes.
TIey ure uIso poLenLIuI pIuyers In mIcrogeneruLIon, energy-eIhcIenL producLs, und smurL
uppIIcuLIons, wIere LIey cun druw on LIeIr brunds, reIuLIonsIIps wILI energy cusLomers,
und knowIedge oI consumpLIon puLLerns. BuL In mosL oI LIese cuLegorIes, uLIIILIes Iuce
sLrong compeLILors, IncIudIng LecInoIogy und LeIecom compunIes und reLuIIers, us weII us
consLrucLIon und medIu compunIes.
Our reseurcI covers Iour counLrIes-Germuny, LuIy, Sweden, und LIe UnILed KIngdom-
LIuL combIned muke u good proxy Ior LIe Europeun murkeL.
1
L sIows Iow LecInoIogy,
reguIuLIon, und consumer beIuvIor ure IIkeIy Lo LrunsIorm LIe resIdenLIuI energy murkeL
In LIe comIng Len yeurs. To succeed In LIIs new envIronmenL, uLIIILIes musL pIuce hne-
gruIned beLs on LIe segmenLs wIere LIey cun besL creuLe vuIue Ior LIemseIves und deveIop
wInnIng cupubIIILIes beyond LIeIr LrudILIonuI busIness, oILen by seekIng purLnersIIps wILI
compunIes Irom oLIer secLors.
1
We cIose Germuny, LuIy, und LIe UnILed KIngdom becuuse LIey ure LIe IurgesL reLuII energy murkeLs In CenLruI, SouLIern,
und NorLIern Europe, respecLIveIy. We cIose Sweden becuuse oI ILs IuII peneLruLIon oI smurL meLers, wIIcI, InLeresLIngIy, so
Iur Iuven`L greuLIy sIIILed energy usuge puLLerns LIere.

A crowded marketplace
We Iound LIuL more LIun zoo compunIes Irom u wIde runge oI IndusLrIes, muny oI LIem
Ieuders In LIeIr segmenLs, ure operuLIng In LIIs murkeL, oILen us enLrunLs expIorIng wuys Lo
compeLe mosL eIIecLIveIy. Among LIese compunIes ure uLIIILy IncumbenLs movIng IusL und
seekIng Lo depIoy porLIoIIos oI producLs und servIces Irom busIc InsuIuLIon Lo sysLems LIuL
uuLomuLIcuIIy udjusL energy consumpLIon Lo LIe needs oI peopIe In Iomes. OLIer uLIIILIes
oIIer LurgeLed soIuLIons-Ior exumpIe, mIcrogeneruLIon-LIuL Iuve reguIuLory supporL
Irom governmenLs In LIe murkeLs wIere LIey operuLe. Some uLIIILIes ure noL respondIng
uL uII. We uIso observed compunIes In oLIer secLors (Ior exumpIe, LeIecom, LecInoIogy, und
medIu) deveIopIng und seIIIng energy eIhcIency producLs, us weII us uuLomoLIve pIuyers
operuLIng ucross LIe eIecLrIc-veIIcIe vuIue cIuIn.
DeveIopIng or ucquIrIng new cupubIIILIes wIII be essenLIuI Ior uLIIILIes us LIey move beyond
LIeIr comIorL zones. TIey musL, Ior exumpIe, IeIp cusLomers overcome LIe InvesLmenL
burrIer by provIdIng hnuncIng opLIons LIrougI purLnersIIps wILI bunks or by creuLIng
InLernuI hnuncIuI unILs. Muny pIuyers uIso reuIIze LIuL LIey Iuve Lo joIn Iunds wILI oLIer
new enLrunLs Lo cover LIe vuIue cIuIn eIIecLIveIy. TIe pun-Europeun uLIIILy RWE, Ior
exumpIe, Ius unnounced purLnersIIps wILI u runge oI pIuyers, IncIudIng MIcrosoIL und
EQ (Ior u cenLruI conLroI unIL IInkIng uII uppIIunces) und RenuuIL (Lo LesL LIe perIormunce
oI eIecLrIc veIIcIes In Germuny`s commuLer LruIhc). BrILIsI Gus coIIuboruLes wILI LIe UK
grocery reLuIIer SuInsbury`s. Under LIeIr purLnersIIp, consumers cun purcIuse energy-
munugemenL producLs (sucI us soIur puneIs und InsuIuLIon) In u supermurkeL und BrILIsI
Gus InsLuIIs LIem.
TIe growLI oI LIe opporLunILy wIII depend on LIe consumers` speed In udopLIng meusures
LIuL reduce LIe consumpLIon oI energy Irom LIe grId. We unuIyzed LIree key udopLIon
drIvers und Iound muILIpIe uncerLuInLIes uL pIuy-compunIes muy commercIuIIze LIeIr
LecInoIogIes uL dIIIerenL speeds, mucI us reguIuLors ure IIkeIy Lo conLInue LIeIr supporL Ior
energy eIhcIency meusures uL dIIIerenL speeds ucross dIIIerenL murkeLs, und consumers
ure unIIkeIy Lo drIve cIunge Ior energy eIhcIency buL muy respond Lo LecInoIogy udvunces
and regulatory stimuli.
Technology development
We don`L expecL LruIy dIsrupLIve LecInoIogIes Lo boom over LIe nexL Len yeurs und Ieud
LIe wuy Lo LIe Iow-energy Iome oI LIe IuLure. TIe puce uL wIIcI u wIde runge oI reIuLIveIy
muLure und emergIng LecInoIogIes deveIop und become commercIuIIy vIubIe wIII LIereIore
deLermIne wIen we cun see u crILIcuI IeveI oI consumer udopLIon. TIuL In Lurn wouId
enubIe producLIon uL scuIe, IurLIer reducIng cosLs und puvIng LIe wuy Ior muss udopLIon.
q
Muny LecInoIogIes uIreudy recoup LIeIr InvesLmenLs Loduy, someLImes wILI reguIuLory
supporL. TIese IncIude IeuL pumps, doubIe- und LrIpIe-gIuzed wIndows, energy-eIhcIenL
IIgILIng, und mIcrogeneruLIon producLs (sucI us soIur puneIs). OLIer LecInoIogIes Iuve
u IurgeIy unexpIoILed poLenLIuI, mosL noLubIy IeuLIng, venLIIuLIon, und uIr-condILIonIng
sysLems usIng occupuncy sensors LIuL uuLomuLIcuIIy munuge wIen und wIere IeuLIng
und uIr condILIonIng ure uppIIed. SLIII oLIer LecInoIogIes, now under deveIopmenL, Iuve u
Iuge poLenLIuI und couId be commercIuIIy vIubIe by LIe end oI LIe decude. One exumpIe Is
ucLIve wIndows wILI couLIngs LIuL bIock IncomIng IIgIL wIen LemperuLures ure IIgI. TIey
couId recoup InvesLmenLs In Iess LIun LIree yeurs wIen InsLuIIed In new Iomes.
Regulation
Muny Europeun governmenLs ure pursuIng u mIx oI suppIy- und demund-sIde meusures
Lo meeL LIe Europeun UnIon`s commILmenL Lo u zo percenL reducLIon In greenIouse gus
emIssIons by zozo. On LIe suppIy sIde, LIey cun Increuse LIe sIure oI Iow- or no-emIssIon
power generuLIon sources, sucI us nuLuruI gus, nucIeur, und renewubIes. BuL LIere ure
cIuIIenges. NuLuruI gus ruIses securILy-oI-suppIy Issues; nucIeur power Is uguIn under
scruLIny In Europe; renewubIes requIre cosLIy IncenLIves LIuL muke energy more expensIve
Ior uII consumers und muy be uL rIsk gIven currenL budgeL dehcILs. TIereIore, we expecL
LIe pusI Ior Iow-energy Iomes, wIere energy eIhcIency meusures reduce demund Ior
power, Lo remuIn sLrong or even be reInIorced In some counLrIes.
As LIe reguIuLory ouLIook Ior dIIIerenL Iome energy LecInoIogIes vurIes by counLry,
compunIes need Lo wuLcI deveIopmenLs cIoseIy und ucL on opporLunILIes us LIey urIse.
Sweden, Ior exumpIe, IncreusIngIy supporLs LIe conversIon oI eIecLrIc IeuLIng Lo IeuL
pumps und bIoIueIs, und LIe UnILed KIngdom Is InLroducIng u green deuI Lo IeIp
consumers hnunce energy eIhcIency puckuges.
Consumer behavior
Consumers ure posILIve ubouL suvIng energy, uccordIng Lo our murkeL reseurcI In LIe
UnILed KIngdom. YeL LIey expecL busIness und LIe governmenL, noL LIemseIves, Lo Luke LIe
Ieud on LIe journey Lowurd LIe Iow-energy Iome.
or mosL consumers, cosL Is LIe onIy reuson Lo reduce energy consumpLIon. BuL
IuncLIonuIILy, LecInoIogIcuI sImpIIcILy, brunds, und desIgn Luke prIorILy over suvIng energy
wIen peopIe purcIuse uppIIunces. MosL consumers perceIve Iow-energy producLs Lo be
beIow pur on LIese uLLrIbuLes und on perIormunce us u wIoIe. TIIs hndIng suggesLs LIuL
energy-munugemenL compunIes musL work Iurd Lo brIng down cosLs, ruIse LIe quuIILy oI
producLs, und educuLe consumers ubouL LIe Iong-Lerm suvIngs LIey cun ucIIeve.

Our reseurcI reveuIed un InLeresLIng rouLe Lo wInnIng IIgIer sIure oI mInd und wuIIeL:
consumers do Iuve u IuLenL need Lo conLroI LIeIr energy usuge. TIey were mosL excILed
ubouL LecInoIogIes LIuL IeIped LIem do so, sucI us sensor-IIgILIng und Iome uuLomuLIon
sysLems, wIen LIey LesLed energy-munugemenL producLs und servIces. BuL LIe need Ior
conLroI uIso poses u cIuIIenge Ior uLIIILIes, wIIcI ure perceIved Lo Iuve u conIcL oI InLeresL
In promoLIng energy eIhcIency. WIIIe consumers see LIese compunIes us possIbIe suppIIers
oI specIhc producLs-Ior exumpIe, mIcrogeneruLIon und InsuIuLIon oIIerIngs-some ure
concerned ubouL gIvIng LIem more power.
Three scenarios
TIe combInuLIon oI LecInoIogy, reguIuLIon, und consumer beIuvIor generuLed LIree
scenurIos IeudIng up Lo LIe yeur zozo. TIe hrsL ussumes IncremenLuI reducLIons oI
LecInoIogy cosLs, u reIuxuLIon oI LIe Europeun curbon reducLIon LurgeLs, und upLuke onIy
oI some meusures LIuL recoup consumer InvesLmenLs. TIe second scenurIo ImpIIes u IusLer
reducLIon oI LecInoIogy cosLs, u reguIuLory pusI Ior meeLIng Europe`s curbon LurgeLs
LIrougI IncenLIves, und LIe udopLIon by consumers oI mosL meusures LIuL oIIer uLLrucLIve
reLurns. TIe LIIrd scenurIo ussumes even IusLer deveIopmenL, In wIIcI muny new Iomes
ure uImosL energy neuLruI (ExIIbIL 1).
Exhibit 1
Main drivers
Technology
development
Reduction in technology costs
follow past trends
Technology costs decrease,
on average, by 15% over
10 years
Costs for new technologies
decrease by up to 60%
Consumers adopt some
economically viable initiatives
Consumers adopt a majority
of the economically viable
initiatives
Consumers adopt a majority
of the economically viable
initiatives
Consumer
behavior
Regulators maintain status
quo (implies relaxation of
2020 carbon targets)
Regulators push for
meeting 2020 CO2 targets
through incentives
Regulators increase
incentives to achieve 2020
CO2 targets by 2018
Regulation
Scenario 1
Incremental development
Scenario 2
Aggressive deployment
Scenario 3
Energy-neutral homes
Three key areas will affect the path toward
energy-efcient homes in 2020.
Web 2011
Home of the future
Exhibit 1 of 3
We quunLIhed LIe opporLunILIes ucross LIe LIree scenurIos Ior Germuny, LuIy, Sweden,
und LIe UnILed KIngdom, IookIng uL new und exIsLIng Iomes und upurLmenLs, us weII us
exIsLIng renLed Iomes und upurLmenLs, wIere LIe moLIvuLIon Lo InvesL In energy eIhcIency
Is Iower. TIe meusures we unuIyzed runged Irom wIndow gIuzIng und uIr IeuL pumps
Lo smurL dIsIwusIers und soIur mIcrogeneruLIon geur. TIe key hndIngs muke cIeur wIy
uLIIILIes musL Iook Ior new revenue sources und wIere Lo hnd LIem:
6
Exhibit 2
Scenarios
Incremental
development
22 billion 21 billion ~6% +0.9 0.4 1.8
Margin increase
found in energy-
efcient homes
Resulting
decrease
in margins
Margin reduction caused by
lower energy consumption
2010
value pool
Retailing Generation
Potential
value pool
19 billion ~16% +1.2 0.8 3.9
Aggressive
deployment
16 billion ~28% +1.5 1.3 6.5
Energy-neutral
homes
Value pool evolution, billion
Aggressive deployment of energy efciency measures
will substantially lower utilities generation volumes.
2020 value pool at EBIT level,
1
Germany example
1
EBIT = earnings before interest and taxes. Assumes same volume and mix as 2010.
Across LIe LIree scenurIos und Iour murkeLs, LIe poLenLIuI prohLs LIuL uLIIILIes couId
cupLure Irom new vuIue pooIs wouId jusL ubouL compensuLe LIem Ior LIeIr Iosses
In power-reLuIIIng murgIns. BuL us energy eIhcIency meusures ure depIoyed more
uggressIveIy, uLIIILIes wIII be IIL Iurder by Iower generuLIon voIumes (ExIIbIL z). n LIe
mosL uggressIve scenurIo, we esLImuLe LIuL murgIns wouId drop by uImosL o percenL.
n LIe zozo LIme Irume, Iow-energy Iomes wIII noL be smurL Iomes. BuIIdIng
IubrIcs (sucI us rooI und wuII InsuIuLIon) und cenLruI sysLems (IncIudIng IeuL pumps)
represenL upproxImuLeIy IuII oI LIe LoLuI vuIue pooI ucross LIe Iour counLrIes (ExIIbIL ).
AppIIunces (sucI us energy-eIhcIenL wIILe goods) represenL u bIL Iess LIun u LIIrd, und
mIcrogeneruLIon uround 1o percenL. WIIIe growIng IusL, smurL uppIIcuLIons (Ior InsLunce,
meLerIng) do noL represenL mucI vuIue. TIe sume IoIds Lrue Ior eIecLrIc veIIcIes, wIIcI
we see more us u posL-zozo opporLunILy.
TIese overuII opporLunILIes vury by murkeL, scenurIo, und Iome Lype, underscorIng LIe
need Ior mIcrosegmenLed sLruLegIes. TIe unuIysIs sIouId Iocus on IdenLIIyIng wIn-wIn
producLs und servIces, wIIcI creuLe posILIve neL presenL vuIue (NPV) Ior consumers us
weII us uLIIILIes. BuIIdIng IubrIcs, Ior exumpIe, oILen Iuve u posILIve NPV Ior consumers
ucross mosL scenurIos, murkeLs, und Iome Lypes. TIey ure uIso uLLrucLIve Ior uLIIILIes
becuuse LIe vuIue creuLed exceeds LIe vuIue IosL Irom reduced energy consumpLIon.
7
n conLrusL, soIur puneIs oIIer consumers very IuvorubIe economIcs under currenL
governmenL subsIdIes buL ure u IosIng gume Ior uLIIILIes. SInce muny compunIes ure
munuIucLurIng, seIIIng, und InsLuIIIng soIur-power equIpmenL unywuy, Iowever, u uLIIILy
muy cIoose Lo enLer LIIs busIness Lo recover purL oI LIe vuIue IosL Irom Iower
grId consumpLIon.
A LrunsILIon Lo Iow-energy Iomes wouId be u dIsconLInuILy Ior Europeun uLIIILIes. WIuL`s
more, LIe puce oI cIunge Is IruugIL wILI uncerLuInLy. BuL II uLIIILIes prepure Ior severuI
possIbIe scenurIos, udupL LIeIr orgunIzuLIon Lo LIe new compeLILIve Iundscupe, und muke
grunuIur cIoIces ubouL wIere LIey cun creuLe LIe mosL vuIue, LIey cun sIupe u new IuLure
Ior LIemseIves.
The authors would like to acknowledge Antonio Volpin, a director in McKinseys Verona ofce, for his contribution to the
development of this article.
Giorgio Busnelli is a principal in McKinseys Milan ofce, Venkie Shantaram is a principal in the London ofce, and
Alice Vatta is an associate principal in the Rome ofce. Copyright 2011 McKinsey & Company. All rights reserved.
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Exhibit 3
100% in billion =
Building fabrics
Central systems
Microgeneration
Appliances and electronics
Smart applications
Electric vehicles
Enabling serviceseg, consulting,
nancing, insurance
Advanced metering infrastructure
Building fabrics and central systems represent
approximately half of the total value pool.
MoBT 2011
Home of the future
Exhibit 3 of 3
Distribution of 2020 value pool at EBIT level,
1
average of Germany,
Italy, Sweden, and United Kingdom, %
1
EBIT = earnings before interest and taxes. Assumes same volume and mix as 2010.
Incremental
development
28
24
2.1
28
10
Aggressive
deployment
26
23
2.9
30
11
Energy-neutral
homes
24
19
3.8
33
11
6
2
3
4
1
2
3
4
1
2
4
1