Global Utilities Industry

Global Utilities Industry: Value Chain Analysis- ML00027-094

Global Utilities Industry

Value Chain Analysis

ML00027-094


Table of Contents

2

Complete Value Chain: Overview

Complete Value Chain: Overview (cont’d)

Raw Materials: Overview

Raw Materials: Analysis

Raw Materials: Burning Issue – Oil Prices

Power Generation: Overview

Power Generation: Analysis

Power Generation: Burning Issue – Increased Efficiency of Coal-Fired Plants

Processing: Overview

Processing: Analysis

Processing: Burning Issue - LNG

Utility Companies: Overview

Utility Companies: Analysis

Utility Companies: Burning Issue - Liberalization

End Users: Overview

End Users: Analysis

End-Users: Burning Issue – Rising Costs

Appendix


Complete Value Chain: Overview

3

The global utilities industry can be split into five distinct stages; raw materials, power generation,

processing, utility companies, and end users

Raw Materials

Oil

Gas

Coal

Renewables

Water

Power Generation

Nuclear Plants

Coal Plants

Gas

Wind Farms

Solar Farms

Processing

Water Processing

Natural Gas Processing

Distribution Network Operators

Utility Companies

Power Generation Companies

Wholly Renewable Companies

End Users

Residential

Industrial

Business

Transport

Agriculture


Complete Value Chain: Overview(cont’d)

4

Companies involved at each stage are very large global players, able to operate at a high degree of

technical sophistication

Raw Materials

Gazprom

Royal Dutch Shell

Coal India

ExxonMobil

China National Petroleum Corporation

Power Generation

EDF Energy

General Electric

Siemens

Areva

Nordex

Processing

Veolia

Thames Water Utilities

Suez Water Utilities

Lukoil

National Grid

Utility companies

E.ON SE

OAO NOVATEK

Duke Energy

Sinopec

American Water Works

End Users

Residential

Industrial

Business

Transport

Agriculture


Raw Materials: Overview

5

Raw materials are required to generate energy for transmission. There is the option for non-renewables or

renewables.

Raw Materials

Mining

Coal

Uranium

Iron Ore

Renewables

Solar Wind

Hydro

Drilling

Crude Oil

Natural Gas


Raw Materials: Analysis

6

Companies operating at this stage are typically large mining companies

• Mining companies will typically provide raw materials for fossil fuels. While some companies will generally produce

some coal and uranium, the largest producers of coal globally are Peabody Corporation, Coal India, and BHP. Coal

India is state owned, but privately owned mining companies are also large and possess significant financial muscle.

• State involvement in this industry can be common due to the strategic nature of these resources. International cartels

such as OPEC coalesced around oil, while India, Iran, Russia, and Saudi Arabia all have state involvement in these

industries. However, Saudi Arabia privatized Aramco, with its 2019 IPO pushing the company’s market value to $1.88

trillion - the largest public offering globally..

• Renewable raw materials generally negate any suppliers and can be accessed an infinite number of times with the

appropriate equipment. This makes low scale entry for solar and wind affordable; however, for hydro this generally

requires appropriate geography and substantial investment to construct a dam capable of generating on a large scale.

• Major suppliers to the industry are companies undertaking outsourced activities for water utility companies. A wide

variety of business activities are outsourced, including construction, civil engineering, laboratory services and

administrative functions. Such activities are generally provided under fixed term contract, giving them a degree of

power by locking water utilities companies in to contracts which incur a penalty fee when broken. Moreover, demand is

largely unaffected by inflation, recession, interest rates, changing preferences, or inventory loss.


Raw Materials: Burning Issue

7

On April, 20, 2020, US oil prices crashed to a more than two decade low; dropping below zero for the first time in history as

a collapse in demand triggered by the coronavirus pandemic leaves the world awash with crude oil and raises concerns

about storage facilities being overwhelmed. The price fell as low as -$40 a barrel. Lockdowns imposed in many of the

world’s major economies have sent crude demand tumbling by as much as a third.

OPEC, Russia and other oil-producing nations finalised an

unprecedented production cut of nearly 10 million barrels, or

a tenth of global supply, in hopes of boosting crashing

prices amid the coronavirus pandemic and a price war.

However, the deepening fall in oil prices has come despite

this.

Reductions of varying magnitude are planned to run until

April 2022 as part of efforts to stabilise prices.

US rig count data by Baker Hughes, showed that the

number of active oil rigs in the US has dropped by more

than a third over the past month. But signs of curtailed US

supply have done little to boost prices.

US oil price plunges to 20 year low as COVID-19 hits demand


Power Generation: Overview

8

Power generation can be divided into three board areas: fossil fuel, renewable energy and nuclear.

Companies building and operating power plants tend to stick to a limited range due to the highly

specialized nature of each technology.

Generation

Fossil Fuel

Coal Natural Gas

Renewable

Hydro Electric Solar

Wind Turbine

Nuclear

Pressurized Water Reactor

Boiling Water Reactor

The Chinese renewable

energy market is not only

one of the fastest growing

markets, it is also the largest

globally.

Liquefied Natural Gas

(LNG) has opened up gas

distribution to the shipping

industry.


Power Generation: Analysis

9

Governments are increasingly seeking to diversify power mixes, resulting in greater attention being

devoted to alternatives to coal.

• Water and gas utility companies skip this stage as it is only relevant for generating electricity.

• Pressurized water reactor (PWR) nuclear power plants have fuel assemblies of 200-300 rods each, arranged vertically in

the core. Although the temperature of the water in the reactor reaches approximately 325 degrees Celsius, pressure of 150

atmospheres prevents it boiling and enables power to be derived.

• Many countries are seeking to reduce consumption of coal to help achieve climate change emission targets. This has

resulted in consolidation. Drax, the leading coal energy supplier in the United Kingdom, purchased Opus Energy in a £340m

($412m) deal which now places the company in the top five largest UK power companies. However, China is constructing

many coal-fired plants around the world at relatively low cost thanks to substantial economies of scale and much of the

technology being installed not being cutting-edge.

• Globally the construction of renewable energy power plants has been rising rapidly of late, but much of this is due to

investment from the Chinese government. Solar panel subsidies have proved to be particularly lucrative, but there are

concerns over whether the government will be able to pay the promised subsidies on a long-term basis.

• Countries such as the United Kingdom have moved towards much greater use of natural gas for power generation, but the

outlook for new construction of gas power stations has been reduced. Recently the government stated only a small number

of new gas power plants will be constructed over the next two decades in anticipation of improved renewable technology.


Power Generation: Burning Issue

10

Coal-fired power plants are improving significantly in efficiency, ensuring the technology has a future.

The RDK 8 coal-fired power plant in Karlsruhe, Germany, is

one of the most efficient in existence, producing thermal

efficiency of 47.5% and reduces carbon emissions by 40%

compared to the global average conventional coal-fired fleet.

According to industry insiders, such plants are part of plans

to raise the global efficiency of coal from 33% at present to

over 40%. Whilst many countries will be reliant upon coal at a

time when there is pressure to reduce carbon emissions,

significant reductions in impact of coal in new generation

power plants provide the dirtiest fossil fuel with a potential

future. Demand for power in China will help costs for ultra-

supercritical come down.

Despite efforts towards cleaning air and decarbonizing the

economy, more coal-fired power plants are due to be built.

Improvements in techniques to extract power from coal will

be important. Performance growth is important for the energy

mix of many developed economies.

Until the capacity to store energy from renewable

sources becomes part of the mainstream, power that

can be controlled remains a greater priority than

switching to more environmentally friendly sources.

That makes ultra-supercritical coal relevant to power

grids in the coming couple of decades. Consequently,

coal is more likely to experience a slow and controlled

decline than proved to be the case in the UK, creating

an environment for a graduated transfer to cleaner

power sources.

Global Utilities Industry: Value Chain Analysis- ML00027-094 11

Processing: Overview

Processing is sometimes undertaken by the utility companies themselves, while other companies are

independent

Processing

Water

Veolia Thames Water

Utilities

Suez Water Utilities

Beijing Capital

Gas

The Hong Kong and China Gas

Company

OAO NOVATEK

Gazprom

Electricity

National Grid

RTE France


Processing: Analysis

Processing requires technical knowledge and specialist equipment

• Natural gas processing is a complex process and as a result it is usually large scale companies that are present at this

stage. Many utility companies are also present at the processing stage. For example, the Purovsky Plant in Russia,

which processes unstable gas condensate into stable gas condensate and natural gas liquids, operates as a subsidiary

of Novatek and helps the company to take full control of its gas utilities. Furthermore, the Purovsky Plant is connected

via its own railway line to the Russian rail network at the Limbey rail station, allowing efficient transport.

• This stage is also where infrastructure plays an important role. Poor infrastructure can cause major issues for end

users. Geographically isolated islands particularly suffer as they have to pay very high prices for utilities and also have

to rely on generators because power cuts are so frequent. Hawaii, for example, has the highest energy costs of all 50

states, spending billions of dollars on imported oil each year.

• The complexity of water purification depends on its source. Water from aquifers, layers of water-bearing permeable

rock, is already of high quality so only needs to be disinfected with chlorine. River and reservoir water tends to contain

more contaminants that have to be filtered through several steps.

• Electricity towers and cables are owned and operated by Distribution Network Operators (DNOs) such as the National

Grid in the UK. These companies may also own and operate the gas transmission network.


Processing: Burning Issue

Liquefied Natural Gas (LNG) has added a distribution stream into the gas utilities market that for the first time connects many countries together.

LNG is connecting gas supplies from countries that have never been

regarded as major gas producing nations. Australia is one such example and

is finding customer nations in the developed world that are running out of

domestic supplies. The leading exporter globally of LNG is Qatar, but it has

been estimated that Australia will take the top spot by the end of 2020.

The expansion of shale gas production in the United States has enabled the

country to become a LNG exporter – a development that is particularly

important for countries such as the UK which is under pressure to improve

energy security. Some eastern European countries are using this alternative

means of distribution to reduce dependence on the Russian giant, gas

company Gazprom. The Russian government itself is ploughing tens of

billions of dollars into LNG projects as part of an effort to become a leading

player in this area. Shipping LNG around the world allows countries with little

or no access to natural gas to gain a supply.

Lithuania constructed a terminal and agreed to purchase LNG from Statoil in

Norway at 10% more than the price asked by Russia for natural gas.

Although costs are higher, the new form of distribution provides adequate

benefits.

The $325m terminal has granted Lithuania

new influence and confidence in dealing

with Gazprom. Previously Lithuania paid

the highest gas prices of any of the 28

European Union member states; now,

following completion of new contract with

Gazprom, the cost is 25% lower. Demand

has enabled more countries to become

involved – even Egypt is seeking to end gas

imports during 2018 and begin exporting.

LNG will play an important role in finding

customers for that gas.


Utility Companies: Overview

14

Companies will often offer both electricity and gas but water utilities tend to be separate

Utilities Companies

Electricity

EDF Centrica

China Guodian Corporation

E.ON

Gas

E.ON OAO

NOVATEK

Gazprom

Water

American Water Works

Beijing Enterprises


Utility Companies: Analysis

15

The global industry is dominated by a moderate number of large, very powerful firms

• Gas is the most lucrative segment of the industry, making up 47% of its revenues in 2018. Many companies offer both gas and

electricity, and some, such as Beijing Enterprises, offers all three utilities.

• The utilities industry is heavily price-driven, and product differentiation is very low. Because of this the threat from new entrants is

increased as little investment is required in order to match the product offering of existing players. Little prior knowledge is required

to operate successfully in the industry. Industry growth is also fairly high, which is likely to make the industry more attractive to new

firms and competition is likely to be tempered somewhat making market share easier to secure. However, existing firms in the

global industry are very large players with significant wealth and financial muscle. They are much better suited to price wars, and

aggressive pricing strategies could be employed to choke out new firms.

• Entry into the Chinese utility industry is all but impossible given the current domination of state-backed enterprises. Certainly foreign

companies can expect to be rebuffed in any efforts to enter China. The government is very conscious of the strategic importance of

utility supplies and is showing no sign of relinquishing control of the industry. Were some degree of liberalization to happen in the

long-term future, chances are it would be limited to domestic companies.

• The gas wholesale market involves the buying and selling of natural gas after it has arrived from production sites. The wholesale gas

market in the United Kingdom has one price for gas irrespective of where the gas comes from. Prices at which gas is then sold to

end-users are heavily dependent upon the initial wholesale price.

• Individuals may become self-sufficient by harnessing their own energy from the sun and filtering their own water but this is likely to

be very time consuming and expensive.


Utility Companies: Burning Issue

16

Liberalization continues apace, although in some markets patience is wearing thin.

Liberalization has been pressed globally. The European Commission

took efforts to liberalize the EU’s energy markets several times, while

the US, Chile, Argentina, and other countries have undertaken further

efforts to establish a competitive market in energy. However, in a

market which tends towards natural monopolies and strategic

government intervention, it is proving to be much more difficult to

implement in practice.

Free marketers blast government intervention, particularly in the form of green subsidies in a bid to induce a switch to

renewables. In one of the epicentres of the first liberalized energy markets, the UK, the conversation has begun to turn towards

renationalization. Successive attempts to regulate the energy market have done little to induce competition. A new Ofgem rule

introduced in October 2016 demanded that suppliers must show all the cheapest alternative tariffs they offer on customers'

statements, including tariffs offered by 'white label' partners. Rather than induce competition, Centrica just raised its white label

partner tariffs rather than divert to its cheaper plan. The oligopolistic behavior saw the government introduce legislation aimed at

capping prices in February 2018 with over 11 million more households on poor value default tariffs being protected from being

overcharged. A move once considered hysterical and even saw Centrica threaten to withhold investment only three years ago.

As such, players in this market are likely to continue to attract the ire of regulators.


End-User: Overview

17

In some cases end-users have backwards integrated via

microgeneration, for example with solar panels.

Nearly the whole population are end users of utilities companies in some way or another

End-users

Residential

Households

Industrial

Agricultural

Manufacturing

Services

Public Services

Transportation


End-User: Analysis

18

Due to a lack of differentiation, end-users tend to focus primarily on price.

• In terms of numbers, the predominant buyers in this industry are residential customers. These lack financial muscle,

bargaining power, and small size individually in relation to electricity consumption. This is offset somewhat by the size of

other buyers such as commercial, industrial and public services customers.

• Low-cost switching is favorable towards buyers, particularly in liberalized markets where consumers can respond to

unfavorable service quality or price increases by switching supplier easily. However, some markets have few major

players. Others have monopoly suppliers, such as KEPCO in South Korea, or an incumbent with large market share and

few challengers, such as Eskom in South Africa.

• Product differentiation is minimal. Utilities offer a commodity; all firms offer the same end product. The only real

differentiation offered from electricity retailers is the source of the electricity (e.g. whether it comes from renewable

sources or not), and the differing services provided with the electricity such as fixed-term prices. This leaves customers

in markets with more than one player to focus primarily on price. Those with non-liberalized markets and/or limited

players are faced with limited or zero choice.

• There is a growing possibility for end-users to backwards integrate, for example with solar panels. The availability of

feed-in tariffs and government climate change policy can influence the significance of self-generation.


End-User: Burning Issue

19

Energy cost increases are causing rises in fuel poverty and impacting high energy businesses.

Fuel or energy poverty definitions vary, but is an issue becoming increasingly apparent. The latest ONS data (from 2017)

estimates that in the UK 10.9% of households are in fuel poverty. A fuel poor household is defined as one which needs to

spend more than 10% of its income on all fuel use and to heat its home to an adequate standard of warmth and would be left

with a disposable income below the poverty line. In England, adequate standard of warmth is defined as 21°C in the living room

and 18°C in other occupied rooms. Households with the lowest incomes spend 10% of their expenditure on energy – over three

times more than the proportion spent by households with highest incomes. A combination of high energy prices and stagnant

wages have contributed to this, and it is becoming an increasingly prominent conversation in Europe. When pushing up

customer bills, energy companies often blame punitive green taxes, although government data appears to contest this. When

energy prices are high, intensive industries such as aluminum or steel which require vast amounts of power have had to shut.

In December 2014, the Government introduced a new statutory fuel poverty target for England . The target is to ensure that as

many fuel poor homes as reasonably practicable achieve a minimum energy efficiency rating of a Band C by 2030.

Larger businesses may have the clout to negotiate or go direct

to wholesale, but SMEs and poorer households generally suffer.

Regulators are encouraging more competitiveness in a bid to

improve price competition in the market. In the UK however,

despite an influx of businesses the big six’s hold remains pretty

firm.


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