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Energy transformation The impact on the powersector business model

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13th PwC Annual Global Power & Utilities Survey

94%predict complete transformation orimportant changes to the power utilitybusiness model.

67%expect technology and new supply sources to dramatically reducedependence on oil and gas-richcountries.

82%see distributed power generation as an ‘opportunity’ versus only 18% rating it as a ‘threat’.

2 13th PwC Annual Global Power & Utilities Survey

About the survey

The 13th PwC Annual Global Power &Utilities Survey is based on researchconducted between April and July2013 with senior executives frompower and utility companies incountries across Europe, the Americas,Asia Pacific, Middle East and Africa.The Europe survey includes Russia.The majority of participants weresenior vice-presidents, senior generalmanagers, directors or otherdepartment heads from power and gas utilities, with interests coveringsupply, transmission, generation and trading.

AcknowledgementsPwC thanks all the participants whotook time to participate in the survey.We take this opportunity to also thankeveryone who has participated in the 13 year period we have beenconducting the survey, both withinPwC and in the power and utilitiessector.

Published October 2013

ArgentinaAustraliaAustriaBrazilBulgariaCanadaChileChinaEgyptFranceGermanyGreeceIndiaIndonesiaIsraelItalyJordanKenyaMexicoNamibiaNepalNew ZealandOmanPortugalRomaniaRussiaSouth AfricaSouth KoreaSri LankaSwedenThailandTurkeyUAEUKUSA

Introduction 3Executive summary 4Big issues 6

Transformation 6 Disruption 8Technology 10Supply 12

Big responses 14Companies 14Regulators 22

CEO perspectives 26Around the world 29

Regional survey highlights 29Contact 35

Contents

worldwide industry viewpoints

53 power and utilities companies

35 countries

IntroductionToday’s power utilities market is facing majordisruption. The magnitude of near and mid-termchallenges is immense. Power companies arepulling the plug on conventional generation. Utility commodity businesses face continued strongheadwinds. Carbon markets are not functioning.Regulation is often failing to produce the outcomes intended and is adding to uncertainty.The traditional utility business model is cominginto question.

In Europe, the move towardsrenewable and distributed powergeneration is advanced furthest. But it is having challenging marketconsequences. Highly efficient andflexible generation that couldcomplement intermittent renewablessources is being mothballed. Gasstorage levels are coming close tocritical reserve levels but it isuneconomic for companies to developstorage capacity. Blackout risks areincreasing and subsidies for renewablegeneration are pushing up costs forcustomers. Integrated power utilitiesare facing massive challenges.

But while Europe provides the focusfor what is close to a current crisis, the issues that lie at the heart of it arepresent in other regions. Where is thebalance, often contradictory, betweensecurity, affordability and cleanerenergy leading us? What is the role of subsidies and how are they bestdesigned to avoid unintendedoutcomes? Crucially, what will be theimpact of distributed generation oncentralised grids and the traditionalutility business model?

The extent of current disruption to thebusiness model is perhaps only nowbecoming clear. Where it will lead andwhat it will mean for the future utilities’business model remains unknown. We’d be wrong to say it can be predictedbut the direction of some of the forcesshaping it can be mapped out. And it isthis ambitious territory that we makethe focus of this year’s PwC AnnualGlobal Power & Utilities Survey.

We look at these big issues through theviewpoint of a survey that is extensivein scope as well as intensive in its depth.We have talked to senior power andutility company executives in 53companies and 35 different countriesaround the world. The survey issupplemented by the ‘on the record’perspectives of a number of CEOs thatare also included in the report. Wereport their findings on a range ofquestions and also, in a series of futurescenarios, their assessment of howparticular aspects of the world ofelectricity will look like in the future.

13th PwC Annual Global Power & Utilities Survey 3

Norbert SchwietersGlobal Power & Utilities Leader

Executive summary

Changes in technology and cost

The growth of distributed generation andits threat to the power utility businessmodel depends on technologicaldevelopments and cost. Its rise in Europehas been subsidy-driven. Cost barriersremain in the way of it being truly market-driven. But, if these barriers can be overcome, they could set the scene for widespread global industrytransformation. Many believe that point is within reach. Energy efficiency, fallingsolar prices, demand-side managementand smart grid technology head the list of technological developments that theindustry believes will have the biggestimpact on their power markets.

But new sources of fossil fuel supply willalso have a major impact on the powermarket. The advent of shale gas and tightoil are changing the economics of theenergy landscape. Peak oil forecasts arefast being revised. The prospect of NorthAmerican energy independence is withinreach and the geopolitics of world energyflows are in flux. Industry opinion is farfrom ruling out the possibility that a newabundant energy era might open up. But alongside this, there is a significantdegree of societal concern about extractiveactivities and a feeling that renewableenergy can bring benefits and is here to stay.

The PwC Annual Global Power & Utilities Survey goes to the heart of boardroom thinking in utility companiesacross the globe. In this, our 13th edition, we look at the pressures building up on the traditional power utility business model and the industry’s viewpoint onthe transformative changes that lie ahead.

94%predict complete transformationor important changes to the power utility business model.

7

Disruption andtransformation

Many in the industry expect the existingpower utility business model in theirmarket to transform or even beunrecognisable in the period between now and 2030. 94% predict completetransformation or important changes tothe power utility business model. But thereare big regional differences and theindustry is split on the extent of changeand transformation ahead.

The prospect of transformation of theindustry business model arises from anumber of potentially disruptive changes.Decentralised generation is alreadyeating into revenues and partlymarginalising conventional generation.Ultimately it could shrink the role ofunwary power utility companies tooperators of back-up infrastructure. Across the main markets of Asia, Europeand North America, only a minority of our survey participants expect centralisedgeneration and transmission to play thelead role in meeting future demandgrowth.



How can regulatorsrespond?

Governments and policy-makers have thedifficult task of grappling with the bigissues of supply availability, affordabilityand environmental impact. The tensionsbetween these goals are coming to the foremore and more. Affordability has risen upthe agenda in many countries. Concernsabout blackouts are increasing as reservecapacity gets stretched. And the advent of shale gas is introducing a newenvironmental battleground whichgovernments will need to police.

The sentiment from many of theparticipants in our survey suggests thatregulation is facing something of a crisis.On balance, the industry viewpoint is that,in many places, current developments incompanies’ power markets are increasingrather than decreasing the risk ofblackouts. There is a feeling thatregulation is at a crossroads, with the eraof liberalisation fading and a new era ofgreater certainty needed.

The issue of what policy design featuresare needed to enable system operators tobalance a system with high levels ofintermittent generation is an urgent onefor regulators. Capacity schemes are oneanswer to this. Together with measures tointroduce demand response and demand-side management markets and the abilityto curtail intermittent generation duringlow demand periods, they top the list ofmeasures that survey participants thinkpolicy-makers should introduce to balanceintermittent generation sources.

How should companiesrespond?

How companies respond to these changeswill determine whether they will be part of the future or join the ranks ofcompanies from other industries whosebusiness models have been eclipsed bytechnological and market change.Strategies are needed that identify the best revenue opportunities in a changedand, potentially, transformed futuremarket landscape.

Key elements in this will be a strategicview on just how far and at what pacedistributed generation will take hold intheir markets, together with a view on therole and opportunity afforded by gas. The impact of shale gas will be heavilydetermined by how the environmental andcommunity concerns about it are playedout in different territories. Vast amounts of distributed power generation willchange the nature of the distributionnetwork, making it much more complex.The roles of transmission system operatorsand distribution system operators willneed to be re-defined in an era of self-generation, smart grids and demand-sidemanagement.

Efficiency savings and performanceimprovements can buy power utilitycompanies considerable defensiveheadroom in responding to the changingindustry environment. Nearly a third(31%) of all survey participants worldwidesay there is scope for power and utilitycompanies to achieve cost base andefficiency improvements of more than20%. Nearly three-quarters (73%) see bigscope for improvement in assetperformance management.

But also critical will be how companiesrespond to the rise of the ‘energy saving’,‘energy generating’ active consumers. Asignificant proportion (41%) of our globalsurvey participants see their market in oneor more of these terms in ten years’ timecompared to just 9% today. This includes60% of survey participants in Europe, 50%of those in North America and 46% ofthose in Asia.

73%see big scope for improvement in asset performancemanagement.

PwC viewpoint: Reaching a tipping point

“In Germany the industry is at a tipping point. Baseload power generation from gas and nuclear nolonger makes economic sense for utilities. Companiesare literally asking ‘what will stop the bleeding?’ It wasa question posed by a leading company CEO in a recentconference call to analysts. Unless a market model isagreed that puts profitability back into traditionalgeneration, many of the power stations will be shutdown. The feasibility of dismantling gas-fired stationsand moving them to other parts of the world is even being examined.”

Norbert Schwieters, PwC Global Power & Utilities Leader


Business model change

In most contexts, this demand growthwould present a rosy picture for companiesalready established in the market and well positioned to profit from furtherexpansion. But the industry is increasinglycoming to recognise that to stay profitableand to succeed in the period ahead,companies will need to adapt theirbusiness models to respond to a powerenvironment that could be transformed by changes such as decentralised power,technological changes and a very differentcustomer outlook.

Indeed, our survey shows that many in the industry expect the existing powerutility business model in their market totransform or even be unrecognisable in theperiod between now and 2030. Four inevery ten (41%) of our survey participantsanticipate business model transformationand, of the rest, a further 53% expectexisting business models to undergo‘important changes’. Very few (6% ofparticipants worldwide) expect thebusiness model to remain ‘more or less the same’.

Many in the industry expect the existing power utility business model in their market to transform or even beunrecognisable in the periodbetween now and 2030. But there are big regionaldifferences and the industry issplit on the extent of change and transformation ahead.

Transformation The power utility sector worldwide ischaracterised by a range of business modelsub-sets – independent power producers,merchant generators, unbundled operatorsof network assets, and others – but at itsheart is the core traditional power utilitybusiness model of companies deliveringprofit from a mix of generation,distribution and retailing activities acrosscentralised grids. Companies have beenused to high investment credit ratingsenabling them to develop capital-intensiveasset bases with predictable long-term costrecovery from a mix of regulated andunregulated returns.

This paradigm has been well established atthe heart of many markets worldwide formany decades. Underpinning it, greaterreliance on electricity by more devices hasled to an expanding electricity requirementeven in mature markets. Global demandfor electricity is set to continue to growfaster than demand for any other finalform of energy in the coming decades. The electrification of vehicles and greateruse of electricity for heating could addsignificantly to already growing demandfrom the ever-increasing volume ofelectronic devices, machinery,communications and data uses forelectricity.

Business model terminology

The term “business model” is used in connection with a range offormal and informal descriptions of the core elements of abusiness. We have used the term in the following sense:

“A company’s business model is the means by which it makes aprofit – how it addresses its marketplace, the offerings it developsand the business relationships it deploys to do so.”

Big issues


Given the changes in industries such astelecommunications, retailing, airlines andmany other sectors, it might be construedas surprising if the power utility businessmodel wasn’t transformed over a period ofnearly two decades ahead. On the otherhand, the current power utility businessmodel is deeply entrenched and thegeopolitical context of the industry meansthat the environment for change is lessdynamic than sectors more exposed topure market forces.

Industry sights set on transformation

In such a context, nearly half of theindustry expecting transformation issignificant. And perhaps more significant is that, although Europe is where thecurrent environment for power utilities isproving most disruptive, the anticipationof transformation is more widely felt(figure 1). Indeed, the strongestanticipation of transformation is frompower utility companies in Asia. It’s asignificant indicator of the extent to whichthe industry is set to change radically,given that Asia is not as fully electrifiedand renewables are not as subsidised asEurope. Asian change and technologydevelopment could reinforce and quickenthe pace of change elsewhere.

In Asia, 69% anticipate business modeltransformation compared with 46% ofEuropean and 40% of North Americansurvey participants. Eight per cent of those in Asia go so far as to say the futurebusiness model will be ‘completelytransformed and unrecognisable fromtoday.’ In contrast with other regions, few participants in the Middle East andAfrica (MEA) and South America (SA)anticipate business model transformation.Instead, most or all expect it to be similarto today but with “some importantchanges” (70% of MEA and 100% of SAparticipants) – see later ‘around the world’chapter for full breakdown.

Figure 1: How do you expect utility business models to be in 2030 compared to today in your market?

* of which ‘unrecognisable transformation’ – North America 0%, Europe 8%, Asia 8% and Global 4%.Source: 13th PwC Annual Global Power & Utilities Survey

31% 69%

100%

10% 50% 40%

10% 70% 20%

8% 46% 46%

Transformed*Similar but with important changes

More or less the same

North America

South America

Europe

Asia

Middle East & Africa

Global 6% 53% 41%

69%of respondents fromAsia anticipate business model transformation compared with 46%of European and 40%of North Americansurvey particpiants.

5

Europe is where the current environment forpower utilities is proving most disruptive butthe anticipation of transformation is morewidely felt.


It’s a dramatic scenario and one that may seem remote. But the threat to thebusiness model doesn’t depend on itswholesale realisation. As the currentGerman experience shows, if the impact of decentralised generation shaves peakdemand then much conventionalgeneration is rendered unprofitable. The leading European power utilitycompanies have not shrunk from using theterms ‘crisis’ and ‘strategic transformation’to describe the changes underway. Theyare moving decisively to accelerate theshift of their business focus.

The impact of distributed power generation

Across the Atlantic, a paper produced forthe Edison Electric Institute, an associationthat represents all US investor-ownedelectric companies, notes: “Today, a varietyof disruptive technologies are emergingthat may compete with utility-providedservices. Such technologies include solarphotovoltaics (PV), battery storage, fuelcells, geothermal energy systems, wind,micro turbines, and electric vehicle (EV)enhanced storage. As the cost curve forthese technologies improves, they coulddirectly threaten the centralised utilitymodel.”1

Figure 2: Which energy market transformation vision most closely matches your expectation for your market?

Source: 13th PwC Annual Global Power & Utilities Survey

Large-scale centralised generation and transmission

A mixture of large-scale centralised and distributedgeneration

Distributed generation will largely replace centralised generation

North America

South America

Europe

Asia


Global

9% 82% 9%

20% 67% 13%

50% 50%50% 50%

50% 50%

24% 67% 9%

8% 15%77%

1 Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business, Edison Electric Institute, January 2013.

Indeed, across the main markets of Asia,Europe and North America, only aminority of our survey participants expectcentralised generation and transmission toplay the lead role in meeting futuredemand growth (figure 2). In both Asiaand North America, less than one in tenhave such an expectation and in Europejust one in five. Instead, most envisage afuture where demand growth will be metby a mixture of centralised and distributedgeneration. And there are some in theindustry that even go as far as expectingdistributed generation to replacecentralised generation in meeting futuregrowth. Again a full regional breakdown isgiven in the ‘around the world’ section.

In a separate question, we asked surveyparticipants to estimate the extent of theinroads likely to be made by distributedgeneration. Nearly two thirds (64%)believe there is a medium to highprobability that it will deliver more than a 20% share of worldwide generation by2030. But this, in turn, poses significantwider system challenges on a technical and revenue level.

The prospect of transformation of the industry business modelarises from a number ofpotentially disruptive changes.Decentralised generation isalready eating into revenues and partly marginalisingconventional generation.Ultimately it could shrink the role of unwary power utilitycompanies to operators of back-up infrastructure.

Disruption

say there is a high or very high likelihood that distributedgeneration will force utilities to significantly change theirbusiness models. The strongest such sentiment came fromNorth America with 90% of respondents saying this. In Asia, it is 62% and, surprisingly, just 33% in Europe.Perhaps some European participants see such changes asalready underway.


Physical and revenue impacts

On a technical level, the intermittentnature of distributed generation increasesthe difficulty of physically balancing thesystem and ensuring adequate powersupply. On a revenue level, managingthese extra challenges pushes more costsback onto the system. There is the dangerof increased centralised costs to be borneby those customers who are more grid-dependent. The cost impact is furtherexacerbated by any cross-subsidisationmechanisms to recover payments used topromote renewable sources and demandside measures, as these are also typicallyborne by the wider customer base.

For power utility companies, this opens up a potentially very destructive scenario.As well as the decline in revenues todecentralised sources, there is the impactof cost pressures on the centralised systemwhich, in turn, reinforces the movement to decentralisation. In our survey 57% saythe increased difficulty and expense ofbalancing will have a high or very highimpact on their market.

On the revenue side, half (50%) give ahigh or very high rating of distributedgeneration pushing up the price consumerspay for transmission and distribution. It will increase the proportion of fixedcosts in the price of electricity. Only 20%of participants report fixed costs above50% now but a third (33%) expect fixedcosts to have risen above 50% of theelectricity price in ten years’ time. On thephysical balancing side, 43% give the samehigh or very high rating for an increasedrisk of blackouts or grid instability.

The cost impacts of decentralisedgeneration could open up a potentiallyvery destructive scenario.

57% in our global industry survey

50%give a high or very highrating of distributed generation pushingup the price consumers pay for transmission and distribution.

6

PwC viewpoint: Are currentincumbents nimble enough?

“Technology changes, particularly in IT and the potential thatarises from smart grids and demand-side management, are goingto change the business model in the power utilities sector. The bigquestion is whether existing players are capable of driving thatchange or will the momentum come from other entrants? If it’s thelatter, the role of existing utilities could shift to the low marginbusiness of providing back-up capacity.”

Jeroen van Hoof, PwC Global Power & Utilities Assurance Leader


Many believe we are close to that point. At the beginning of 2013, UBSInvestment Research published aresearch paper that declared“unsubsidised solar era begins –utilities’ customers turn intocompetitors.” The authors say: “Sharplydecreasing costs for solar panels andbatteries, combined with risingelectricity tariffs, make solar viablewithout any subsidies in several keyEuropean markets, such as Germany, Spain and Italy.”

Fast-changing economics

The UBS research estimates 43GW ofunsubsidised solar in these markets by2020, reducing demand for grid-supplied power by 6–9%, on top ofshrinking demand due to energyefficiency and subsidised renewables. It talks about “a vast opportunity forunsubsidised solar, even though certainfinancial and technical limitations willleave some potential untapped.”2

The view that renewables are ready tocompete without subsidies is reinforced bya study by Citi Research which found that:“Residential solar PV has already reached‘grid parity’ in regions of high solarinsolation, with much of the world set tofollow by 2020. Our view is that utility-scale renewables will be competitive withgas-fired power in the short to mediumterm, with the exact ‘crossover’ pointsvarying from country to country. In manyregions, we believe competitiveness will beachieved by 2020.”3

A technology-driven future

The impact of the changing economics ofsolar power, as well as the potential ofenergy efficiency and other demand-sidemanagement innovations, is reflected inour survey participants’ views on whichtechnological development they expect tohave the most impact in their powermarkets. Energy efficiency, falling solarprices, demand-side management andsmart grid technology head the impact list(figure 3).

Energy efficiency measures

The rapid fall in the price for solar

modules

The deployment of demand-side

management technology

Smart metering/grid deployment

60% 56% 53% 51%

Figure 3: Percentage of respondents saying the following technology developments will have a high or very high impacton their market

Most impact


Efficient electric heating – heat pumps etc

Stationary electricity storage deployment

Carbon captureand storage

Offshore wind generation

Least impact

11%13%17%26%

2 UBS Investment Research, European Utilities, The Unsubsidised Solar Revolution, 15 January 2013.3 Citi Research, Shale & renewables: a symbiotic relationship, 12 September 2012.

The growth of distributedgeneration and its threat to thepower utility business modeldepends on technologicaldevelopments and cost. Its rise inEurope has been subsidy-driven.Cost barriers remain in the wayof it being truly market-driven.But if these barriers can beovercome they could set the scenefor widespread global industrytransformation.

Technology


Least impact is expected from offshorewind (except in Europe where it is rated asof greater significance) and from carboncapture and storage technology whichremains hindered by feasibility anddevelopment problems. And, interestingly,the crucial breakthroughs needed instationary battery storage that would beneeded for self-generation customers tobreak free from dependence on the grid,appear too far off for most surveyparticipants to foresee any significantmarket impact for the time being.

Some technology impacts get a middlingscore when aggregated on a global levelbut head the list of impacts at a regionallevel (figure 4). For example, shale gasheads the list of technology impacts inNorth America alongside the developmentof electric cars.

Clearly many survey participants feel thatthe era of the electric car is coming muchcloser. Indeed, the California New CarDealers Association report that Tesla all-electric sedan car electric sedan outsold allmodels from other luxury brands such asPorsche, Volvo, Lincoln, Land Rover andJaguar based on new-vehicle registrationsin the first half of 2013.

Onshore wind generation gets the highestimpact rating in South America withcountries such as Uruguay giving windgeneration a prominent role in theirenergy policies. Elsewhere in the world,energy efficiency heads the impact list oftechnological developments in Europe,Asia and the Middle East and Africa.

Figure 4: Top technological impacts by region*

* % of respondents rating it as high or very high impact.Source: 13th PwC Annual Global Power & Utilities Survey

EuropeEnergy efficiency measures

85%

North AmericaShale gas

North AmericaElectric vehicles

58%

64%

AsiaThe deployment of demand-side management technology

64%

AsiaEnergy efficiency measures

South AmericaOnshore wind

58%

83%

Middle East & AfricaEnergy efficiency measures

80%

Energy efficiency, falling solar prices, demand-side management and smart grids head the listof technologies expected to have the biggestimpact on the power sector.


Already, the impact of shale gas on thepower market is reaching far beyond NorthAmerica. Declining US gas prices haveincreased the volume of exported coal. The effect on lower European coal priceshas made coal a higher margin fuel source than gas. As a result, coal has beenpreferred as a power source with the ‘dark spread’ (a measure of gross margin of coal-fired power stations) much widerthan the ‘spark spread’ (the equivalentmeasure for gas-fired plant). This hasadded to the economic pressures leadingto the closure of gas-fired generation inEurope.

Shale gas impact

The impact of shale gas on the powermarket is scored highest by surveyparticipants in the Americas (figure 5). Of course, the US is now well advanceddown the shale gas road. But SouthAmerica is also set to be a major producingregion. Argentina holds the third largesttechnically recoverable shale gas reservesin the world after the US and China. Brazil and Mexico are also in the world top ten for shale gas reserves.4

Important quantities of shale gas also exist in countries, such as South Africa,Jordan and Chile, which have limitedconventional oil and gas or in regions such as Europe where conventional ownsupplies are becoming depleted. Butnational energy policies, ‘above ground’economics and local community politics as well as geology will be key factorsdetermining the pattern of shale gasexploitation. In Europe, for example, UK policy is encouraging shale gasexploitation but France has so far ruledout exploration on environmentalgrounds.

It is doubtful that shale gas productionwill come into play in other countries asrapidly as it has done in the US. This is akey factor in any assessment of its eventualimpact outside North America. But themarket-changing potential is there and theresponses to two ‘future scenarios’ relatedto shale gas presented to our surveyparticipants indicate that the industry isanticipating significant change ahead (seepanels on p13 and p20).

4 US Energy Information Association, Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States, June 2013.

Figure 5: Percentage of respondents saying shale gas will have a high or very high impact on their market


67%

38%

20%

35%

7%

Global

South America

North AmericaEurope

Asia


58%

New sources of fossil fuel supplywill have a major impact on thepower market. The advent ofshale gas and tight oil arechanging the economics of theenergy landscape. Peak oilforecasts are fast being revised.The prospect of North Americanenergy independence is withinreach and the geopolitics of world energy flows are in flux.

Supply


Future scenario

give it a medium or high probability score.

67%attach a low probability score to this scenario.

33%

“Technological advancesand new sources such asshale gas will dramaticallyreduce dependence on oiland gas-rich countries andchange the power balancebetween buyers and sellers.”

Out of all our scenarios, this one had mostresponses in the medium probability rangeand fewest low probability responses. So clearly the industry does expect a shiftin the balance of power away from sourcessuch as Russia for gas and OPEC countriesfor oil and gas. But less than a fifth ofsurvey participants are bold enough toassign it a high probability. It seems thatmost see a shift in the balance of powerhappening but don’t expect it to bedecisive.

Probability scoring system is:Low (probability rating of less than 40%). Medium (rating between 40–59%). High (60% or above).

Industry opinion is far from ruling out thepossibility that a new abundant energy eramight open up.


Cost reduction and efficiency improvement of more than 10%

Cost reduction and efficiency improvement of more than 20%

Figure 6: What is the scope for power utility companies to reduce the cost base and improve efficiency?*

40%

20%

* % of respondents.Source: 13th PwC Annual Global Power & Utilities Survey

Global

North America

65%

31%

67%

22%

South America

Asia 62%

31%


44%

11%

Europe 92%

58%

5 RWE, Report on the First Half of 2013, August 2013.6 E.ON Debt Investor Update Call, September 3 2012.

The response of companies like RWE andits rival E.ON has been to embark onsignificant restructuring of portfolios, costreduction and pursuit of higher margingrowth opportunities. E.ON, for example,has accelerated the implementation of its‘E.ON 2.0’ cost saving programme whichaims to reduce controllable costs fromaround €10.9bn to €9.5bn, including theshedding of 11,000 full time equivalentjobs6.

How companies respond to thesechanges will determine whetherthey will be part of the future orjoin the ranks of companies fromother industries whose businessmodels have been eclipsed bytechnological and market change.They will need to be clear-sightedabout where their best revenueopportunities lie, act fast toreduce costs or exit unprofitableareas, improve customer serviceand appeal to a new type ofactively engaged customer.

Companies Companies in Europe are already movingdecisively to respond to the current marketenvironment, mindful that the full impacthas still to hit them. As RWE’s CEO PeterTerium observes: “We are still benefitingfrom the fact that we sell forward most ofour electricity generation up to three yearsin advance…Sooner or later, the crisis willhit us with full force.”5

Big responses


Figure 7: Percentage of respondents saying there is high or very high scope for improvement in the following areas of power utility company operations

Global

Asset performance management

Capital project risk management

Customer relations and service

Asset risk management

R&D effectiveness


44%60%61%68%73%

Efficiency and performance improvement

In the opinion of our survey participants,the industry as a whole has the potential todeliver substantial cost base and efficiencyimprovement (figure 6). Nearly a third(31%) of all participants worldwide saythere is scope for power and utilitycompanies to achieve cost base andefficiency improvements of more than20%. In Europe, 58% and, in Asia, 31% say this level of cost saving is possible. In North America and South America, 22% and 20% view this as possible and11% say the same in the Middle East andAfrica.

It is clear that the industry itself recognisesthe scope for major efficiencyimprovement. And when it comes to areasof improvement it is the core activities ofasset operations, capital projectmanagement and customer relations thatare singled out (figure 7).

More than six out of ten of all surveyparticipants see high or very high scope for performance improvement in asset risk management, customer relations andcapital project management. And nearlythree-quarters (73%) see the same bigscope for improvement in assetperformance management. In Europe thispercentage was even higher – at 82%.Given that assets are the lifeblood of the power and utilities industry, this self-recognition of the potential forimprovement is a striking finding.

PwC viewpoint: A springboard to greater efficiency

“The scope to take 10–20% out of the cost base of companies inthe sector is definitely there. It would provide some room for thelonger-term sustainability of companies as they adjust theirstrategies. Looking hard at asset performance is vital. And theaccelerating pace of development in things like geospatialtechnology, mobility tools, smart grids and sophisticatedscheduling and warehousing can all provide a springboard formajor cost savings.”

David Etheridge, PwC Global Power & Utilities Advisory Leader

31%of all participants worldwide say there is scope for power and utility companies to achievecost base and efficiencyimprovements of more than 20%.


Future scenario



36%

g

“Power utility companiesneed to become much more tariff-clever, perhapslearning some bundlingand ‘free allowance’ tricksfrom mobile telephony.”

A future where power utility companies offer ‘free power’ similar to the ‘free call’bundles of some telephone companies is clearly not being ruled out by surveyrespondents. Just under two thirds see a medium or high probability of this becoming part of a more interactiverelationship with customers.



At the moment we are beginning to cometo the end of a phase where the spread ofdistributed generation has been policy and subsidy-led. With the economics ofdistributed generation fast changing, weare likely to move into a phase where take-up is commercially and market-led.Companies will need to take a view abouttheir positioning and product offer in thismarket. They will need to judge the extentto which their customers will want to come to them for new innovative productsand added value service offerings.

Shale gas exploration could be an enablerof gas-fired generation and price-competitive grid electricity. Coal is alsolikely to be in a similar position if energypolicies allow. As a flexible source ofbalancing generation to smooth outimbalances arising from intermittentrenewable generation, both wouldcomplement distributed generation. Butthey would also rival it and be a factor inlimiting distributed generation deploymentin countries where policies favour fossilfuels.

The majority of companies in our surveyseem ready to go on the front foot. 82% of participants see distributed powergeneration as “an opportunity” versus only18% rating it as a “threat”. In a conferencecall to analysts, the CEO of a leadingEuropean power utility company observedthat “big rivers start with small drops” in outlining his company’s expansion intodistributed energy. The same company isexpanding its position in large-scale solarand onshore wind in the US as well asgrowth markets worldwide.

Strategy

Efficiency savings and performanceimprovements can buy power utilitycompanies considerable defensiveheadroom in responding to the changingindustry environment. But defense needsto be accompanied by offense. Strategiesare needed that identify the best revenueopportunities in a changed and,potentially, transformed future marketlandscape.

Two key elements in this will be a strategicview on just how far and at what pacedistributed generation will take hold intheir markets, together with a view on therole and opportunity afforded by gas.Different national energy policies, fossilfuel supply and cost situations will meanthat take-up will continue to vary fromcountry to country and the interplaybetween different generation types willremain complex.

More than a third (35.8%) of US households don’t have a landlinetelephone and use mobile telephony instead7. In many parts of Africa,mobile telephony has leapfrogged fixed line infrastructure.

Disruption of the telecoms business model has been profound. Many telecommunications companies, for example, are now more akin tobroadcasters as they seek to retain and expand remaining landlinerelationships through online sports and entertainment content.

The need for back-up electricity and other differences between the sectors make us cautious about drawing exact parallels with the power utilityindustry. But a changing self-generation cost base and any futurebreakthroughs in electricity storage suggests power utility companies would be wise to keep the telecoms experience in mind.

Changing technology…changing business models

82% see distributed power generation as‘an opportunity’ versus only 18% ratingit as a ‘threat’.

7 Center for Disease Control and Prevention, Wireless Substitution: Early Release of Estimates From the National Health Interview Survey, January–June 2012.

In Russia and Germany, stores with their own micro gas-fired combinedheat and power (CHP) unit are being rolled out by METRO Cash & Carryas part of a partnership with E.ON for distributed energy solutions.

The units will be used to produce heating and hot water for the stores and will also cover a portion of the stores' electricity needs. The CHP unitsallow remote control, which makes it possible to respond flexibly to priceand demand peaks on the market. E.ON is installing the units andMETRO will operate them.

A future option would be to supplement the on-site CHP units with solar power. Already at the Düsseldorf site, a photovoltaic system has been inoperation since late 2007.


Customers

Companies are likely to face stiffcompetition with each other as they seekto ensure distributed power generationbecomes an opportunity rather than athreat. Becoming a provider of distributedgeneration services to customers tops thelist of strategies that our surveyparticipants identify as most likely tosucceed in a more decentralised powerlandscape (figure 8).

Companies will also need to address thebarriers that are likely to stand in the wayof them being well positioned to competefor customers in this new marketlandscape. Survey participants already feelthey fall short in their customer strategies.Three fifths (61%) say there is ‘high’ or‘very high’ scope for improvement incustomer relations and service.

Figure 8: Percentage of respondents rating the following strategies as likely or highly likely to be successful in a distributed generation market

Global

* ‘prosumers’ refers to customers that generate their own electricity.Source: 13th PwC Annual Global Power & Utilities Survey

Services to provide distributed

generation

Help consumers save energy through efficiency contracts

Help ‘prosumers’* share energy

through intelligentgrids

Become ‘energy partners’ rather

than ‘energy suppliers’ to customers

Enter new markets where

demand isexpected to

grow rapidly

Diversify into other home or

business services

67% 60% 56% 52% 43% 40%

Becoming an ‘energy partner’rather than an ‘energy supplier’

61%say there is ‘high’ or ‘very high’scope for improvement incustomer relations and service.


Future scenario



52%

“In the coming decades, we could see the death ofthe current energy retailingbusiness model in somemajor world marketsbecause of the rise ofdistributed generation.”

Although it’s the scenario that gets thehighest number of ‘low probability’responses, nearly half of surveyparticipants see it as sufficiently possibleto give it a ‘medium’ or ‘high probability’score.



Future scenario



45%g

“In the future concernsabout energy security willbecome a thing of the pastdue to technologicalchanges and new sources of energy.”

Although a substantial minority of surveyparticipants are sceptical about this‘breakthrough’ scenario, a majority are more positive on it. Clearly the promise of lower cost and more widespreadrenewable technology allied withdevelopments such as shale gas on thefossil fuel front is leading many to lookfavourably on the possibility that a newabundant energy era might open up.



Time is running out on customer relationsshortcomings as we enter an era of moreengaged ‘energy-saving’ and, increasingly,‘energy generating’ customers.

Time may be running out on companiesbeing able to get away with shortfalls incustomer relations. At present, nearly twothirds (65%) of survey participantscharacterise their customers as ‘passivecustomers that take what they are given’.But only 39% expect this to be the case inten years’ time.

Instead, they foresee a rise of active‘energy-saving’ and, increasingly, ‘energygenerating’ customers (figure 9). A significant proportion (41%) of ourglobal survey participants see their marketin these terms in ten years’ time comparedto just 9% today, including 60% of those inEurope, 50% of those in North Americaand 46% of those in Asia.

Figure 9: The growth of a new type of active energy customer (energy-saving and/or energy-generating customer)*

0%

Now In ten years’ time

* % of survey participants giving ‘strong’ or ‘very strong’ scores to one of the following descriptions of customers in their market – ‘actively engaged seeking to minimise consumption’/customers that generate their own electricity/customers generating own electricity and interacting with the market via a smart grid.


Global

North America

9%

41%

0%

41%

0%

50%

South America

33%

Asia 15%

46%


11%

Europe 25%

60%

41%see the emergence of a new breedof customer in their markets inten years’ time compared to just9% today.


Affordability has risen up the agenda inmany countries. Concerns about blackoutsare increasing as reserve capacity getsstretched. And the advent of shale gas isintroducing a new environmentalbattleground which governments will need to police.

The sentiment from many of theparticipants in our survey suggests thatregulation is facing something of a crisis.More than half (55%) of surveyparticipants say that energy policy-makers“have produced a significant amount ofpolicy uncertainty that is undermininginvestment” (figure 10).

The sentiment is particularly strongly feltin North America (67%), South America(67%) and Europe (50%) but less so inother parts of the world. But only in theMiddle East and Africa do a significantproportion of our survey participants feelthat policy-makers are working well withthe industry to promote investment andprotect customers.

Figure 10: How would you describe energy policy makers in your market?

15%38%

Asia

36%55%

Global

South America

North America

36%50%

33%67%

33%67%

Europe

67%33%


% of survey participants selecting each statement in a longer list of statements. More than one statement could be selected.Source: 13th PwC Annual Global Power & Utilities Survey

Working well to promote investmentand protect consumers

Producing significant policy uncertainty that is undermining investment

Policy-makers have the difficulttask of grappling with the bigissues of supply availability,affordability and environmentalimpact. The tensions betweenthese goals are coming to the foremore and more.

Regulators

55%of survey participants say that energy policy-makers “have produced a significant amount of policy uncertainty that is undermininginvestment.”


Keeping the lights on

On balance, the industry viewpoint is that,in many places, current developments incompanies’ power markets are increasingrather than decreasing the risk ofblackouts (37% increasing versus 26%decreasing globally) (figure 11). Manysurvey participants are neutral on thistopic. But, of those expressing a view, the worry that current developments aretilting the balance towards blackouts isparticularly felt in South America (67%versus 0%), North America (30% versus0%) and the Middle East and Africa (50%versus 30%). In Europe, opinion is muchless likely to be neutral but is divided with 40% feeling the risk of blackouts isincreasing and 40% saying it is decreasing.

Certainty and clear planning are the thingsthat the sector most needs according tosurvey participants. There is a feeling thatregulation is at a crossroads, with the eraof liberalisation fading and a new era ofgreater certainty needed. There areimmense infrastructure requirementsassociated with just the renewal andmaintenance of existing infrastructure butthere are also new demands such as howback-up capacity is going to be providedfor a system with renewable anddistributed generation.

Figure 11: How are current developments in your power market influencing the risk of blackouts?

Decreasing the risk Neutral Increasing the risk

15%46%

Asia

37%26% 37%

70%

33%

20%

39%

20%

Global

South America

30%

67%

North America

40%40%

Europe

50%30%



….was the headline on the front page of the Financial Times’companies and markets section on 16 September 2013. Nine companies– Enel, Eni, E.ON, RWE, GasTerra, GDF Suez, Iberdrola, Gas Naturaland Vattenfall – were reported to be joining forces in dialogue with theEuropean Parliament. Among their proposals are for policy-makers “towork quickly to introduce a system of capacity payments, which wouldincentivise gas-fired generators to remain online and prevent moreplants being shut down.”(Financial Times, 10 September 2013)


Meeting and balancing demand

Asked what the most important policylevers are to help meet demand in thecoming decades, it is a regulatoryenvironment that encourages networkinvestment (scored strongly by 81% ofsurvey participants), increasedinterconnection (also 81%) and fast-trackplanning and permitting for strategicinfrastructure (67%) that tops the list.Things like market liberalisation (40%)and unbundling (35%) come at the bottom of the list.

On the generation side, nearly three-quarters (73%) of our survey participantsreport that obtaining finance is a majorbarrier to new investment. Regulatorybarriers and uncertainty are an element inthis. Just over two thirds (68%) say theyare unable to recover the cost of newgeneration via regulated energy tariffs and 62% say regulatory and politicaluncertainty is a deterrent to thedevelopment of new large-scalegeneration. In North America and Europe,the issue of capacity payments is at the topof the company agenda. Three-quarters(75%) of survey participants in Europeand two thirds (67%) in North America say the lack of capacity payments is amajor barrier to the development of newgeneration.

The issue of what policy design featuresare needed to enable system operators tobalance a system with high levels ofintermittent generation is an urgent onefor regulators. Capacity payments are oneanswer to this. Together with measures tointroduce demand response and demand-side management markets and the abilityto curtail intermittent generation duringlow demand periods, they top the list ofmeasures that survey participants thinkpolicy-makers should introduce to balanceintermittent generation sources (see figure16 in ‘around the world’ section).

European utilities warn EU over energy risks

81%of survey participants say aregulatory environment thatencourages network investmentis an important policy lever


Future scenario



32%

“The nuclear/renewableinvestments needed toavoid significant globalwarming (2 degrees or less)will prove too costly forgovernments to support.”

Leading scientific assessments indicatethat time is running out fast in the race toavoid significant and problematic globalwarming. No doubt survey participantswill have been mindful of this in theirresponses to this scenario. It got thehighest number of ‘high probability’responses of all the scenario questions.But, perhaps what is most significant isthe fact that it is the cost of reducingemissions that is the key factor as muchas the race against time.



With so many survey respondentsputting an emphasis on businessmodel transformation, wedecided to show the early resultsof the survey to leading CEOsfrom different parts of the powerutilities sector around the world.Here we present their perspectiveson the changes ahead.

Do you expect the power utility businessmodel to be transformed and how wouldyou characterise future model(s)?“It is not very likely that the currenttransformation of the industry will lead toone specific global utility business model.Rather, we will see different options,mainly based on the available choices onthe customer side, in combination with ITand energy technology changes. Regardingcustomers, the future utility business willbe characterised by the digitalisation of the customer relationship.

“This means more and fastercommunication with the customers abouttheir actual demand or, in some cases, alsoabout their auto-generation. Demand-sidemanagement will play a more active roleand the integration of more PV and wind,i.e. more volatile generation, and of moredecentralised generation, will determinefuture business models. In regions andcountries with less of an establishedenergy system, decentralised generationcould play an even larger role.”

Will the boundaries of the sector changeas business models evolve? “More players will enter the energybusiness, hence naturally reducing thefootprint of companies already in thesector. Additionally, the use of power willalso increase in transport and in heatingapplications so that stronger competitionbetween fuels will gradually develop. The increasing need for communication,IT, internet and telecommunications,means these types of companies will showincreased interest in the energy segment – also driven by their own electricityconsumption. IT/Server hosting companiesplacing their servers in buildings wherethe waste heat can be used while they save on building cost themselves is aninteresting example.

“Last but certainly not least, consumerswill become more actively involved in thewhole energy system and have a higherfootprint in the system as‘prosumers’. This requires the ability of the incumbentcompanies to enter into a new dialoguewith their customers and increases thepressure to deliver tailor-made solutions.”

What will be the strategic choices thatcompanies will have to face up to? “The bigger diversity of potential utilitybusiness models will influence the numberand type of strategic choices. Some utilitieswill partially become geographically morediverse, in order to find new opportunitiesand to reduce regulatory risk. Others willre-focus on their traditional home marketand search for their niche.

“The focus on customer services anddistributed generation will also presentoptions for new business fields. New andmore partnerships are likely, either toshare financial risk or to profit fromdifferent knowledge.”

What’s your reaction to some of the‘future scenarios’?“Scenarios are food for thought. Oneshould not rely on them too much, but usethem as a tool to think about possiblefuture developments and how a consistentpicture of the future could look like.Particularly interesting is the (shale gas)scenario (p13), because it does not followthe route of the often used assumptionthat mankind is running out of fossil fuels.It is thus an important scenario to find out how robust the renewable energydevelopment will be – and it also putsmore competitive pressure on renewablesright now.”

On the ‘death of the current energyretailing business model’ scenario (p19):“This is an additional challenge in thefuture that has the potential to drasticallychange the whole value chain: generation– because of distributed ways to produceelectricity, transmission and distribution– since energy transport would thenhappen in a much more bi-directionalmanner, sales – since the products relevantfor customers will change. It’s an excellentstarting point to find out what kind ofmodifications will possibly affect thepower sector. It is also a good example ofdisruptive thinking. Since many scenarios

CEO perspectives

Dr. Johannes Teyssen Chairman and CEO

E.ON SE


only extrapolate an observed trend in alinear manner these scenarios describe‘game changers’ and therefore serve as arobust test for our industries currentstrategy.”

On the energy security scenario (p20): “It’s a famous saying – ‘some things are so unexpected that no one is prepared for them’. No one knows where thebreakthroughs will happen and when. But the art is really to find out that abreakthrough is just about to take place.The only fact that is for sure is that ourindustry cannot rely anymore on anunchanged investment and operationalenvironment in the future.

“Energy security will most likely stay aconcern. It might be that in the future,technological development will help toachieve this goal more easily. However,it is also not unlikely that the globalenergy demand rises in a way that leads toenergy security becoming an even biggerconcern. Furthermore due to the highimportance for energy for any societypolitics will always pay closer attention to our industry and will focus on securityof supply for its society.

“One important issue for a transformationprocess – and we see this currently inGermany – is affordability. Scenariosmainly concentrate on technological andenvironmental aspects, a few also on thegrowing importance of public acceptanceof our industry in general and certaintechnology in special. But between nowand the future scenario is always thetransformation process – and this meanschanges, leaving some old ideas behindand heading to something new, that is onlyvaguely known. And this transformationprocess costs money – money for newdevelopment, for new assets, for inevitableerrors and for inevitably strandedinvestments. These costs have to be borneby someone – and in the end this is usuallythe end-customer. Keeping the acceptanceof the transformation high throughout thewhole process requires affordable bills forthe end-customers.”

Is regulation facing a crisis? “In many European countries at least, theenergy costs for the customers consist of a regulated and a non-regulated share. In the non-regulated share, competitiondrove cost-savings and was hencesuccessful in finding the most efficientsolution for the customers. However, insome jurisdictions regulators defined anunfair competition between subsidised and privileged renewables and traditionalconventional generation. We need asustainable regulation for linked marketsthat fosters market-based solutions bysimultaneously being open totechnological progress.”

Do you expect the power utility businessmodel to be transformed and how wouldyou characterise future model(s)?“The power and utilities business is wherebanking and landline telephony were adecade or two ago, with new technologiesthe main driving force. Technologyadvancements, especially in distributedgeneration and energy efficiency, will have a definite impact on existing businessmodels. This, together with a moreinformed and empowered customer, willshift the business model.

“The timing of these changes will bedifferent across regions. Within the Africancontinent, the transformation of thebusiness model will be influenced bychanges in the economic position of thepoorer sectors of the population. Shouldno major improvement in their positionoccur, government policy is likely torequire provision of electricity to themthereby requiring a central dominantutility. This could prevent choice byindustry and perpetuate cross subsidies.However, with the rapid advances intechnology development and reduction inprices of technologies, utilities could benegatively impacted by reduced demandfrom the sectors that are currentlycarrying the cross subsidy.

“Technology and electricity policy reformswill be the major determinants of futuremodels. In South Africa, deregulationcould mean a significant increase in thenumber of IPPs in the sector. Smaller, more efficient plant with shorter leadtimes could result in decentralisationwithin the African continent. There couldbe more partnerships with the customerand more strategic alliances in the sector.‘Self-reliance’ in reaction to rising pricesand unserved areas together withdevelopments in energy efficiency will also have a major impact.”

What will be the strategic choices thatcompanies will have to face up to? “In South Africa and Africa, you areconstantly on a tightrope and balancing act to find a sustainable business model.The three A’s (access, affordability,availability) will continue to drive thestrategic choices companies make. The difficulty is trying to find a balancebetween the three, within the givenresource constraints. These aspectsinfluence the next area of choice, namely

Brian A. Dames Chief Executive

Eskom

technology choice which includes thetechnology mix and needs to be balancedwith environmental impacts and requiredinvestment.”

Will the boundaries of the sector changeas business models evolve? “The collaboration between banks,financial institutions and telephony isanother facet that could spill over to theutility sector. Partnerships across industrycould affect the resource intensive natureof the business, with efficiencyimprovements and self-generationresulting in reduced demand. Boundariesbetween sectors and industry are likely tobecome diluted.

“New players and entrants into the sectorcould transform and expand the serviceofferings with a probable merging ofrelated services. Policy will be a majordeterminant on the choice by theseplayers. However this may all result in anelectricity price that is a barrier to thesustainability of the industry.”

What’s your reaction to some of the‘future scenarios’?“New energy sources, such as gas fromfracking, will be a game changer as willtechnology ‘behind the meter’. Withcurrent advances this is likely tomaterialise in five to ten years. Indeveloping countries affordability andaccess to energy, together with othersocio-economic challenges, the timeframewill probably move closer to ten years.

“Other important scenarios that could beconsidered include a scenario of asignificant gap between supply optionsand demand; water becoming increasinglycritical in Africa (investment indesalination plants); and regulationbecoming location instead of pricespecific.”

Is regulation facing a crisis?“There is always a potential to operatemore efficiently and reduce costs withoutcompromising significantly on plantreliability. In South Africa, current tariffsare sufficient to cover costs. But fuel costsremain a challenge. The true challenge ofregulation is to provide a sufficient returnto facilitate new investment and replaceplant that is nearing the end of its designlife. This is due to the significant cost ofnew investments relative to the size andwealth of African countries. Regulationwill need to evolve as the electricity sectorevolves into new products/technologiesand the electricity value chain extends‘beyond the meter’.”


Do you expect the power utility businessmodel to be transformed and how wouldyou characterise future model(s)? “From my point of view, the market willenforce a change and transformation inthe power utility business. But it may be a long time before it becomesunrecognisable transformation. The key to this change will be the penetration ofrenewable energy and its associatedtechnology, in particular in storage.

“It may change dramatically, but the extentof change depends on the share andpenetration of renewable energy and wheneach consumer will be a producer. Thismay create a new power utilities modelwith different infrastructure, investmentand regulations.”

What will be the strategic choices thatcompanies will have to face up to?“The choice (for companies) is ‘to be or not to be’ depending on the evolvingrenewable technology. But the question of when will need a few more years to be answered.”

Dr. Omar Kittaneh Chairman Minister for Energy

Palestinian Energy and Natural ResourcesAuthority

Will the boundaries of the sector changeas business models evolve? “New players will come in and mostly theywill be the renewable energy producerswhich will mean that some boundaries and companies may disappear.”

What’s your reaction to some of the‘future scenarios’? “I would like to start by commenting onthe question whether ‘the number ofcustomers having difficulty affordingpower will cause governments tointervene more dramatically in the nextten years’. For the next ten years, thismight be the case in many of the growingeconomies around the world, althoughgovernment intervention is not expected to last for the long run. Technologies willevolve and develop with higher efficienciesgetting lower costs, making electricityprices more affordable to people.”

On the nuclear/renewable investmentsneeded to avoid significant global warmingwill prove too costly for governments tosupport (p25): “I think this is of lowprobability taking into consideration thetechnological advancements occurring inthe sector, and the constant improvementstaking place in areas such as energystoring technologies which will highlyimpact the sector on the long run.

“Another point to take into considerationare the regulations that are being imposedaround the world to protect the earth’senvironment, which would make thecurrent ordinary methods of generatingelectricity less attractive, simultaneouslymaking renewable energy more attractiveand feasible while maintaining thefeasibility of the power generationbusiness.”

Is regulation facing a crisis? “The room for improvement is within theindustry and the regulation. The efficiency of the industry and the regulation shouldcooperate together.”

Do you expect the power utility businessmodel to be transformed and how wouldyou characterise future model(s)? “With the deregulation of power market,under the impact of project approval, tariffmechanism and government regulations,the power utility business model willchange gradually but a fundamentalchange is not expected.

“The possible characteristics of futurepower utility business models include:continuous increase in distributed energysources; coexistence of mega sizecentralised power source and distributedenergy sources; continuous enhancementin power companies’ information system,integration and globalisation.”

What will be the strategic choices thatcompanies will have to face up to?“The strategic choice our company isfacing up to is to increase investment inclean energy, enhance integration of fuelcoal and power generation business,globalisation of operation.”

Will the boundaries of the sector changeas business models evolve? “Our company’s future development in the power sector is to improve themanagement of thermal power generation,optimise business structures, keep theleading position of domestic power sectordevelopment and strengthen cooperationwith other sectors. Regarding theboundaries between the power sector andother sectors, our focus is to stick with ourcore power generation business, and grow into relevant sectors based on this focus. I am not expecting these boundaries willhave significant changes. Coal companiesand private funds will gradually increasetheir investments into power sector.”

What’s your reaction to some of the‘future scenarios’?On the potential for concerns about energysecurity to become a thing of the past dueto technological changes and new sourcesof energy (p20): “I agree with this view. I think the main breakthrough will be inwide utilisation of energies such as windpower, solar, shale gas and gas hydrate.And the breakthrough may happen in tento 20 years.”

On the ‘shale gas’ scenario (p13):“I think the possibility of changing thesupply-demand condition is increasinggradually with more types of energysupply emerging.” On the death of thecurrent retailing mode (p19): “I think anew retail model will emerge but thecurrent energy retailing business modelwill not fade away.”

Is regulation facing a crisis? “No crisis. There is room for improvementfor both regulation and the power sectoritself.”

Liu GuoyueDirector and President

Huaneng Power International, Inc.


Power markets around the worlddiffer in many ways, not least the stage of their developmentand their natural resourcecontext. Different energy policieshave also played a key role withthe result that the inroads madeby new forms of renewable anddistributed power generationvary considerably.

Regional surveyhighlights

The fossil fuel context will be an importantcontinuing factor in the generation mix.The balance between centralised gridgeneration and distributed generation will also be influenced by factors such asaccess and affordability.

These factors are likely to play a large part in the nature of transformation thatlies ahead. In general, expectations oftransformation are strongest in the moremature markets of Europe, North Americaand Asia. We report on many of the keyregional similarities and differences in themain report. In this chapter, we highlightsome of the other main regional findings.

Business model transformation

Although Europe is where the currentenvironment for power utilities is provingmost disruptive, the anticipation oftransformation is more widely felt. Indeed, the strongest anticipation oftransformation is from power utilitycompanies in Asia. It is weakest in SouthAmerica, the Middle East and Africa (seemain figure 1 at front of report). Some ofthe factors at work in explaining thesedifference are the strong role ofhydropower and the potential of shale gasin South America, the fossil-fuel-richcontext of the Middle East and theimportance of widening access to gridpower in Africa.

Around the world

Future scenario

“In the coming decades, we could see thedeath of the current energy retailingbusiness model in some major worldmarkets because of the rise ofdistributed generation.”

Nearly half of all survey participantsworldwide and exactly half in NorthAmerica and Europe give this a mediumor high probability rating. But Asia is thestand-out region with over two thirdsseeing this as medium or highly likelyprospect.

North America 50%

South America 20%

Europe 50%

Asia 69%

Middle East & Africa 30%

Percentage of survey ranking this scenario as a medium or high probability. Probability scoring systemis: Low (probability rating of less than 40%). Medium(rating between 40–59%). High (60% or above).


The impact of distributed power generation

Across the main markets of Asia, Europeand North America, only a minority of oursurvey participants expect centralisedgeneration and transmission to play thelead role in meeting future demandgrowth (figure 2). Indeed, in all regions atleast half of our survey expect the rise ofdistributed generation to be such that itplays a role alongside centralisedgeneration.

But there are big regional differences whenit comes to whether distributed generationwill force utilities to significantly changetheir business models. North Americanand Asian respondents are most likely toexpect such change with those in SouthAmerica and, surprisingly, Europe leastconvinced (figure 12).

Figure 12: Percentage of respondents saying it is likely or highly likely that increasing levels of distributed generation will forceutilities to significantly change their business models


North America Asia Global Middle East & Africa

South America Europe

57% 50%33%33%

62%90%

90% of North American survey participantssay there is a high or very high likelihood thatdistributed generation will force utilities tosignificantly change their business models.

Future scenario

“In the future concerns about energysecurity will become a thing of the pastdue to technological changes and newsources of energy.”

Perhaps the current fragility of Europeanpower markets explains why Europeansurvey participants are least optimisticabout prospects for a new era ofabundant energy in the future. Awayfrom Europe a majority give this scenarioa medium or high probability rating.

North America 58%

South America 67%

Europe 29%

Asia 69%




Figure 13: Percentage of respondents reporting strong or very strong scope for improvements in asset performance management


Europe South America Asia Global Middle East & Africa

North America

77% 73% 60%67%80%82%

Companies

We reported earlier on the widespreadview in the industry that the sector has thepotential to deliver substantial cost baseand efficiency improvement (figure 6).There are some variations in opinionacross regions about just how far the costbase can be reduced.

But there is worldwide consensus that thenumber one opportunity for the biggestperformance improvement is in ‘assetperformance management’ (figure 13). It is the top scored selection in a list ofimprovement measures.

Future scenario

“Technological advances and newsources such as shale gas willdramatically reduce dependence on oil and gas-rich countries and changethe power balance between buyers and sellers.”

It’s the scenario that attracts the mostbullish responses. Across all regions, amajority of survey participants anticipatea shift in the balance of power away fromtraditional oil and gas producing areas.

North America 67%

South America 100%

Europe 57%

Asia 69%




There is also a consensus across regionsthat, when it comes to distributedgeneration, companies in our survey areready to go on the front foot. In everyregion, a clear majority see it as an“opportunity” rather than a “threat”.

Figure 14: Distributed generation – opportunity or threat?

Threat Opportunity

85%15%

Asia

82%18%

30%

Global

South America

70%

100%

North America

83%17%

Europe

80%20%



Future scenario

“Power utility companies need tobecome much more tariff-clever,perhaps learning some bundling and‘free allowance’ tricks from mobiletelephony.”

The possibility of the power sectorfollowing some of the customer tariffroutes followed in the telephony sectorgets a boost from particularly strongprobability scores from surveyparticipants in Europe and SouthAmerica.

North America 50%

South America 80%

Europe 83%

Asia 62%




Regulators

On the generation side, regulatory barriersare reinforcing the problem of access tofinance for new generation. Consistently,in every region, companies report the‘inability to recover the cost of newgeneration via regulated energy tariffs’ asa disincentive to developing newgeneration.

This is going hand in hand with difficultiesin obtaining finance. Only in Asia wasaccess to finance not seen as a widespreadissue. Instead in Asia, ‘regulatory andpolitical uncertainty’ was seen as more of aproblem alongside the difficulty of tariffsbeing insufficient to recover costs.

Figure 15: Percentage of respondents rating the following barriers for their company investing in new large-scale generation as ‘important’ or ‘very important’


Obtaining finance

Inability to recover the cost of new generation via regulated energy tariffs

Global

North America

South America

Europe

Asia


73%

100%

100%

33%

78%

75%

Global

North America

South America

Europe

Asia


68%

60%

83%

64%

63%

75%

Top two barriers

Future scenario

“The nuclear/renewableinvestments needed to avoidsignificant global warming (2 degrees or less) will prove toocostly for governments to support.”

Concerns about the cost of investmentsand time running out to avoid significantglobal warming are expressed moststrongly by survey participants in SouthAmerica and Europe.

North America 50%

South America 100%

Europe 75%

Asia 62%




Regulators will need to take urgentdecisions on what measures are needed toenable system operators to balance asystem with high levels of intermittentgeneration. Our survey participants favourthree responses – demand response marketmechanisms, curtailing intermittentgeneration and capacity payments – withthe some regional variation as to which isthe most favoured (figure 16).

Figure 16: How can system operators respond most effectively to the problem of balancing high levels of intermittent generation?

% of respondents rating it as effective or very effective.Source: 13th PwC Annual Global Power & Utilities Survey

Global

North America

South America

Europe

Asia


Introducing demand response and demand-side management measures

67%

100%

50%

67%

56%

63%

Global

North America

South America

Europe

Asia


Curtailing intermittent generation during low demand periods

66%

83%

67%

75%

67%

38%

Global

North America

South America

Europe

Asia


Introducing capacity payments for flexible generation (e.g. CCGT)

62%

63%

58%

71%

67%

50%

Top three responses


ContactsLana PatonPartner, National Power and Utilities [email protected]+1 416 869 8700

Alistair BrydenPartner, [email protected]+1 403 509 7354

Rahul KohliPartner, [email protected]+1 403 781 1848

Arun GuptaPartner, [email protected]+1 780 441 6717

Robert HawleyPartner, Audit & [email protected]+1 403 509 7546

Courtney KollaPartner, Audit & [email protected]+1 403 509 6631

Kelvin JonesPartner, [email protected]+1 403 509 7485

Steven LeemingManaging Director, [email protected]+1 780 441 6886

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Pwc Global Survey New

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