The road ahead Gaining momentum from energy transformation
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PwC global power & utilities
The road ahead
Gaining momentum from
energy transformation
Megatrends and
disruptions are having
profound implications for
the strategies and future
role of companies all along
the power utility value
chain.
We map the impact on
the power sector and look
ahead at what it might
mean for future market and
business models.
Making the right moves
now will be vital if
companies are to be a
successful part of energy
transformation.
www.pwc.com/utilities
The forces of transformation 3
Disruption dynamics 6
Looking ahead: future market and business models 11
Discover more 29
Introduction
The impact on the power sector from the convergent forces of changes in customer
behaviour, new forms of competition, renewable and distributed energy and
regulation is creating new opportunities and challenges. The root causes for these
developments are global megatrends that are affecting all markets and are having
particular impacts on power.
This report looks at the overall
trends that are shaping tomorrow’s
market environment and the market
designs and business models that
might ensue. It looks at the
disruptions affecting companies
and introduces PwC’s Energy
Transformation framework.
The framework helps companies
map the effect on them all the way
from the root causes through to
impacts on future market designs
and business models, addressing
questions such as:
• What will the future market
design look like?
• Who will be your competitors?
• What will customers want?
• How might regulation be
responding?
Norbert Schwieters • What are the implications for the
Global Power & Utilities Leader company’s purpose, role and
positioning?
• What will be the winning business
models?
The changes affecting the power
utilities sector have provoked some
apocalyptic phrases from headline
writers. We’re much more optimistic.
True, if companies don’t stay ahead
of change, the dangers they face will
intensify. But if they make the right
moves to address the challenges they
face and embrace the opportunities,
they can be a successful part of
energy transformation.
2 The road ahead Gaining momentum from energy transformationThe forces of transformation
Energy transformation is being driven by five global megatrends interacting with
and amplified by a set of shifts taking place within the power sector. The five
megatrends – technological breakthroughs; climate change and resource scarcity;
demographic and social change; a shift in global economic power and rapid
urbanisation – are challenges for all businesses.
But in the power sector their impact is made Some of the changes arise from the Together these megatrends and the
all the greater by a number of simultaneous megatrends – for example the regulatory changes taking place in and around
disruptions, involving customer behaviour, encouragement of renewables in the sector have profound implications
competition, the production service model, response to climate change concerns for the strategies and future role of
distribution channels, government policy – while others heighten the impact of companies all along the power utility
and regulation. The extent and nature of particular megatrends – for example value chain. They are combining to
these disruptions vary from market to the potential for rapid urbanisation to have a disruptive impact which will
market. But in many markets, their intensity accelerate the roll-out of distributed lead to the development of new market
is making their impact transformational energy and micro-grids. models and require companies to pursue
rather than incremental. new business models (see figure 1).
Figure 1: PwC energy transformation framework
How are megatrends
affecting the
energy sector?
Technological Climate change and Demographic Shift in Accelerating
breakthroughs resource scarcity changes economic power urbanisation
Customer Production Distribution Government and
What are the Competition
behaviour service model channels regulation
disruption factors
impacting the
power sector?
Disruption dynamics
What could this
mean for future
market models?
Green command Ultra distributed Local Energy Regional
and control generation Systems supergrid
What business models Business Operating model/ Financial
Purpose HR model
are likely to evolve? model capabilities performance
What transformations
are necessary?
Power & utility company transformation
The road ahead Gaining momentum from energy transformation 3Global forces – Technological Climate change and
breakthroughs resource scarcity
five megatrends
Technological innovation is at the heart The energy sector is on the frontline
impact power of the shifts that are occurring in the of concerns about climate change.
power sector. Advances are happening in The sector as a whole accounts for more
many parts of the sector – for example, than two-thirds of global greenhouse-gas
in large-scale technologies such as offshore emissions1 with just over 40% of this
wind and high-voltage DC transmission, stemming from power generation.
in distributed and smaller-scale customer- Resource scarcity or availability, and the
based energy systems and on the load associated geopolitics and economics of
side. Power is being transformed from a gas, oil and coal supply, are key factors
top-down centralised system to one that shaping power market policy.
is much more interactive but also
decentralised and fragmented. Elements A growing emphasis on renewables is a
of the old centralised system are becoming response to both climate change and
stranded and there’s a need to find an security of supply concerns. In the US
alternative investment model that alone, over 30% of new electricity
recognises technological advances. generation capacity added in 2010–2013
involved solar and wind power, up from
In many jurisdictions, renewable power is less than 2% in 2000–2003.2 Solar
replacing or has the potential to replace photovoltaic (PV) is now present on more
fossil fuel generation. Smart grids are than 1.2 million Australian homes and
delivering the potential for greater producing over 3.3GW per annum.3
interactivity with customers. And the In Germany, renewables accounted for
scope for even more transformative 24% of gross electricity consumption in
technological breakthroughs is being 20134, placing the country slightly above
taken more and more seriously all the the growth trajectory needed to reach its
time. A breakthrough in the cost and 2025 target of 40 to 45%.
practicality of battery storage technology
could be a quantum leap enabler, opening Energy efficiency has also risen up the
up the possibility of off-grid customer policy and customer agenda. Together,
self-sufficiency when used in combination renewable technologies, energy saving
with ‘own generation’. ‘Power to gas’ is and a different customer outlook are
also a potential transformative technology. leading to a transformation of the
All bring opportunities for incumbent electricity environment. They are causing
power companies but many also have the the value chain to shift, away from large
effect of eating away at a utility company’s conventional power plants towards local
traditional revenues and undermining the power generation, and a greater focus on
traditional utility business model. distributed energy and demand
management.
Other technologies, notably the
combination of the internet, mobile Transformation is also very relevant to
devices, data analytics and cloud developing countries, many of which face
computing with smart grids and smart the triple challenge of being unable to
metering, present opportunities for utility meet existing demand for electricity while
companies to get closer to the customer, also facing huge demand growth and the
play an enhanced ‘energy partner’ role need to extend access to those who don’t
and exploit data opportunities. Analytics have electricity. The need for good demand
capabilities, which today are generally management is already very familiar in
of a low to moderate standard within countries such as South Africa where
utilities, will need to be a core strength managed outages and demand restrictions
in the future if companies are to fend are commonplace. Technological advances
off competition from new entrants who will enhance this response as well as
already have these capabilities at the present the opportunity for expansion of
heart of their business. power in ways that may leapfrog the
traditional grid evolution route.
4 The road ahead Gaining momentum from energy transformationDemographic changes Shift in economic power Accelerating
Within the next minute the global The focus of global growth has shifted.
urbanisation
population will rise by 145. By 2025, Looked at historically, we come to realise
Over the next two decades, nearly all of
we’ll have added another billion that western economic strength is a
the world’s net population growth is
people to reach about eight billion. relatively recent phenomenon and the
expected to occur in urban areas, with
Explosive population growth in some current developments we see are essentially
about 1.4 million people – close to the
areas set against declines in others a rebalancing of the global economies.
population of Stockholm – added each
makes for very different power market
week.5
growth potential in different parts of As fast-growth economies become exporters
the world. Africa’s population is of capital, talent and innovation, the
By 2050, the urban population will
projected to double by 2050 while direction of capital flows is being adjusted
increase by at least 2.5 billion, reaching
Europe’s is expected to shrink. in a way that is quite different from the
two-thirds of the global population.6
traditional routes from developed-to-
Fast urban expansion presents a major
The growth prize for power companies emerging and developed-to-developed
challenge and an opportunity for power
of serving expanding populations is countries.
utility companies. The speed of urban
a big one. For example, Nigeria’s
growth puts a big strain on infrastructure
population is expected to exceed We are already seeing significant east-west
development. In Africa, already large cities
America’s by 2045. But the infrastructure and east-south investment flows in power
such as Lagos, Kinshasa and Cairo are
challenge in many countries is immense markets, involving both financial investors
going to become megacities, with more
and not all growth markets are readily and power sector corporate investors.
than 15 million people. The population in
open to international expansion. For example, Chinese state-owned power
Nairobi is set to more than double between
Companies seeking to reposition their and utilities companies have been active
now and 2025.
geographic footprints towards faster- in their search for suitable international
growth countries will also need to have power utility and grid investment
Power companies can play a pivotal role
a clear view on the impact of energy opportunities. Europe, South America,
in ensuring future cities become ‘urban
transformation on these countries. Australia and other parts of Asia have all
smart’ rather than ‘urban sprawl’.
The prospect of bypassing the grid and been targets for expansion. Sovereign wealth
They have the potential to be lead players
leapfrogging to new local distributed funds and pension fund investments in the
at the heart of future city infrastructure
technologies and market models is not sector have also become multi-directional.
but it will require a new mindset and the
unrealistic if the pace of technological The challenge for many power companies is
development of new partnerships.
advances and cost reductions continues. access to scarce capital from this global flow
And, of course, the pace and nature of
of capital, minimising the risk of stranded
urbanisation in fast-growth and
investments and seeking innovative ways of
developing economies takes a different
securing investment in replacement assets.
form than in the west. In the former, the
challenge is very fast growth on top of
already stretched or absent infrastructure.
In the west, rural urbanisation is a trend
alongside big city growth.
Snapshot: Faster technology
development, falling costs
The time it takes to go from breakthrough technology to mass-market application is collapsing.
In the US, it took the telephone 76 years to reach half the population. The smartphone did it in
under ten years.
The price of new technologies is falling equally rapidly. An analysis by UBS predicts shrinking
battery and solar costs will make the combination of electric vehicles, solar panels and stationary
batteries for excess power a compelling proposition in many markets within the next ten years.
It estimates the combination of an electric vehicle + solar + battery should have a payback of
7–11 years, depending on the country-specific economics.7 After that, the electricity generated is
truly ‘free electricity’ for the remainder of the lifetime of the equipment.
Falling costs have the potential to introduce a new challenge to the power utility business model.
If they translate into actual falls in the price of electricity itself, the industry will have to move
away from the default assumption of ever-rising prices, on which many of its deals and investment
are based.
The road ahead Gaining momentum from energy transformation 5Disruption dynamics
The disruption taking hold in the power sector is just the start of an energy
transformation. It’s not a question of whether the business models pursued in
the sector will change but rather what new forms they will take and how rapidly
companies will have to alter course. Companies need to be sure they have fully
factored into their strategic planning the megatrends and changes discussed in
the previous chapter.
The pace of change will be different in We see five areas in which disruption is
each market and each specific situation. having an impact and where it will be
The important thing for companies is that important for companies to assess their
they assess their strategy and implement strategies:
the changes they need to make in time or,
even better, ahead of time. Already, of • customer behaviour
course, many have reset their compasses • competition
with a switch in priorities and emphasis.
But will this be enough and what more • the production service model
needs to be done?
• distribution channels
• government and regulation.
Together they form the context in which
future market and business models will
be framed. For each one it is possible to
identify developments that are happening
now and which, if they accelerate or
impact in combination, could intensify
disruption dynamics.
Snapshot: Google eyes power opportunity
Addressing a recent PwC roundtable on customer transformation,8 Google’s Chief
Technology Advocate Michael T. Jones described the internet as “machines talking
to machines. It can develop in all sorts of ways whether it is components on a 747
or your roof tile sending an SMS saying ‘replace me, I’m starting to leak’.” Moving
on to the world of power, he observed: “All electronic devices will talk about their
power needs to an aggregator and you can have an auction for the power for each
one. All you need is someone to identify what the rates are.”
Google already holds a wholesale power licence in the US. Its January 2014
acquisition of Nest Labs for US$3.2bn also gives it a position in home automation
with ownership of a company that has built a position selling thermostats and
smoke alarms for the home. At the time of the acquisition, Tony Fadell, CEO of Nest,
said: “Nest will be even better placed to build simple, thoughtful devices that make
life easier at home.”
6 The road ahead Gaining momentum from energy transformationCustomer behaviour Competition Engineering and technology companies
such as GE, Siemens and Schneider
We’re already seeing a gradual erosion Energy transformation is shifting the Electric have long been important players
of power utility company revenues as opportunity for good margins into new as equipment providers in larger-scale
distributed energy gains an increasing parts of the value chain. But lower segments of the distributed energy market.
foothold. Some commentators go so barriers to entry in these areas of the The growth and extension of distributed
far as to predict that customers will be value chain and the need for new energy is likely to blur the boundaries
saying “goodbye to the grid” in the capabilities mean there is the prospect between such companies and the power
future. In some places, it’s already of existing companies being outflanked utility sector, both at the individual
happening. Significant changes in and outpaced as more nimble and able customer and community levels.
the economics and practicalities of competitors seize key revenue segments.
self-generation and storage are needed Demand management services are another
for such a scenario to occur on any kind New roles for companies come into view. key area and, already, we see companies
of scale. In a distributed energy community with such as Kiwi Power in the UK providing
its own micro-grid, players other than services to industrial and commercial
But even if customers don’t literally say power utilities can play an energy clients, offering demand reduction
goodbye to the grid, power utility management role. This could be for local strategies that they claim might typically
companies face the prospect of playing the systems such as transport networks, see larger businesses reduce their
role of being providers of secondary or residential communities or industrial electricity bills by around £100,000.10
back-up power to customers. Instead, they communities.
could become part of the change by In addition, there is considerable interest
being more active participants in the For example, distributed energy is a key from companies seeking to explore the
self-generation market, providing advice focus both for incumbent power utility opportunities that come from existing
on equipment, metering and using the companies and for new entrants. It’s a big home and online services as well as
opportunity to secure more of the home market space, worth tens of billions. future smart grid and distributed energy
and business services space. It covers a wide spectrum of opportunities, provision. “The battleground over the
from energy controls and demand next five years in electricity will be at the
The growth in self-generation can create a management activities that save energy, house,” David Crane, CEO of NRG Energy,
reinforcing dynamic. As well as the decline to local generation, both small-scale and told Bloomberg Businessweek. “When we
in revenues to decentralised sources, there larger-scale, embedded in own use or local think of who our competitors or partners
is the impact of cost pressures on the networks, through to distributed storage will be, it will be the Googles, Comcasts,
centralised system which, in turn, reinforces that can shift loads or, ultimately, end AT&Ts who are already inside the meter.
the movement to decentralisation. grid dependency. We aren’t worried about the utilities,
The reaction of some in the industry has because they have no clue how to get
been to press for new regulatory policies beyond the meter, to be inside the house.”11
to allow for some form of cost recovery
in recognition of utilities being left with
the fixed cost of the grid but a shrinking
revenue base. But as one academic study
points out: “In the short run, these steps
very well could insulate the utility from
solar PV competition but at the same time
create substantial medium- and long-term
risks, including those of customer
“ Utility companies need to align their
backlash, deferral of adaption, and ambitions with those of their customers
stimulation of enhanced competition.”9
in a new energy future, ensuring their
Both in terms of regulatory relations and
customer relations, utility companies
services are relevant and cost-effective.”
need to align their ambitions with those
of their customers in a new energy future,
ensuring their services are relevant to
and cost-effective for as many customer
situations as possible.
The road ahead Gaining momentum from energy transformation 7“ Do power utility companies risk losing out to
new entrants from the world of online data
and digital technology?”
The production Disaster risk led to all of Japan’s nuclear Distribution channels
reactors being gradually taken offline
service model after the 2011 Fukushima disaster and In a digital-based smart energy era, the
they remained offline three years later. expectation is that the main distribution
The production service model of Across the world in Germany, the reaction channel will be online and the energy
centralised generation and grids is being to Fukushima was to begin to phase out retailing prize will hinge on innovative
joined by a much more disintermediated nuclear power altogether. Official policy digital platforms to secure the energy
and distributed model. New supply in Japan is to bring plants back into automation, own generation and energy
sources requiring centralised operation, with the first restart expected efficiency customer space.
infrastructure, such as offshore wind, to be announced in late 2014, as and when
are coming onstream but the danger the atomic regulator deems new stricter Already, many companies are shifting their
for utilities is that other assets and safety standards are being complied with. positioning to cluster energy management
infrastructure are left stranded. But opinion polls have consistently shown offerings around a central energy
The centralised infrastructure that has that a majority of Japanese are opposed to efficiency and energy saving proposition
long been a source of strength of the restarting reactors and nuclear assets are and using new channels such as social
industry can be a source of weakness unlikely to regain the same role in Japan’s media to engage with customers. But do
vulnerable to market, policy or disaster energy system as they had before power utility companies risk losing out to
risk. And we’re seeing all three of these Fukushima. new entrants from the world of online
risks currently playing out in Europe,
data and digital technology?
the US and Japan. In the US, one can draw a direct line from
environmental policy to the stranded A risk for energy companies is that their
In Europe, the changing economics of asset risk faced by many of the country’s distribution channel to end customers
generation brought about by a coal generation plants. Coal-fired power becomes disintermediated in ways that
combination of the rise of renewables, the plants are subject to the Mercury and are not dissimilar to what has happened
collapse in the carbon market and cheaper Air Toxics Standards (MATS), which to incumbent publishers and booksellers
international coal prices has left much gas require significant reductions in emissions with the advent of Amazon. Not only is
generation out of the market. Even modern of mercury, acid gases, and toxic metals. the channel to market for incumbents
plants, completed as recently as 2013, have The standards are scheduled to take dominated by the new platform but the
had to be temporarily mothballed and effect in 2015 and 2016, with generators actual demand for product is eroded as
many others have been taken out of the needing to install costly pollution-control the platform acts as an aggregator for
market more permanently. In total, over equipment if they want to keep their self-publishing and second-hand sales.
the course of 2012–13 ten major EU coal plants running. The US Energy And, of course, the offering is now
utilities announced the mothballing or Information Administration expects much wider than just books, with the
closure of over 22GW of combined cycle about 60GW of coal generation to shut combination of a trusted brand and
gas turbine (CCGT) capacity in response to down between 2012 and 2018 – a sheer presence providing a marketplace
persistently low or negative clean spark reduction of about a fifth.13 A further joining consumers to a wide range of
spreads, of which 8.8GW was either built threat to coal comes in the form of the product providers.
or acquired within the last ten years.12 proposed Clean Power Plan, which will
require carbon emission from the power Smart grids, micro-grids, local generation
sector to be cut by 30% nationwide and local storage all create opportunities
below 2005 levels by 2030. to engage customers in new ways.
Increasingly, we are seeing interest in
These developments highlight the risk of the power sector from companies in the
over-reliance on a concentrated centralised online, digital and data management
power generation asset mix. The wrong world who are looking at media and
type of asset mix can leave companies entertainment, home automation, energy
vulnerable to rapid transformation, saving and data aggregation opportunities.
arising from market or policy forces or In a grid-connected but distributed power
the forces of events, in the case of nuclear. system there are roles for intermediaries
Such forces provide a wake-up call which who can match supply and demand rather
is likely to accelerate the move to than meet demand itself.
alternative power systems.
8 The road ahead Gaining momentum from energy transformationA key consideration for incumbent power Government and The political context shapes the utility
utilities is if their brands are perceived business model. Changes in that context
as being part of the past that is being regulation can dramatically impact utilities. This has
broken away from rather than the future always been the case but, in a more
for customers. An energy saving or Energy is by its nature a key economic dynamic energy transformation context,
demand management proposition may be and political issue. More than in many political and regulatory decisions become
perceived as more credible coming from other sectors, firms in the power sector even more significant. The different
a new entrant rather than an incumbent, depend on the political context for their political approaches to energy
so use of the brand needs to be carefully licence to operate and public trust in transformation in different countries are
considered. their activities is a big factor. key to explaining why the impact on fossil
and nuclear generation has been faster
Another important challenge for The cost of power is an important and more dramatic in Europe compared
companies arises from the need to be element in household budgets as well as to elsewhere.
expert at managing data in a smart business and industrial competitiveness.
home, smart city and smart company The availability of power is a ‘make or A more dynamic environment also
environment. As well as data from smart break’ matter for everyone. And its elevates the importance of public trust
devices and the grid, additional layers infrastructure is the centre of often and perception. Energy transformation
of information about demographics, controversial planning debates. is extending the scope for the public to
behaviour, customer characteristics and vote with their feet, not just by switching
other factors will often be required to best So it’s inevitable that the activities of suppliers but by reducing dependence
exploit the data opportunity. Many power power utility companies are never far on utility companies altogether.
utility companies already use sophisticated from the centre of the public and political
data analytics for customer segmentation spotlight. Recent and current events in
purposes which can be built on and different countries discussed in the earlier
supplemented by enhanced analytics, section on the production service model
big data from social media and learning highlight the potential for the public and
from other industries. political will to alter the nature of the
business.
Snapshot: A weakened capital base
In Europe, the erosion of utility company earnings has had an inevitable
impact on investment attractiveness. The Economist reported that
“in 2008 the top ten European utilities all had credit ratings of A or better.
Now (in 2013) only five do.”14 Share prices were similarly hit over the
same period.
In the US, the power utility share price story has been much healthier
but the association representing US shareholder-owned electric utilities
has sounded a warning note about the capital implications of energy
transformation: “When customers have the opportunity to reduce their
use of a product or find another provider of such service, utility earnings
growth is threatened. As this threat to growth becomes more evident,
investors will become less attracted to investments in the utility sector.
This will be manifested via a higher cost of capital and less capital
available to be allocated to the sector.”15
The road ahead Gaining momentum from energy transformation 9“ Sector transformation could shrink the role
of some power utility companies to providers
of back-up power.”
The need for innovation Business model innovation is just one Avoiding a capital crunch
element of the innovation required but is
Incumbent companies that don’t innovate likely to be a key part. The difficulty is As well as innovating, utilities need to
could risk seeing themselves succumbing that business history tells us that the make sure that a weakened investment
to the pressure points and being eclipsed majority of business model innovations are case doesn’t close off growth routes.
in the same way that incumbents like introduced by newcomers and incumbents Energy transformation is eroding the
Kodak, Blockbuster video stores and high often find it hard to respond successfully. capacity of utilities as investors. Some have
street booksellers were in other sectors. Incumbent companies sometimes try to suffered rating downgrades. Others have
Certainly, sector transformation could hold on to the existing model for too long had to deleverage, reducing debt relative
shrink the role of some power utility or fall between two stools as they try to to cashflow, to maintain credit ratings.
companies to providers of back-up power. manage two competing business models These developments, primarily affecting
at the same time – the original business companies in Europe and some in Africa,
In our most recent Global Power and model and the new model. come at a time when they also face major
Utilities survey, only a minority of our capital investment challenges to replace
survey participants expect centralised One way to avoid this trap is to separate ageing infrastructure as well as make
generation and transmission to play the out responsibility for developing new energy transformation investments such
lead role in meeting future demand business models and value propositions. as smart grids. In parallel, many such
growth across the main markets of Asia, For example in banking, this is what HSBC utilities need to deploy capital to pursue
Europe and North America.16 Instead, did in the UK when it developed its highly diversification away from mature, low or
energy transformation will gather pace successful First Direct telephone, and now flat-growth markets towards fast-growth
and we expect that growth will become internet, banking service in the 1990s. regions.
more innovation-dependent, with success Not only was branding separate from its
coming to those companies that use then ‘Midland/HSBC’ traditional branch Global competition for capital is intense,
innovative technologies, products, banking brand but the service operated and all the more so because the capital
services, processes, and business models largely independently of the parent constraints faced in some markets stand in
to gain competitive advantage, to stay company. Another route for separation is contrast to other markets. In the US, the
ahead of change and create new markets by outsourcing to a community of new challenge for power companies has been
for their products and services. In Africa entrants and smaller firms. The incumbent to convince investors that peak stock
innovation will be driven in part by the utility can then nurture these innovations valuations can be maintained, a key part
fact that power utilities will not be able and help scale up the emerging dominant of which will be to demonstrate that they
to support the increasing demand for products or services. can negotiate the challenges of energy
electricity supply and businesses will transformation without facing the kind
evaluate other solutions, such as looking of conditions that have engulfed their
at different means of co-generation. European peers. Innovative and
alternative approaches to financing are
becoming more commonplace in the
sector. Partnerships and strategic tie-ups
with sovereign wealth funds, insurance
and pension funds, already becoming
more numerous, are likely to increase
in importance.
“ We expect that growth will become more
innovation-dependent, with success coming
to those companies that use innovative
technologies, products, services, processes,
and business models to gain competitive
advantage.”
10 The road ahead Gaining momentum from energy transformationLooking ahead: future market
and business models
No-one can predict the future but it is important that companies take a clear view
on the ways in which their marketplace is likely to evolve and their company’s
place in the various different possible scenarios.
PwC’s energy transformation programme At its heart, this means addressing key • What are the implications for people
includes joint activities with companies questions such as: and operational change?
to support their future strategies and
map out the risks and opportunities • What will future market design look • What will existing and new competitors
involved. like? be doing?
• What are the implications for my • How best to continue to deliver
company’s purpose, role and shareholder value throughout the
positioning? transformation process?
• What are the business models that
I need to pursue?
Figure 2: The power sector has reached an inflection point where its future direction is much less predictable
Few disruptive elements Less predictable future
Demand
Arab oil
embargo
destruction
Market
reform and ‘Golden age’ of utility reinvention?
liberalisation
Flat and declining grid value?
Broad Emergence
industrialisation of new ‘Death spiral’ from disintermediation,
technologies technology disruption and customer
evolution?
Expansion of Fukushima
nuclear and gas nuclear
generation emergency
1970 1990 2010 2030
The road ahead Gaining momentum from energy transformation 11‘Business as usual’ with the maintenance Green command
of a classic centralised ‘command and
Future market control’ energy system may continue and control
designs to be an option for some countries,
although we expect to see an increased The Green Command and Control market
focus on technology and innovation as scenario represents a market in which
We foresee a number of market models government owns and operates the
this model develops. But already over the
emerging. Unlike markets for many energy sector and mandates the adoption
last two decades or so, many countries
other products and services, the role of renewable generation and digital
have moved away from this ‘classic
of governments is significant given the technology.
model’ and, through a combination of
importance of power to everyday life
regulator-led and market-led innovation,
and economic activity. So the exact In this scenario, we see vertical integration
have created markets characterised by
market shape for individual countries as the norm (particularly between
different ownership structures with
will depend on policy direction as well generation and retail), and investment
varying degrees of market liberalisation,
as on other local factors such as the decisions made as a response to regulatory
customer choice and technology
extent of competition and customer direction. It is a market in which
adoption.
choice, access to fuel, the nature of renewables may be cost-competitive or
existing infrastructure, the degree supported under renewable policy
Current change has so far, on the whole,
of electrification and degrees of initiatives, whilst stranded thermal assets
been incremental and stopped short of
interconnectedness or isolation from may remain operational even when private
‘transformative change’, although
neighbouring territories. And, of sector owners would have taken closure
many would see aspects of current
course, a crucial factor will be the decisions. Ongoing capital investment
developments in Europe as
pace of global technological change. would be subject to policy approval and
transformative. But we believe that,
if the pace of innovation leads to would feed into regulated tariffs.
widespread adoption of renewable and
smart energy technologies, we are likely The market may combine a central grid
to see the emergence of a number of new with distributed networks where the latter
market models. Each market scenario support social policy initiatives such as
can be described by a unique set of rural electrification or reducing the level of
characteristics and illustrates different capital investment in major transmission
points along a series of transformation infrastructure. There is likely to be an
curves. We have considered a wide increased level of investment in
range of characteristics in developing distribution networks to support back-up
the scenarios, including ownership capacity in localised areas of the grid.
structures, the level of adoption of Consumer tariffs will reflect policy
renewable technology, level of decisions and recovery of stranded costs,
deregulation, level of engagement in and may be smeared across central and
the wholesale market by customers, distributed networks.
regulatory and policy involvement in
market structure and operations, use of There may be some limited opportunities
digital media and the mix of large-scale for new market entrants – potentially as
and small-scale generation. outsource partners supporting state-owned
companies with operations of distributed
We outline below four new market networks, or as compliance advisors
scenarios which represent transformative to the regulator supporting tariff
change – a significant shift from where determinations and investment case
we are today. Power utility companies business approvals. Outsourcing support
are unlikely to be in only one of these opportunities might offer local small-scale
scenarios but, instead, experience a as well as large project opportunities.
blend of them with perhaps one being For example, in South Africa the
dominant. The most appropriate path Department of Energy has mandated the
for any given company will depend on roll-out of a national solar water heater
local, as well as global, factors. programme with the goal of one million
installations on households and
commercial buildings over a period of
five years, providing significant potential
for local capacity-building.
12 The road ahead Gaining momentum from energy transformationHow might this market arise? Ultra distributed There are significant opportunities for
We see two routes. In the first, it might new entrants in addition to investment in
develop directly from a traditional,
generation renewable and distributed generation.
centralised “classic model” where the We expect to see growth in participants
The Ultra Distributed Generation (DG) providing aggregation services, both for
government takes policy decisions to invest
market scenario represents a market in small-scale distributed generation and for
in renewable generation, smart technology
which generators have invested in load management. Offshore TSOs or
and local energy hubs. In the second, the
distributed renewable generation, with private sector, localised DSOs linked to a
market may have undergone some degree
investment decisions based on policy portfolio of distributed generation will
of liberalisation and/or new entrants in
incentives and/or economic business become more prevalent. There may be new
generation or retail, but policy decisions
cases. It is a market with full unbundling roles for managing the interconnection
result in control reverting to the public
and strong customer engagement, both between local networks or for managing
sector. This might be the case, for example,
in retail and as micro-generators. and interpreting generation data.
in the event of a political decision to
renationalise or when a company fails and
Market operation becomes more complex How might this market arise?
private sector entities are not prepared to
for both transmission and distribution We see the main driver of this model
step in.
operators, given the increased volume of being policy decisions which result in a
distributed and renewable generation and significant increase in small-scale
We would see private sector players
the continued operation of large-scale distributed capacity over a relatively short
exiting the market and may see mergers
thermal generation, but remains centrally period of time. This might be led by
of generators and/or retailers to support
operated and does not fragment. retailers encouraging their consumers to
government policy preferences (for
Regulatory oversight and revenue price reduce demand through becoming a
example, a state-owned generator
controls are likely to address efficiency of prosumer owning micro-generation, by
operating stranded assets as back-up
system operation and equitable treatment proactive consumers or by generators
for renewable generation, another state-
of generation in dispatch and system sizing investments to meet local community
owned company operating small-scale
support. In particular, determining which needs at a distribution grid level.
renewable generation and supplying
market participants pay for the central
customers within distributed networks).
transmission grid becomes a critical Integrated investments in new
regulatory question. communities that include distributed
Which countries might adopt
this market scenario? generation and a back-up connection to
We expect to see stranded thermal assets the grid also support an Ultra DG market
In our view, a green command and control
as distributed resources become cost- scenario. The Ultra DG model could also
market scenario is most likely to evolve in
competitive and, in part, due to the lower arise through an evolving spiral of
markets where there remains significant
flexibility of some distributed generation developments, where there has been no
public ownership, single-buyer models or
and the ensuing volatility of wholesale conscious policy decision but investments
limited interest from the private sector in
prices. Risks to security of supply increase over time have led to the closure of
investment, e.g. in China, selected South
and we are likely to see continued policy uneconomic thermal plant, prosumers
American, Middle Eastern and African
and regulatory intervention to maintain an reducing local demand requirements and
markets. Further, in some countries,
appropriate level of thermal capacity on rebalancing the system operations roles
renewable energy dominates the energy
the system. Generators with distributed of the TSO and DSOs.
mix, such as hydropower in Bhutan or
capacity will have increased volumes of
Norway. In such situations, it makes sense
operational data to manage as they match Which countries might adopt
for governments to encourage green power
their physical and trading positions. this market scenario?
for own use, thereby reducing any import
Retailers will need to continually review In our view, an Ultra DG model is most
of fossil fuels, and for earning extra
their trading and hedging strategies to likely to arise in markets where there is
revenue from export of green power.
manage price volatility and to determine already significant investment in distributed
the tariffs that can be offered to different generation but where there is a strong
categories of consumers – particularly national infrastructure supported by policy
prosumers who offset their demand objectives, e.g. Germany or California.
through micro-generation. It could also arise in markets where the
opportunity for significant investment in
This scenario presents considerable small-scale renewables or larger-scale
challenges for system operators with distributed generation could support local
complexities such as reverse flows, voltage networks or isolated developments which
management, fault maintenance etc., would only require periodic back-up
placing even greater importance on data generation from the transmission grid,
management capabilities. Generators, e.g. Middle Eastern markets or Australia.
transmission system operators (TSOs) and
distribution system operators (DSOs) will
need to revisit the capability and skills
required from their staff and we expect to
see an increased emphasis on technology
specialists over time.
The road ahead Gaining momentum from energy transformation 13Local energy systems We see a need for new approaches to Which countries might adopt
security of supply, which we would expect this market scenario?
The Local Energy Systems market to be provided by DSOs in the main, We see Local Energy Systems as having
scenario represents a market in which providing interconnections between most relevance in developing countries
we see significant fragmentation of the localised grids. The role for the TSO would without a strong national transmission
existing transmission and distribution be greatly reduced and would result in infrastructure. The fall in costs of
grids and local communities demand significant overcapacity in transmission. renewable generation and the improved
greater control over their energy supply, technology to support distributed grids
or a market in which a local approach is The market provides a new set of means that isolated communities could be
adopted for serving remote communities. challenges for the regulator, particularly electrified without the need for major
in relation to a customer protection capital investment in transmission or fuel
The market is likely to have undergone obligation. Regulators will need to address infrastructure. We would expect to see
full unbundling and experienced strong interconnections between local energy combinations of solar, wind, biomass and
customer engagement, both as consumers systems, review the risk of disconnection storage technologies used in these
and micro-generators, but recognises the and put in place reporting oversight markets, for example in Africa, where a
benefits of vertical integration for off-grid mechanisms to check that customers are number of such systems have already been
solutions. Financial viability of distributed not being overcharged. Where a territory put into place. But in a country like India,
generation and distributed grids is a has existing transmission capacity, the where almost all generation capacity is
prerequisite. Strong policy support for regulator might also need to determine grid-connected, local energy systems
fragmentation is required, either to allow appropriate charging mechanisms for the based on renewable energy are likely to
local initiatives or to encourage and transmission grid, both in terms of which be limited to island systems such as in
incentivise local communities and customers should pay and what proportion the Sundarbans or Lakshadweep.
businesses to take control and build and of the stranded capacity should be
operate their own local energy systems. included. We see Local Energy Systems as being
particularly suitable for isolated island
In its purest form, there would be a limited There are a number of new roles that systems, such as are found in Indonesia
role for large-scale generation connected could arise within a Local Energy Systems and the Philippines. The prerequisite is
to a central transmission grid. It would market. Generators may wish to become likely to be cost-competitive storage
continue to support industrial customers local energy operators providing a full technology to support distributed
with large, secure, long-term loads and range of generation, network and retail renewable technology, CHP generation
would be able to provide back-up for services across a range of technologies. and limited thermal generation.
security of supply reasons. We would Technology companies are also likely to The benefits would be in replacing
expect significant levels of stranded look at the option of becoming local carbon-intensive diesel generation, for
capacity, which may close without policy energy system operators. Market example in Alaska or the Philippines.
support. participants may look at the opportunities In India, a new local approach to energy
to link the power and gas markets. is taking root in some states in the form
We see generators focusing on developing Grid companies may decide to provide of retail supply outsourcing, whereby the
and operating small, distributed O&M services to micro-grids to maintain DSO contracts out part of its licence area
generation assets, sized to support the capability and skill base required to to franchisees.
domestic communities or commercial support their stranded assets.
customers and most likely connected to
distribution networks. Tariffs may well How might this market arise?
vary across the country as the costs of We see the main driver for Local Energy
supply would be based on the local Systems to be policy decisions, based
generation assets. Customers may be able on an objective to increase rural
to invest in the generation assets so that electrification, reduce the emissions
they have an incentive to manage their caused by using diesel generation in
demand at times when the local capacity isolated communities or to deal with
margin is tight. currently unreliable/intermittent supply.
Coupled with technology improvements
in electricity storage and reductions in
the capital investment costs of solar and
wind generation (for example), tariffs
become affordable and Local Energy
Systems become practical.
14 The road ahead Gaining momentum from energy transformationRegional supergrid The intermittent nature of some renewable India has proposed the development of a
generation is likely to mean volatility in renewable energy grid, the ‘Green Energy
The Regional Supergrid market market prices, particularly with long- Corridor’, with support from the German
scenario represents a market which is distance transmission, and managing the government. It aims to handle growth in
pan-national and designed to transmit pricing differentials between different renewable energy from the current 30GW
renewable energy over long distances. countries will be crucial. Skilled regional to 72GW by 2022. In southern Africa, with
It is likely to embrace some degree of traders will be vital, particularly for the support of the Southern Africa Power
unbundling and customer choice. merchant generators. Pool (SAPP) and the different utilities in
It requires large-scale renewable the region, a supergrid called Zizabona
generation, interconnectors, large-scale National TSOs will enter into agreements is being established between Zimbabwe,
storage and significant levels of with other TSOs in the region or, if Zambia, Botswana and Namibia, providing
transmission capacity. agreement can be reached between for the import/export of electricity via
countries, a regional TSO will manage the either PPAs or day-ahead trading through
The main challenge that will need to be overall system. Decisions on where new the SAPP.
overcome is regional regulation that transmission capacity is required to
applies across borders. National regulators improve the efficiency of the system will
will have limited responsibilities and will be taken on a regional basis, and will
be required to oversee national markets require a new charter to be developed
within the regional context. In some to lay out the objectives, rules and
situations, geopolitical risk will also be a operational processes of the regional
major factor, for example if supply relies market. Distribution businesses will
on generation located in neighbouring but remain national or local but are likely to
politically sensitive regions. require restructuring so that their focus
shifts to management of small-scale local
We will see a new approach to generation renewables and of the interface with the Combined models
investment decisions, where generators or transmission grid.
governments will consider a regional Each of the four potential market scenarios
merit order and interconnector access How might this market arise? outlined above represents a transformative
requirements as part of their business case The main driver for a Regional Supergrid move away from current markets. There
assessment (for example, South Africa and is policy, jointly created and pursued by are common themes across the models
the Democratic Republic of the Congo in neighbouring governments who recognise and we can see how, in practice, countries
the case of the Inga hydro dam project). the benefits of harnessing renewable might adopt certain components from
The emphasis on large-scale renewable generation sources and linking them to more than one model.
generation means that we are likely to see distant demand centres. It could arise from
stranded thermal assets, which would market coupling initiatives, where the The seeds are in place for transformative
require regulatory support to remain governments and regulators determine change but there is still a lot of inertia
available for national or local grid support that each market would become more in the system. The pace of change will
for security of supply reasons. efficient and pricing signals would become vary from territory to territory.
more appropriate if the two markets Some will see a gradual evolution while
We will see a shift in approach from became one. others will see parts of the sector
retailers, who will either become regional undergoing faster transformative change.
retailers or will enter into partnerships Which countries might adopt Such transformative change might be
to access customers in other countries. this market scenario? defined by locality or by the part of the
Brand management and customer We see forms of a Regional Supergrid, value chain.
segmentation will become more complex but without common regulation in the
as retailers embed their products and USA, so there is the potential for further We believe that these transformative
services in multiple countries. aggregation and adoption of common energy market scenarios provide a future
approaches. Looking at where a Regional in which market participants and new
Both generators and retailers will place Supergrid could arise through investment, entrants can thrive and the role of policy
an increased emphasis on trading and we think that the Middle East has the makers and regulators is clear. The most
risk management. The presence of potential to adopt this model. The EU appropriate market scenario will come
constraints, for example through limited has an objective of a single European out of an assessment of the impact of the
interconnector capacity, means that electricity market which would effectively major disruptors and the local factors that
locational pricing is the most likely become a Regional Supergrid, but the apply in each individual situation.
outcome, so market participants will need complexities of implementing common
to manage both national market prices and regulation across multiple countries with
market prices in neighbouring countries. different legal structures makes the pure
model less likely to be achievable. A hybrid
market adopting certain aspects would be
a more realistic option.
The road ahead Gaining momentum from energy transformation 15Within the next decade we anticipate that In defining future business models,
step-change milestones will be reached companies need to first understand and
Future utility in at least some of the key disruptive challenge their company purpose and
business models technologies – grid parity of solar
distributed generation, lower cost and
positioning in the markets of the future.
We call this ‘blueprinting the future’ and
mass-scale storage solutions, vibrant it consists of several fundamental steps,
Companies need to determine the
and secure micro-grids, attractive starting with defining ‘where to play’ in
future direction of their own markets,
electric vehicle options and ubiquitous terms of business segments, markets,
how these markets are affected by
behind-the-meter devices. In this new products and, services (see figure 4).
technological advancement and what
technology-enabled, customer-engaged Core, adjacent and growth market
this means for their business strategies.
marketplace, companies need to define participation areas are assessed based
While the urgency of their responses
their desired purpose (see figure 3). on attractiveness, capability to compete
may vary by location and value chain
We foresee a distinction between energy and potential for profitable success.
presence, we believe companies can’t
suppliers, integrators, enablers and Next comes assessing ‘how to play’ in
afford to wait as the next decade
optimisers with different points of focus these selected areas, which defines the
is crucial.
along the value chain. go-to-market strategies to be adopted by
participants in pursuing their market
Incumbents and new entrants need to aspirations, e.g. new products, innovative
ask themselves how they intend to unbundled pricing.
position themselves as market
participants, i.e. the ‘role’ they will play We then focus on the most important
in market development, customer dimension of the blueprint, ‘how to win’.
engagement and business execution. This element defines the particular
Companies have distinct options on this tailored approach that is most appropriate
spectrum ranging from ‘passive and for a company to achieve competitive
market-following’ to ‘innovative and market success, e.g. partnering or channel
market-making’. Defining the future role expansion.
of the entity is fundamental to shaping
the business model to deliver on
aspirations.
Figure 3: Future role evolution
Emergent roles
Energy Supplier Integrator Enabler Optimiser
‘Asset-focused’ ‘System-focused’ ‘Value-focused’ ‘Insight-focused’
Primary segment Transmission/ Distribution/
focus Generation Customer
distribution customer
• ‘Have to do’ if asset • ‘Will do’ regardless • ‘Should’ migrate into • ‘Could’ evolve into as
heavy or short in of new area depending on role new business models
supply participation mature
Key focus areas • Ensuring assets are • Facilitating grid • Enhancing the • Enabling customers
optimised in the interconnection with value of the grid to better leverage
market to match other transmission to all stakeholders behind-the-meter
price signals developers technology
• Addressing how to
• Achieving the right • Extending the leverage technology • Broader engagement
balance of asset-based deployment of to enhance system with the customer by
and notional technologies or performance and providing value
transactions within equipment into customer engagement through advanced
risk parameters the distribution data analytics
network
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