Europe's energy efficiency services market to reach €50 billion by 2025

The growing climate change awareness as well as improvement to technology have lifted the market for energy efficiency in Europe to almost €25 billion. Growth will accelerate in the coming years, with the market set to double to €50 billion by 2025. The landscape remains fragmented however, according to a new report.

Climate change mitigation remains a key priority for much of the world – failure is noted as one of the world’s biggest risks going forward. Efforts to meet the Paris Agreement target of no more than 2.0°C warming by 2100, with a strong preference for 1.5°C, mean that transformations of various industries remains a priority. While reductions in the use of fossil fuels is a key part of wider moves to reduce global emissions, improvements to the efficiency of energy produced is a second avenue of improved energy outcomes.

Analysis regarding the improvement to energy efficiency for Europe show that considerable gains will need to be made over the coming decades to meet the region’s commitments. While governments have been keen to push for improvements in the space, companies too have sought to improve their energy efficiency, both to reduce long-terms costs as well as meeting their own goals related to reducing their carbon footprints.

In a new report by Roland Berger, the authors analysed the market for energy efficiency services and products (EES), aimed at improving the energy efficiency of buildings, physical assets and business processes. In Europe, the most in demand service is engineering, focused on mobility technology, building technology and process technology, with the total market value estimated to be around €9.5 billion. Contracting, focused largely on energy supply, generates market volumes of €6.6 billion, followed by consulting at €5.2 billion.

As Europe ramps up attempts to reduce the energy waste in many of its systems, demand for services is set to rise significantly in the coming five to six years – at a CAGR of 8% across the various market segments. The market volume is projected to jump from €26 billion to almost €50 billion in the period up to 2025, in the process becoming a "key market in the European industrial landscape.” Software is forecast to enjoy the highest increase in demand, at a CAGR of 14% for the period, followed by engineering at a CAGR of 9%.

While the consulting firm has projected strong growth for the market in the coming decade, various challenges for growth are also noted. This reflects the market’s diffuseness and fragmentation, and its relatively competitive nature, as well as the technical difficulty and sophistication of the space. While there are a range of companies focused primarily on developing propositions in the EES space, many established companies are also creating solutions for the space as a diversification strategy of their core propositions.

Fragmentation is the highest in the software industry, where around 60% of total EES activity stems from non-EES focused companies. The consulting segment is the most mixed, with 70% of companies operating in the space having a business focus within and without the industry. Contractors tend to have the strategic focus on the energy efficiency services market, at 70%, followed by operations-focused companies at 60% and engineering focused companies at 50%.

The fragmented picture in part reflects the effect of acquisitions that are not well aligned with wider business processes and outcomes. Over the past five years around 100 deals were made in the space. Energy services specialists are the keenest to invest, according to Roland Berger, at 38% of the total, followed by utilities at 16% and investment funds at 11%. However, the researchers note that in many instances the deals were not well matched to the buyer’s wider business model, or were experiments in the segment, which sometimes created risks on their current business model.

For players to succeed in the market, the authors have three pieces of advice. “Players can succeed by following a few relatively straightforward principles. They must build a compelling business case for their customers, using levers such as digitalisation and cost of delivery. They must pursue smart growth through mergers and acquisitions, taking great care not to kill off the entrepreneurial spirit of their newly acquired firms. And they must ensure that they themselves have the right internal setup, with the required flexibility to accommodate strong growth businesses.”