Today’s power utilities market is facing major disruption. The magnitude of near and mid-term challenges is immense. Company business models are under threat. Regulation is failing to produce the outcomes it intends and is adding to uncertainty. We look at the issues and how companies and regulators can respond.
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. Four in every ten (41%) of our survey participants anticipate business model transformation and, of the rest, a further 53% expect existing business models to undergo ‘important changes’.
The prospect of transformation of the industry business model arises from a number of potentially disruptive changes. Among them, decentralised generation is already eating into revenues and marginalising conventional generation. Ultimately it could shrink the role of unwary power utility companies to operators of back-up infrastructure.
As many as 90% say there is a high or very high likelihood that distributed generation will force utilities to significantly change their business models.
The growth of distributed generation and its threat to the power utility business model depends on its 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 analysts believe that point is within reach. And in our survey, energy efficiency, falling solar prices, demand-side management and smart grid technology head list of technological developments that the industry believes will have the biggest impact on their power markets.
New sources of fossil fuel supply will 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.
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.
They will need to be clear-sighted about where their best revenue opportunities lie, act fast to reduce costs or exit unprofitable areas, improve customer service and appeal to a new type of actively engaged customer.
Policy-makers have the difficult task of grappling with the big issues of supply availability, affordability and environmental impact. The tensions between these goals are coming to the fore more and more.
The sentiment from many of the participants in our survey suggests that regulation is facing something of a crisis. More than half (55%) of survey participants say that energy policy-makers “have produced a significant amount of policy uncertainty that is undermining investment”.
Certainty and clear planning are the things that the sector most needs according to survey participants. There is a feeling that regulation is at a crossroads, with the era of liberalisation fading and a new era of greater certainty needed. There are immense infrastructure requirements associated with just the renewal and maintenance of existing infrastructure but there are also new demands such as how back-up capacity is going to be provided for a system with renewable and distributed generation.