Political intervention main threat to future of utilities, EY report finds

18 April 2013

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  • Shift in thinking as traditional business models come under threat and new ways are sought to engage with consumers
  • 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

Political intervention through energy policy changes is seen by Power and Utility companies as the most significant risk affecting their future according to Business Pulse: Exploring the dual perspectives of the top 10 risks and opportunities in 2013 and beyond, a new report launched today by EY.

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.

Commenting on the impact of the findings for UK firms, Richard Postance, Power & Utilities Advisory Leader said: “Given its potential impact on everything from half-century capital planning to customer operations, political intervention is seen as a significant risk for the P&U industry, even in markets like the UK that have been considered stable and transparent. In a world of rising energy prices we are seeing a real fear amongst utilities of ending up on the wrong end of expedient, but short sighted political action.

“Since political intervention is expected to continue as energy policy evolves utilities cannot take a back seat in the engagement of their consumers. Without prior education and a trusted relationship consumers will perceive “it is government policy” as an excuse, not a reason.

“Consumers are voters too and at the heart of the complex relationship between utilities, regulators and policy-makers. With energy prices expected to increase, it is those utilities that transform how they interact with consumers and adopt technologies, such as Smart, and innovative win-win partnerships, such as efficiency, that are likely to capitalize on the opportunities available to shift public perception of the industry.”

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. 

A shift in thinking is evident in this year’s report, with compliance and regulation 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.

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.

Business model evolution: striving for innovation

As the utilities sector transforms, so too must its traditional business model of generating, supplying, metering and billing; towards one that is capable of adapting to changing requirements.
Postance adds: “While the nature of this transformation varies between markets, the survey’s top three opportunities are accessing growth geographies, gaining new capabilities and growth in ancillary services. For me, the scale of change is significant and only the agile will succeed.”

To download the report, visit www.ey.com/powerandutilities/business-pulse