Utility companies facing ever increasing regulatory burden, look to rapid growth markets to mitigate risk
- Shift in thinking as traditional power and utility business models under threat
- Unprecedented regulatory and infrastructure investment requirements remain major concerns for industry
- Opportunities dominated by rapid growth markets, but acquisitions, alliances and ancillary services also key areas of interest
The traditional business model of utility companies is under threat, with a new approach needed to ensure future success according to Business Pulse: Exploring the dual perspectives of the top 10 risks and opportunities in 2013 and beyond (pdf, 1.8mb), a new report launched today by Ernst & Young.
The report, the latest in a series started in 2008, is based on a survey of senior executives from 110 power and utility (P&U) companies from 20 countries. It highlights that the most significant risks and opportunities facing the sector span four broad themes – compliance and stakeholder confidence, economic volatility, business model evolution and operational challenges.
Tightening regulation weighing heavily on utilities looking to court consumers
Since the last report in 2011, the risk surrounding the cost and accessibility of capital has eased while regulation and compliance obligations are now considered the sector’s biggest concern. The highest priority risk for the executives interviewed is the fast-paced change of regulatory and compliance criteria, which is expected to only increase in significance.
Commenting on the report’s findings, Randall Miller, Ernst & Young’s Global Risk Leader says: “A shift in thinking is evident in this year’s report, with compliance and regulations topping the list of risks, up from second place in 2011. While governments and regulators continue to pursue low-carbon generation and energy efficiency, consumers are becoming increasingly price sensitive, creating a conflict of stakeholder interest for P&U companies.”
The consumer is at the heart of the complex relationship between utilities, regulators and policy-makers. With electricity prices expected to increase, it is those utilities that make the most of smart technology to shape how they interact with consumers that are likely to capitalise on the opportunities available to shift public perception of the industry.
“From an Africa perspective the cost and accessibility of capital, lack of energy infrastructure and aging network infrastructure, and compliance and regulation still rank in the top three risks facing the power and utilities sector. Africa is still grappling with issues of building the necessary power infrastructure to enable industrilisation and economic growth. Clear and consistent regulatory and compliance frameworks are but a necessary enabler to achieve viable and efficient energy markets, “says Norman Ndaba, Ernst & Young’s Africa Power & Utilities Sector Leader.
Economic volatility: the new normal
As the global financial downturn continues, the perceived risk from economic volatility, while significant, is now more accepted among utilities. Commodity price volatility, such as the recent liquefied natural gas price fluctuations, and access to competitively priced long-term fuel supplies are identified by P&U executives as the second biggest risk to the industry.
Managing the fallout of this economic uncertainty threatens to drive up costs for utilities at a time when investment demands are substantial and growing. However, those companies investing outside their domestic territory, in high-growth geographies such as China and Latin America, may be able to partially offset such risks.
Andrea Paliani, Ernst & Young’s Global Power & Utilities Advisory Leader comments: “Utilities have large capital investment needs and long term planning horizons and so uncertainties associated with energy and climate policy, regulatory developments and commodity markets all add exposure and cost to any investment plan. However, growth via the increasing energy demand in rapid growth markets presents opportunities for both local and overseas P&U companies.”
Business model evolution: striving for innovation
As the utilities sector transforms, so too must its traditional business model of supplying, metering and billing; towards one that is capable of adapting to constantly changing stakeholder requirements. While the nature of this transformation varies among markets, there is a clear shift from a focus purely on selling energy to consumers, to selling energy efficiency or home services.
Paliani adds: “New entrants are expected in competitive retail supply markets and to protect future revenue, existing utilities must rethink their business model. In mature markets, 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.”
Operational challenges: large scale and high risk
Securing investment and delivering large capital projects will be a key challenge for all utilities as the infrastructure investment needs of these companies are unprecedented. Completing these projects safely, on time and on budget will see companies compete in a fierce battle for in-demand resources and skills. At the same time, P&U businesses must also ensure their approach to managing aging infrastructure – and related asset failure risk – is adequate.
Political intervention through energy policy changes is also a significant risk, given its potential impact on operations, even in markets previously considered stable and transparent. Since political intervention in utility operations is expected to continue as energy policy evolves it is increasingly important that utilities make the commitment not only to educate consumers about the impact of policy changes but also to build trust.
When looking towards the operational opportunities, integrating distributed energy resources and improving the on- and off-shore wind supply chain offer real opportunities for utilities to mitigate the risks of these operational challenges.
The risks and opportunities that exist in the power & utilities sector at the global level also exist in Africa. The only difference is their varying degrees of significance and intensity in the different regions.
With regard to opportunities, globally in 2013 acquisition or alliances to gain new capabilities is the second ranked opportunity, whereas in Africa, increased investment in generation capacity and delivery infrastructure in growth markets emerges as the second opportunity. Both follow the number one ranked opportunity for 2013, rising rapid growth markets’ energy demand, globally and on the African continent.
“Africa needs a sum in the region of US$93 billion to close the existing energy gap by 2030. The real issue in Africa is the cost of infrastructure development and accessibility to capital to make an impression on this energy gap. This is the number one issue followed by operational challenges. The underlying challenge here is the access and cost of human capital to undertake these challenges,” commented Ndaba.
The resourceful and resilient will survive
Looking ahead to what the P&U companies of the future may look like, Paliani concludes:
“Thriving in a volatile environment is not easy, but companies that do so share several characteristics. They are more outward looking and focused on the market, they respond smartly – and quickly – to change, they understand what drives cost and value, and they engage closely with stakeholders. While utilities face the prospect of value erosion in some areas, a robust forward view recognizes that these risks, as well as opportunities, are essential to future success.”
Notes to Editors
Top ten risks and opportunities 2013
|Rank||Risk 2013||Rank||Opportunity 2013|
|1||Compliance and regulations||1||Rising rapid growth markets' energy demand|
|2||Commodity price volatility and access to competitvely priced long-term fuel suppliers||2||Acquisitions or alliances to gain new capabilities|
|3||Political intervention in power and utilities (P&U) markets||3||Growth in ebergy and ancillary services markets|
|4||Uncertainty in climate policy and carbon pricing||4||Enhancing relationships with external regulatory and compliance bodies|
|5||Significant shifts in the cost and accessability of capital||5||Improving public perceptions|
|6||Capital project execution||6||Increased focus on investor relations programs and communications|
|7||Economic shocks and resulting short-term energy demand shocks||7||Integration of distributed energy resources|
|8||War for talent||8||Increased investment in generation capacity and delivery infrastructure in rapid growth markets|
|9||Aging generation and network infrastructure||9||Rising energy innovation in rapid growth markets|
|10||Managing planning and public acceptance||10||Improving onshore and offshore wind supply chain efficiency|
About Ernst & Young’s Global Power & Utilities Center
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