Centrica is banking on its software business to help rejuvenate its fortunes, as the UK-listed energy company battles tough domestic markets and a drop in its share price.
Jorge Pikunic, the group’s managing director of distributed energy and power, said the company planned to expand its software operations, which include the ability to create what it calls “virtual” power stations, almost fivefold in the next three years, cashing in on an increasing need for more flexible systems as the use of renewable energy grows globally.
Last month Centrica signed a deal with Japan’s Tepco, one of the biggest power companies in Asia, which will see Centrica’s in-house software aggregate various sources of renewable energy in the Kyushu region, which has a large number of industrial customers.
The company is hoping it will demonstrate a growing part of its business at a time when its traditional operations are struggling, showing that so-called “demand response” software that can help balance the grid will grow rapidly.
“This is a very, very important part of the energy transition. We need flexibility on the grid,” said Mr Pikunic. “We can aggregate 100s of assets to create virtual power plants.”
Japan may just be the first step. Centrica has plans to make its distributed energy business a major software supplier to other companies, taking advantage of changes in the UK market that have give the company a head start.
Renewable energy already makes up more than 30 per cent of UK electricity supply, with plans to rapidly increase that amount, giving Centrica experience in developing software that can increase flexibility on the grid.
Electricity supply from traditional power plants is relatively easy to predict and match with demand, but renewables such as wind and solar are less so and require greater flexibility from operators.
“We have experience ahead of others that gave us the opportunity to develop this technology,” said Mr Pikunic.
While this part of Centrica’s business is not yet profitable, as they invest in growth they are targeting expanding revenues from £210m last year to above £1bn within five years. The FlexPond platform was already used by 150 customers in Europe, Centrica said.
Crucially, margins are expected to be far higher than on Centrica’s core business, with Mr Pikunic saying they are targeting “above 20 per cent”.
The company may need to move quickly. Centrica’s share price fell to the lowest level in 20 years last week after JPMorgan warned that increased price regulation in the UK could damage profits.
Its shares are now just a few pence above £1 a share, valuing the business at just £6bn. Six years ago it was trading above £4, but shares have fallen by a third over the past 12 months.
However, some of the same forces that have roiled its core business in the UK, such as the rise of renewable energy and greater switching by customers, could feed into this wider opportunity in software.
Centrica as a whole made £1.4bn of adjusted profit last year on revenues of £29.7bn, meaning margins across the parent group are about 5 per cent.
If its distributed energy software business can grow to £1bn with margins of 20 per cent, it would be a significant boost to the bottom line.