Transformational challenges ahead for power & utilities companies

  • Share

Friday 19 April 2013 — Compliance and regulation, commodity price volatility, access to competitively priced long-term fuel supplies, and political intervention top the list of business risks now facing Australian power and utilities companies.

Released today, EY’s report Business Pulse: Exploring dual perspectives on the top 10 risks and opportunities in 2013 and beyond, Power and utilities report, is based on a survey of 110 power and utilities companies from 20 countries, including Australia.

EY’s Oceania Power & Utilities Leader, Matt Rennie, says the global sector is undergoing transformational changes which are challenging the traditional business model of supplying, metering and billing.

“As the utilities sector transforms, it will need to move towards one that is capable of adapting to constantly changing stakeholder requirements. There is a clear shift from a focus purely on selling energy to consumers, to selling energy efficiency or home services,” he says.

“In mature markets like Australia, with flat or declining demand, opportunities exist in new developments such as smart technology and new distribution solutions. These will offer additional revenue streams, and acquiring or developing capabilities in areas such as data analytics will provide a catalyst for new customer solutions and help drive operational improvements.”

The top 10 risks facing power & utilities companies in 2013 (2011 ranking in brackets):

  1. Compliance and regulation (ranked number 2 in 2011)
  2. Commodity price volatility and access to competitively priced long-term fuel supplies (5)
  3. Political intervention in power and utilities markets (3)
  4. Uncertainty in climate policy and carbon pricing (4)
  5. Significant shifts in the cost and accessibility of capital (1)
  6. Capital project execution (new entrant)
  7. Economic shocks and resulting short-term energy demand shocks (10)
  8. War for talent (7)
  9. Ageing generation and network infrastructure (new entrant)
  10. Managing planning and public acceptance (6)

Consumer relationships are key

Rennie says the consumer is at the heart of the complex relationship between utilities, regulators and policy-makers.

“With electricity prices expected to increase, those utilities that make the most of smart technology to shape how they interact with consumers are most likely to get a competitive edge,” he says.

“Effective stakeholder management is becoming a critical value driver for power and utilities companies in Australia, not only with regulators but increasingly with consumers and consumer representative groups in the context of expected reliability levels and price/service trade-offs.”

“The underlying technology in electricity hasn’t really changed in 100 years but the way we use electricity now and consumer expectations around reliability means the infrastructure has been built around peaks never imagined previously which has lead to rapid increases in asset costs and upward pressure on margins and prices.”

Rennie says power and utilities companies need to navigate a balance between price and cost, which can only be done by listening to consumers about what they want, listening to governments to understand their needs and with regulators about how they discharge their obligations.

“Network companies have lost positive connectivity with consumers over the past 10 years, as they have retreated from retail functions and instead generally interact with consumers only when outages and other problems occur,” he says.

“Rebuilding these relationships to better understand the service levels expected by consumers and to educate consumers about the reliability/price trade off will be increasingly important.”

Compliance and regulation

Globally, many utilities feel they are carrying a relentless and increasing regulatory burden. In established markets like Australia, these regulations are being driven by market reforms and a move toward competition in all aspects of utility operations. “In Australia, regulatory rules have increased from about 600 pages to about 2,000 pages in the past 7-8 years, and have been subject to around 100 rules changes over that time,” says Rennie.

“Much of the change is due to the regulations catching up with the increased complexity of the industry, but there is certainly work to be done in simplifying the regime.”

“Together with the National Energy Customer Frameworks legislation which has remapped retailer/distributor relationships across Australia to new national arrangements, the industry has had to face considerable regulatory burden over the past five years.” “We expect regulation and compliance to remain a top risk for utilities in the foreseeable future, particularly as increased investment in the sector continues to put upward pressure on consumer prices.”

Commodity price volatility

Globally, unconventional gas, the growth of liquefied natural gas (LNG) infrastructure and the wide geographic variation in natural gas prices have moved commodity price volatility up the rankings.

“Continued volatility around the long term price and availability of natural gas in Australia will increasingly present a risk for retailers operating within price capped markets in Queensland, NSW and Tasmania,” says Rennie.

In the medium term, retailers in Australia will continue to diversify into the upstream gas space, particularly coal seam gas, in order to manage this risk for retail pricing purposes.

“However, in the longer term we may see greater attention to alternative sources of generation including coal fired and analysis into the possibility and suitability of nuclear energy to fill the gap.”

Political intervention in power and utilities markets

Political intervention in the power and natural gas markets is becoming a more pervasive risk for both the wholesale and retail sectors. Price rises, accidents and consumer concern over environmental and safety issues are prompting action from governments that can have wide-reaching, cross-border implications.

This risk is expected to remain a top three risk in the future.

Rennie says the risk of political intervention has never been more acute in the Australian market than it is now.

“The Australian market is under pressure from carbon taxes at the wholesale level, rule changes and regulatory uncertainty at the networks level, and retail price regulation at the retail level.”

-ends-

About EY

EY is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

EY refers to the global organisation of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information on our organisation, please visit www.ey.com.

This news release has been issued by EY Australia, a member firm of Ernst & Young Global Limited.

Liability limited by a scheme approved under Professional Standards Legislation.

 

Contact details:

Megan Ball
EY Australia
Tel: + 61 2 8295 6427