Business Pulse: power and utilities
The sector's most significant risks and opportunities fall into four key themes:
- Economic volatility
- Compliance and stakeholder confidence
- Business model evolution
- Operational challenges
This report explores these themes, considering the risks and opportunities related to each.
Economic volatility is becoming the “new normal”; however, the associated risks remain significant.
Risks: commodity price movements, the rising cost and difficulty of accessing funds for investment, and managing the fallout of economic volatility threaten to drive up costs for utilities at a time when investment demands are substantial and growing.
Opportunities: utilities can take steps to mitigate this volatility. Those that invest outside their domestic territory might partially offset these risks through investment in high-growth geographies such as Latin America.
Outlook: we expect to see an increasing amount of cross-border operations and investment. Operational agility and scenario planning are essential if utilities are to manage volatility, as well as economic and political shocks.
“Historically, there was a perfect correlation between oil prices and gas prices. Now there is a mismatch, which affects long-term contracts and procurement.”
— Charles-Emmanuel Chosson
Global Assurance Power & Utilities Leader
Compliance and stakeholder confidence
Governments and regulators favor low-carbon generation and energy efficiency, but public concerns over costs are weighing more heavily in the prevailing economic environment.
Risks: the fast-paced change of regulatory and compliance criteria make this the highest priority risk for utilities executives. As energy policy remains fluid amid the current economic environment, this threat is expected to only increase in significance. Consumer concerns over cost mean that public acceptance of utilities is also seen as a major risk now and into the future.
Opportunities: utilities can create opportunities through better management of these risks. Their primary focus should be on improving relationships with all stakeholders. Particular attention should be paid to customers, who influence both policy-makers and regulators.
Outlook: in mature markets, prices for consumers can be expected to continue to rise in line with infrastructure investment requirements. Effort is needed to engage and educate consumers about expected rises in electricity.
“In Australia, regulatory rules increased from about 600 pages to about 2,000 pages. Many of the changes are due to the regulatory instruments catching up with the complexity of the industry.”
— Matthew Rennie, Oceania Power & Utilities Leader
Business model evolution
The traditional business model of supplying, metering and billing is changing in line with energy efficiency requirements and distributed generation growth.
Risks: we are seeing a clear shift, in mature markets, from a focus purely on sale of commodity to consumers, to selling energy efficiency and energy related home services. The threat of new entrants from other sectors and from innovative start-ups is growing as markets evolve.
Opportunities: new developments, such as smart and distributed solutions, will also offer new, incremental revenue opportunities. Acquiring or developing capabilities in areas such as data analytics will provide a catalyst for new customer solutions and help drive operational improvements.
Outlook: expect to see new entrants in competitive retail supply markets. To protect future revenue, utilities must rethink their business model.
“Western utilities face moribund domestic markets. They have begun eyeing up emerging markets for the opportunities afforded by economic growth but often lack the financial strength to make the most of them.”
— Duncan Coneybeare, Strategic Analyst, Global Power & Utilities
Securing the investment and delivering large capital projects, while maintaining a reliable supply, will be a key challenge for all utilities.
Risks: the infrastructure investment needs of utilities are unprecedented. Completing these projects safely, on time and on budget will see companies compete for in-demand resources and skills. Power and utility businesses must also ensure their approach to managing aging infrastructure - and related asset failure risk is adequate. Political intervention through energy policy changes, once again, present risk, given the potential impact on operations.
Opportunities: integrating distributed energy resources and improving the onshore and offshore wind supply chain offer real opportunities for utilities to mitigate some of the operational challenges.
Outlook: political intervention in utility operations is expected to continue as energy policy evolves. It is more important than ever, that utilities make the commitment to educate consumers about the impact of policy changes and to build trust with their customers.
“The US utility infrastructure has aged significantly over the past 20 years and many utilities plan to invest significantly to update and modernize their critical infrastructure. Being able to deliver these large projects on time and on budget is a big risk.”
— Dana Hanson, Americas Advisory Power & Utilities Leader