EY Eurozone Forecast: September 2013
Energy Sector: reshaping the power industry
Power and utilities companies in Europe face the challenge of improving environmental performance, keeping customers’ costs down, and ensuring the lights stay on.
Under policy pressure to cut carbon emissions, while simultaneously being obliged to renew generating capacity and infrastructure, the sector has an opportunity to reshape the generation mix over the next 30 years. We must take investment decisions today.
Meanwhile, technology change enabling smart grids, demand management and customer empowerment are contributing to sweeping changes in the marketplace. Combined, these multiple changes have far-reaching implications for consumers and for business customers, who must ensure they have an energy strategy on their corporate agenda.
Energy firms must decide the best generation mix for a particular market, navigate shifting policy regimes, fund acquisition or construction of low-carbon and other assets, manage the risks of large-scale production projects and engage more closely with customers.
In a hugely capital-intensive sector, power and utilities companies must locate the finance to replace existing capacity, renew and upgrade aging distribution networks and simultaneously transform them into smart grids. Fiscal austerity and pressure on banks to limit lending may make it hard for power companies to obtain the funding they will need.
Greener and smarter
The European Union has made a commitment to cut its greenhouse gas emissions by 20% relative to 1990 levels by 2020, and generate 20% of its energy from renewables by the same year. To achieve these targets the industry must burn less coal. Countries have mixed enthusiasm for nuclear power: Germany plans to forsake it, France to renew it. Reliance on gas to generate base-load power is likely to increase.
Market intervention has driven the emergence of three key “new” renewable power sources. Onshore wind technology has improved enormously. Offshore wind, with different technology and big construction risks, has the potential for vast scale. However, the most striking change is in the cost of solar photovoltaic power, where industrial scale production by Chinese manufacturers has slashed the cost of photovoltaic modules. In time, wave and tidal power and biomass technologies could also add significant new supplies of energy.
Eurozone: Energy sector GVA
Source: Oxford Economics.
Smart technology connects these distributed power sources to the grid, introduces price signals, and enables power users to manage their demand and select their energy source. Managing the transformation and the large amounts of data that makes it possible is a growing challenge for power and utilities companies.
New business models for a new energy era
In time, smart technology is likely to cause major disruption to the business models of power and utilities firms. For commercial and industrial power users, investments in energy saving enabled by smart metering, smart appliances, and software platforms offer quick paybacks, while power purchase decisions can contribute to carbon-reduction goals. In the meantime, a vast new service sector has emerged, installing:
- Triple glazing
- Heat pumps
- Distributed generation systems
The European Union manufactures most of this equipment, underpinning the emergence of an enlarged clean technology sector. The sweeping nature of these changes makes the pace of this energy transformation difficult to predict. No company, whatever its business, can afford to ignore it.