Energy markets reaching a tipping point

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Currently issued PwC Annual Global Power & Utilities Survey has examined the pressures building up on the traditional power utility business model and the industry’s viewpoint on the transformative changes that lie ahead.

Today’s power utilities market is facing major disruption. The magnitude of near and mid-term challenges is immense and the traditional utility business model is coming into question.

Disruption and transformation

Many in the industry expect the existing power utility business model in their market to transform or even be unrecognisable in the period between now and 2030. 94% predict complete transformation or important changes to the power utility business model.

The prospect of transformation of the industry business model arises from a number of potentially disruptive changes. Decentralised generation is already eating into revenues and partly marginalising conventional generation. Ultimately it could shrink the role of unwary power utility companies to operators of back-up infrastructure.

Across the markets of Asia, Europe and North America, only a minority of PwC survey participants expect centralised generation and transmission to play the lead role in meeting future demand growth.

Changes in technology and cost

The growth of distributed generation and its threat to the power utility business model depends on technological developments and cost. Its rise in Europe has been subsidy-driven. Cost barriers remain in the way of it being truly market-driven. But, if these barriers can be overcome, they could set the scene for widespread global industry transformation. Many believe that point is within reach. Energy efficiency, falling solar prices, demand-side management and smart grid technology head the list of technological developments that the industry believes will have the biggest impact on their power markets.

But new sources of fossil fuel supply will also have a major impact on the power market. The advent of shale gas and tight oil are changing the economics of the energy landscape. Peak oil forecasts are fast being revised. The prospect of North American energy independence is within reach and the geopolitics of world energy flows are in flux. Industry opinion is far from ruling out the possibility that a new abundant energy era might open up.

How should companies respond?

How companies respond to these changes will determine whether they will be part of the future or join the ranks of companies from other industries whose business models have been eclipsed by technological and market change.

Efficiency savings and performance improvements can buy power utility companies time in responding to the changing industry environment. But also critical will be how companies respond to the rise of the ‘energy saving’, ‘energy generating’ active consumers. Over 40% of PwC global survey participants (and 60% of European companies) see their market in one or more of these terms in ten years’ time compared to just 9% today.

Power utility companies need to become much more tariff-clever, perhaps learning some bundling and ‘free allowance’ tricks from mobile telephony. A future where power utility companies offer ‘free power’ similar to the ‘free call’ bundles of some telephone companies is clearly not being ruled out by PwC survey respondents. Just under two thirds see a medium or high probability of this becoming part of a more interactive relationship with customers.

The role of governments

Affordability has risen up the agenda in many countries. Concerns about blackouts are increasing as reserve capacity gets stretched.

The sentiment from many of the participants in the survey suggests that regulation is facing something of a crisis. More than half of survey participants say that energy policy-makers “have produced a significant amount of policy uncertainty that is undermining investment”