Energy industry takes skeptical view of deregulation and underestimates digitization, but is mostly satisfied with business
“EY Electricity Company Study Switzerland 2016”
Swiss power plants and energy supply companies are looking to the future with mixed feelings: more than half of the companies surveyed by EY would like to see plans for full market deregulation completely abandoned. Less and less importance is attached to innovation, and many companies are neglecting the issue of digitization. They view the regulatory environment as the key driver of change, but are largely agree with the federal government’s energy strategy. The companies are satisfied with the development of their business; well over half also anticipate 2016 to be a successful year.
Zurich, 7 June 2016 – Support for full market deregulation, including for private customers, is declining within the energy industry: 57% of the energy companies surveyed by advisory¬ firm EY would even like to see all plans for deregulation shelved, and 55% assume that full deregulation will not happen before 2022. Last year, one third of those surveyed indicated that 2018 would be a reasonable time for deregulation. “Full deregulation of the market for private customers will increase competition. Suppliers must adapt their sales approach and customer support to cater for this new market reality. Companies that are unprepared for the deregulated sale of electricity will have no chance,” says Alessandro Miolo, EY Switzerland Partner for Power & Utilities.
The Energy Strategy 2050 adopted by the Federal Council is supported by the majority of the 44 comp¬anies surveyed (82%). Its popularity has increased slightly compared with the previous year. The Energy Strategy’s postulated expansion targets for wind energy are actually already being exceeded: the larger Swiss energy companies have become heavily involved in the generation of electricity from wind over the past few years. However, while the Energy Strategy envisaged it being generated within Switzerland, most production capacities are located elsewhere. The survey shows that over two thirds of respondents are in favor of including foreign wind energy plants in order to meet the targets under the Energy Strategy.
Two thirds of the companies surveyed rate their business success in 2015 as very good or good, citing good purchase prices as the main reason for this. More than 60% of those surveyed also expect similarly positive results for the current year. “These almost two thirds represent the majority of the Swiss energy providers who do not produce any electricity, but merely sell it. The earnings situation of the few large national providers with their own production is highly critical, on the other hand; these companies are under significant economic pressure and are in the process of divesting valuable assets in order to remain solvent,” explains EY Switzerland Partner Roger Müller.
Disunity on support of hydroelectricity
The support measures adopted by parliament in March 2016 in favor of hydroelectricity are considered constructive by almost half of those surveyed; 9% are demanding even more intensive measures. The situation has not changed since the previou¬s year. “The varying economic situations of the energy providers are also reflected here: owners of hydroelectricity plants will welcome the support¬ measures. Companies without their own hydroelectricity production are likely to oppose a unilateral subsidization of parts of the industry,” says Alessandro Miolo.
The Federal Council’s plans envisage the replacement of the current support scheme for renewable energies, from 2021, with incentive taxes on gasoline, heating oil and electricity. More than three quarters of companies surveyed consider this to be reasonable. According to the Federal Council, fuels are initially to be exempted from these incentive¬ taxes, until 2030; the majority of those surveyed, however, reject this exemption. The proposal has more critics than it did in the previous year; they see this regulation as tantamount to a market distortion.
Change in business models becoming the rule
For a number of years now, energy companies have had to come to terms with dramatic changes in general cond¬itions. Almost half of those surveyed state that their business mo¬del has already changed significantly to very significantly. And they expect this change to continue. Only 13% believe that their business model will not change or will only change slightly.
There are various reasons for these changes, which are often interdep¬endent. The significance of these changes varies from region to region and country to country. For Switzerland, the regulatory framework (70%) and upcoming or anticipated market reforms (66%) are considered pivotal. The penetration of the energy market by new competitors (48%) and the changed customer requirements (43%) are weighted as somewhat less important for the change. The decentralization of energy production with the expansion of the new renewables (39%) and digitization (36%) are also cited as additional reasons. “The regulatory environment, and therefore politics, are currently of crucial importance for the entire industry. Customer requirements and competition will, however, increase in importance as drivers of change if full market deregulation does come about,” explains Alessandro Miolo.
Potential of digitization underestimated
Energy companies primarily understand the term digitization to mean the computer-assisted automation of business processes (80%). However, a small majority of those surveyed also categorize topics such as smart energy (includes smart grids, smart metering and smart home), as well as the availability and use of extensive data analyses under the area of digitization. The companies’ rating of their own state of digitization is conservative: 16% rate it as high, 50% as average, and 34% as low. The companies see by far the greatest potential of digitization in distribution. Within the companies, then, it is the sales and marketing teams as well as the grid divisions that are engaged with this issue as a matter of priority.
“The responses lead to the conclusion that the companies have their sights set above all on increased efficiency and improved workflows. They see digital technologies as instruments for achieving their goals more quickly. However, digitization has the potential to fundamentally change business models. The energy suppliers must take care not to underestimate the potential of digitization among the many other drivers of change,” warns Roger Müller, adding that digitization should be viewed holistically, because it affects the entire company, its products, business processes and values, and cannot be delegated.
Unlike their German counterparts, the Swiss energy companies see their own human resources and the lack of qualifications of their employees as less of a hindrance to driving digitization forward – 23% agree compared with 40% in Germany. There is, however, consensus that the necessary high investments (43%) and the legal uncertainties (36%) pose major obstacles on the road to digitization. The study also shows that municipal plants perceive digitization predominantly as an opportunity (53%) and less as a threat (12%).
Cooperations as a strategic option in focus
Asked about the importance of various strategic options, respondents ranked cooperations in first place (77%). Those surveyed see promising cooperations in particular with neighboring energy companies from the same supply level. New business areas as a strategic option are less of a focus than in previous years. Roger Müller is convinced: “The companies must not lose their flexibility and must again focus more strongly on finding cooperations outside their comfort zone.”
Core issues cited by the companies for the years ahead include sales and customer support (86%) and optimization of internal processes (82%). In view of the persistently low purchase prices, those surveyed believe the matter of energy sourcing (71%) will become less important. Topics such as training new recruits, investments in renewable energies and establishment of new business areas are also believed to become less relevant. The importance of the topics innovations for business processes and business models fell by almost a third, to just 39% and 34%, respectively. “On the whole, it is astonishing and dangerous that there has been a very dramatic decline in the appeal of innovation,” says Alessandro Miolo.
Remarks on the study
The expert survey of decision makers (managing directors or chairmen of the board of directors) of power plants and energy supply companies in Switzerland took place in March 2016. Forty-four out of a total of 204 companies in Switzerland were surveyed. Computer-assisted telephone interviews lasting an average of 40 minutes were conducted based on a standardized questionnaire. Surveys with a large proportion of similar questions were also conducted in the same period for the same target group in Germany and Austria.
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