Amidst the uncertainties and challenges of today’s energy market, home energy management systems (HEMS) can offer value to end users by addressing unmet needs and emerging pain points such as energy consumption optimization, automation, and affordability of energy bills, while allowing companies to diversify and/or enhance their value proposition. The latter has already motivated companies within and outside the traditional energy ecosystem to investigate the opportunity. In this Viewpoint, we explain why companies must act now to convince customers of the importance of HEMS and how they can secure their position within the value chain.
Today’s households are facing a volatile energy market characterized by high and unstable prices, while the adoption of electricity-intensive assets, such as electric vehicles (EVs) and heat pumps, is growing. Even though increased penetration of self-generating assets in homes has enabled customers to partially satisfy their own energy demand, the availability of generation and consumption data and associated systems offers the potential to further optimize their consumption. In this context, HEMS can help end users monitor, control, and optimize their energy generation, storage, and consumption, depending on self-generated energy availability and market prices. Concretely, HEMS solutions and underlying use cases vary based on the degree of automation and integration of the platform with the different energy-related assets and devices within the household, ranging from single device monitoring to automated flexibility monetization (see Figure 1).
Today, most HEMS solutions are quite basic, with use cases generally limited to remotely controlling devices, which leaves the major value pools largely untapped. Evolving to a full optimization of energy-related devices could reduce customers’ monthly energy bill by as much as 30%, according to Arthur D. Little (ADL) analysis.
However, as technology continues the rapid evolution that has characterized the last few years, HEMS are expected to progress through the different maturity stages. Some solutions have grown more sophisticated, as illustrated by developments from the UK and Germany. Players such as OVO Energy (UK), Octopus Energy (UK) and E.ON (Germany) are paving the way toward smart HEMS solutions that could offer opportunities for asset integration and flexibility monetization in the short term. For example, OVO is implementing smart thermostats but is also expanding into vehicle-to-grid trials and ensures EV charging when the energy is the greenest. E.ON combines a smart home application with an interconnected energy ecosystem (i.e., photovoltaic, battery, heating systems, and charge points) to save money, increase energy efficiency, use more green energy, and reduce CO2 emissions.
This Viewpoint focuses on HEMS solutions for households, but similar solutions exist for corporations, especially for those with large vehicle fleets.
The end game for HEMS providers is not about monetizing HEMS solutions toward the customer base (via a subscription or a share of cost reduction from energy efficiency), as those solutions should quickly become commoditized and free, offering limited sustainable revenues. Long-term value will likely be generated by monetizing flexibility, while energy trading and imbalance cost avoidance should bring incremental value:
Observers from different industries see the HEMS value chain as a natural extension of their current activities. Their attention arises from HEMS’s location at the crossroads of multiple value chains, including energy retailers, telcos and tech giants, oil and gas companies, and even automotive OEMs (see Figure 2). Consequently, companies from different industries have the legitimacy and interest to enter this market:
Companies entering the HEMS value chain do not necessarily need to offer the same service. The positioning and value proposition will be determined by their capabilities. Companies can decide to participate in only one part of the value chain, as a hardware provider, platform developer, or service provider (Roles 1, 2, and 3 in Figure 3). They can then choose to address one specific asset type, multiple asset types, or all of them.
An alternative approach is the vertically integrated player, which only focuses on one asset, while covering the entire value chain (Role 4). Finally, the ecosystem orchestrator provides an end-to-end smart HEMS solution to the end customer, across multiple use cases (Role 5). This comes to fruition by creating and managing all stakeholders within the HEMS ecosystem (ranging from manufacturers to service providers) while “owning the home” (i.e., being the central player in the household).
The ecosystem orchestrator role has not fully emerged yet, as only a few specialized companies currently offer a fully functional service, which raises the question of what type of company is best placed to offer it. Looking at the right to play and right to win of each player (see Figure 4), energy retailers and telcos/tech giants seem to be the best placed and most legitimate to take the central role as ecosystem orchestrators, considering their key distinctive capabilities, large customer bases, and strong presence within households. However, energy retailers may have a head start, as they have more to lose and gain and seem the best placed to monetize the entire revenue streams (i.e., flexibility monetization, trading on wholesale market, and imbalance cost avoidance).
Because HEMS likely will become a core service in the home energy ecosystem, failing to offer it could materially deteriorate energy players’ long-term value proposition. Telcos, on the contrary, are less prone to a direct negative impact on their core business. And while trading capabilities might be missing, telcos have serious incentives to enter the market thanks to the opportunity to extend their home services, use flexibility monetization to unlock new sources of revenue, improve their value proposition, and differentiate.
The main entry point to the HEMS market is through the EV user, independent of which players choose to enter (see Figure 5). EVs are the largest pool of flexible energy. When a car is connected to the grid, it can charge faster or slower, discharge, or postpone its charging session to offer flexibility to the grid. The number of EVs has strongly increased recently and is expected to continue its trajectory in the future:
Consequently, data from multiple sources shows EU capacity for EVs could increase to approximately 4,300 GWh by 2030 (from 250 GWh in 2022), resulting in potentially 650 GWh of EV-enabled capacity for flexibility services in the EU. (This assumes 50% of homes are willing to install HEMS and 30% of the battery capacity is available for flexibility purposes.) Comparatively, this would represent about 70-80x the 2022 utility-scale battery-storage capacity in the EU.
Speed is critical for players willing to seize the opportunities presented by HEMS:
Indeed, the flexibility potential is per definition capped by the maximum energy needed by end users, while the inherent value of flexibility correlates with capacity constraints. In some European countries, current capacity constraints are relatively high due to multiple factors (e.g., nuclear power plants decommissioning). Capacity constraints will probably decrease due to significant investments to secure Europe’s energy supply.
The decrease in capacity constraint would consequently lower the need for flexibility, decreasing its intrinsic value. However, the latter could be mitigated partly by the increasing share of renewables in the energy mix, which requires flexibility, due to their intermittent nature.
First-mover advantage is crucial; increasing competition and high entry barriers will limit the opportunity for late entrants. Therefore, companies must quickly assess whether they want to pursue the HEMS market by analyzing market potential, existing and future competition, and their own capabilities. If companies decide to enter, they should consider additional factors to maximize success:
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