No Time for Utilities to Look Back

The traditional business model must be scrapped otherwise the utility will not survive the energy transformation.
Published: Wed 05 Mar 2014

Over the last five years, the top twenty European utilities have lost half their value and credit ratings have dropped substantially. Poor financial results, stranded assets and mass sales of power plants indicate that power providers are in trouble.

Last year, Germany’s mega-utility RWE reported a loss of over US$3.8 billion and Sweden’s utility Vattenfall has reported a loss of US$2.3 billion due to "fundamental structural changes” in the electricity market.

The challenges

Utilities are grappling with a number of changes-the most obvious is the high penetration of renewables in to the electricity sector and its legal priority over fossil fuels which are driving down wholesale market prices. As a result, the value of coal and gas plants is plummeting fast. Added to this, energy consumption continues to fall while renewable energy development escalates.

Another pressing issue is that many commercial and industrial customers are going off-grid in order to avoid government levies which are aimed at renewable energy development. Currently, 16% of German firms are energy-efficient and a further 23% confirm plans to go off-grid in the near future.

It really is a vicious circle-as grid maintenance costs increase and the capital cost of renewable energy decreases, more customers will be motivated to go off-grid. This will of course increase grid costs which existing customers will have to carry. But, for how long? Self-sufficiency offers the customer far more incentives. This leaves the utility with a growing pile of stranded assets.

Changing strategy-fast

As the profitability of fossil fuel plants continues to fall, German utility EnBW concludes in a strategy document that it needs to "develop new business models...without delay.” The document also points out that “conventional business models of larger power supply companies no longer work.”

By 2020, the utility plans to reduce its electricity generation and trading business by around 80%. To make up for the decline, it aims to invest further in wind power, transmission and distribution projects to connect renewables, as well as implement services like home automation.

Ben Kellison, GTM Research's senior grid analyst, said EnBW's approach "provides a window into one possible path in which the value of energy trading and peaker plants systematically erodes, pushing large utilities into more service-oriented work."

RWE is also headed in this direction as it plans to divest many of its large-scale fossil fuel plants and implement a "prosumer" business model to help integrate renewables projects. We discuss renewables integration in our article, Renewables Integration-New Business Models Are Needed.

A shift to renewables?

Utilities are beginning to realize that they need to shift investment from fossil fuels to renewable energy in order to survive in the market. Structural changes have to be implemented and new services should be offered to engage better with the customer. The shift to cleaner energy and home automation has already been tapped into by major commercial companies like Google and Microsoft, creating even more competition for the utility. This is discussed in our articles, The Google Smart Home Play and Google Sees Green.

Energy storage will be the next market trend as technology develops and prices decrease.

Traditional business models have to be done away with and new strategies have to be implemented in order to capture the new market trends before it’s too late.

Further reading:

ENBW-2020 Strategy Plan [pdf]