Turning risk into results

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What are the top risks and opportunities for power and utility companies today? How can they best mitigate and capitalize on these to drive growth and ensure long-term sustainability? Keith Harrison reports.

Our Business Pulse for power & utilities (P&U) is a snapshot of the industry today and a forecast ahead to 2015.

Drawn from interviews with the world’s leading utilities, it offers insight into the biggest challenges facing a sector undergoing massive transformation.

A shift in thinking is evident in this year’s report. Utilities recognize that their traditional business model is under threat and that new approaches are needed to achieve future success.

Regulatory pressures top risks

The fast-paced change of regulatory and compliance criteria ensure this is the top risk for utilities now and in future.

In established markets, these regulations are driven by market reforms and a move toward competition in all aspects of utility operations. In emerging markets, regulation is increasing as the sector grows to keep up with energy demands.

The challenge for utilities is to better manage their regulatory obligations by keeping abreast of frequent changes and effectively communicating with stakeholders about how these will affect prices.

Ongoing economic volatility may be accepted as “the new normal,” but it remains a challenge for utilities. Utility investment planning faces risks from:

  • Commodity and emissions market uncertainties
  • Fluctuations in energy and climate policy

In developed markets, aging infrastructure and the low-carbon agenda will require vast amounts of capital expenditure. In developing markets, the growing demand for energy is the principal driver behind the need to invest heavily in capital assets.

Companies will need to consider how they will access new sources of capital to finance future investment needs.

Risks

Top 10 risks 2013 ranking 2015 forecast
Compliance and regulations 1 3
Commodity price volatility and access to competitively priced long-term fuel supplies 2 2
Political intervention in P&U markets 3 1
Uncertainty in climate policy and carbon pricing 4 4
Significant shifts in the cost and accessibility of capital 5 5
Capital project execution 6 6
Economic shocks and resulting short-term energy demand shocks 7 7
War for talent 8 8
Aging generation and network infrastructure 9 10
Managing planning and public acceptance 10 9

Emerging markets lead opportunities

Utilities continue to see emerging economies as their top opportunity. The International Energy Agency forecasts non-OECD economies, particularly China and India, to grow the most rapidly in coming years.

As utilities move to capitalize on the potential of emerging markets, they face the challenge of mitigating the inherent risks of overseas expansion. Foreign markets can be complex to navigate, and a local presence is key to understanding the regulatory, political and cultural frameworks.

Using an acquisition or alliance to develop new capabilities, move into emerging markets and spread the cost and risk of large-scale capital projects is a growing opportunity for utilities. But decisions regarding these transactions are complex, and utilities will need to engage with the right expertise as they plan and implement any merger or acquisition.

Many of the risks facing power and utility companies are largely beyond their control and can only be mitigated by contingency planning and damage minimization. Other challenges, such as the relationships with customers, offer opportunities to make real change and reap a competitive advantage.

We expect the smart revolution to play a major role in realizing this opportunity. Access to near-real-time data from smart meters opens the door for utilities to build better relationships with customers and to move toward selling new services and solutions.

Utilities may see regulatory pressures as their biggest risk, but many also recognize that improving relationships with regulators may offer one of their greatest opportunities. Building stronger relationships with regulators can minimize the risk of non-compliance and enhance a power and utility company’s ability to influence the rules.

Opportunities

Top 10 opportunities 2013 ranking 2015 forecast
Rising emerging markets’ energy demand 1 1
Acquisitions or alliances to gain new capabilities 2 2
Growth in energy and ancillary services markets 3 3
Enhancing relationships with external regulatory and compliance bodies 4 4
Improving public perceptions 5 9
Increased focus on investor relations programs and communications 6 5
Integration of distributed energy resources 7 8
Increased investment in generation capacity and delivery infrastructure in emerging markets 8 7
Rising energy innovation in emerging markets 9 6
Improving onshore and offshore wind supply chain efficiency 10 10

New challenges

Apart from the top 10 risks identified by utilities, two other emerging challenges are likely to have a significant impact on utilities:

  • Disruption of the traditional utilities value chain: although the dominance of the vertical utility chain is being eroded by evolving regulatory regimes and new entrants, the time frame for change is unclear.

Large utilities still control the majority of customers, but regulators may force change to encourage competition. As consumers gain more control through technical innovations, they may also vote with their wallets.

  • Ineffective energy storage solutions: the high cost of existing storage solutions make their large-scale rollout unlikely while some question whether a major expansion of energy storage is even required. Demand response programs or reserve capacity could resolve many of the relevant issues.

As the structure, operation and regulation of electricity markets will ultimately shape incentives to build storage, this creates a significant political or regulatory risk for potential developers or funders of these projects.

Be ready to respond

Both the top risks and opportunities reflect the evolving nature of energy production, delivery and supply as well as the arrival of new and innovative market participants. They drive home the need to assess your company’s business model and strategy to ensure its readiness for the sector’s transformation.

In an increasingly competitive, globalized world, utilities that are aware of the risks and opportunities they face and have strategies in place to respond stand the best chance of success. 

Read the full Business Pulse for power & utilities.