What are the megatrends and disruptions that are set to transform Australia’s energy sector? How can generators, distributors and retailers make the right moves in order to thrive amidst this change? Mark Coughlin, PwC’s Asia-Pacific energy and utilities leader, examines the headwinds and opportunities facing the industry, and what companies must do to position themselves to win.
The changes affecting the power utilities sector have provoked some apocalyptic phrases from headline writers.
Never before has the power sector faced such convergent forces of change. There is the disruption caused by changing or lacking government policy and regulation, major shifts in customer expectations across the value chain, competition from not only traditional players but also new entrants and the march of disruptive technologies – a veritable tsunami of disruption.
Adding to the impact of these energy-specific challenges are the global megatrends that are cutting across all industries, including technological breakthroughs, climate change and resource scarcity, demographic changes, shifts in economic power, and accelerating urbanisation.
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 the new energy landscape as energy markets transform in the next 10 years.
Research tells us energy company executives across the world are seeing change accelerating and the need for business strategies and business models to change is intensifying.
A PwC report, The road ahead: Gaining momentum from energy transformation, examined these issues in detail – here’s what we found.
In many jurisdictions, renewable power generation is growing exponentially and in time will partly replace fossil fuel generation. Smart grids are delivering the potential for greater interactivity with customers, and advances in battery technology mean a sustainable ‘off-grid’ existence might not be far off for some.
All bring opportunities for incumbent power companies, but many also have the effect of eating away at a utility company’s traditional revenues and undermining the traditional utility business model.
The combination of the internet, mobile devices, data analytics and cloud computing with smart grids and smart metering, present opportunities for utility companies to get closer to the customer, play an enhanced ‘energy partner’ role and exploit data opportunities by creating new products and services. Consider how phone and data markets have changed with the advances in mobile technology.
Climate change and resource scarcity
The energy sector is on the frontline of concerns about climate change. The sector as a whole accounts for more than two-thirds of global greenhouse-gas emissions, with just more than 40 per cent of this stemming from power generation.
Resource scarcity or availability, and the associated geopolitics and economics of gas, oil and coal supply, are key factors shaping power market policy.
A growing emphasis on renewables is a response to both climate change and security of supply concerns. Solar PV is here to stay and is not far from being cost competitive with traditional sources of supply. This is a topic of great conjecture with as much misinformation and marketing circulating as there is a fact base.
Together, renewable technologies, energy saving and a different customer outlook are leading to a transformation of the electricity environment. In time the value chain will shift, away from large conventional power plants towards local power generation, and a greater focus on distributed energy and peak demand management.
Within the next minute the global population will rise by 145 people. By 2025, we’ll have added another billion people to reach about eight billion.
The growth prize for power companies of serving expanding populations is a big one. For example, Nigeria’s population is expected to exceed that in the US by 2045. Companies seeking to reposition their geographic footprints towards faster-growth countries will also need to have a clear view on the impact of energy transformation on these countries.
The prospect of bypassing the grid and leapfrogging to new local distributed technologies and market models is not unrealistic in developing economies if the pace of technological advances and cost reductions continues.
Shifting customer behaviour
Even if customers don’t literally say goodbye to the grid, the relationship between network companies and customers will change in the next 10 years. Utilities will start to make active choices on the role their networks play in the economy and on the type of services they provide to customers. It is easy to envisage a future role where network provide a ‘plus and play’ capability to microgrids, virtual power plants and other new technologies.
In return, new services from these connections will generate new revenue flows. In order to succeed, utility companies 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.
Energy transformation is shifting the opportunity for good margins into new parts of the value chain. But lower barriers to entry in these areas of the value chain and the need for new capabilities mean there is the prospect of existing companies being outflanked and outpaced as more nimble and able competitors seize key revenue segments.
For example, distributed energy is a key focus both for incumbent power utility companies and for new entrants. In addition, there is considerable interest from companies seeking to explore the opportunities that come from existing home and online services as well as future smart grid and distributed energy provision.
Tomorrow’s competitors are likely to include non-traditional utility players including main stream retailers, data and telco companies. We have already seen Google buy into the sector.
In a digital-based smart energy era, the expectation is the main distribution channel will be online and the energy retailing prize will hinge on innovative digital platforms to secure the energy automation, own generation and energy efficiency customer space.
Smart grids, micro-grids, local generation and local storage all create opportunities to engage customers in new ways. Increasingly, we are seeing interest in the power sector from companies in the online, digital and data management world who are looking at media and entertainment, home automation, energy saving and data aggregation opportunities.
Government and regulation
The political context shapes the utility business model. This has always been the case but, in a more dynamic energy transformation context, political and regulatory settings become even more important.
Our research tells us the most disruptive influence in the energy markets around the world right now is government regulation. For this to be more disruptive than global megatrends and technology advances is sobering.
The question is, ‘how do we accelerate the glacial movement of good energy policy across the world?’
Companies must innovate and fight for capital
Incumbent companies that don’t innovate could risk seeing themselves succumbing to the pressure points and being eclipsed in the same way that incumbents like famous camera companies, video stores high street booksellers were in other sectors.
In the future, 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, to stay ahead of change and create new markets for their products and services.
Companies will face capital investment challenges to replace ageing infrastructure as well as make energy transformation investments such as smart grids. Innovative and alternative approaches to financing are becoming more commonplace in the sector.
Where to from here?
Utilities will need to determine ‘where’ it makes sense for them to participate in the future energy market and ‘how’ they can best position themselves for success.
No single business model will be the panacea for utilities. Rather, they will have to be adaptive to the development of the marketplace and the evolution of the connected customer. Just as utilities are unsure of market direction, customers are equally uncertain of what really matters to them in energy decision-making.
These gaps between foresight and expectations provide the ‘open seas’ where utilities can forge new business models that fundamentally reshape the historical relationship with customers and position incumbents for a broader and more value-creating future. It is now about how energy market players create new markets and transform their business models to tackle these new frontiers.