Traditional Utility Business Models Facing Disruption

Utilities recognize that there are disruptive forces affecting traditional business models but interpretations vary.
Published: Thu 07 Aug 2014

The power utility views distributed power generation, technology changes, and a new breed of customer as “disruptive forces” as they are having a significant impact on their traditional business model. These ageing models, which have endured for decades, are now under threat by these forces, according to PwC’s 13th PwC Annual Power and Utilities Survey [Energy transformation-The impact on the power sector business model] which is based on global findings during 2013.

The survey looks at the pressures building up on the traditional power utility business model and the industry’s viewpoint on the transformative changes that lie ahead. According to the survey, the majority of utility companies (94%) predict complete transformation or important changes to the power utility business model between now and 2030. Some models will be completely unrecognizable. The strongest anticipation of transformation is from power utilities in Asia. In contrast with other regions, few participants in the Middle East and Africa (MEA) and South America anticipate transformation to their business models. Instead, most or all expect it to be similar to today but with “some important changes”.

Decentralization is already a reality

Nearly two-thirds of companies believe there is a medium to high probability that distributive generation will deliver more than a 20% share of worldwide generation by 2030. More than half of companies (57%) say there is a high or very high likelihood that distributed generation will force utilities to significantly change their business models.

Angeli Hoekstra, PwC Power & Utilities Leader for Southern Africa, says: “Decentralized generation is already eating into revenues of power utility companies in mainly developed countries and partly marginalizing conventional generation. Ultimately it could shrink the role of unwary power utility companies to operators of back-up infrastructure. Efficiency savings and performance improvements can only buy power utility companies’ a short amount of time.” Engerati discusses how utilities appear to be undermining distributed generation in a recent article, Distributed Generation Cannot be Stopped.

Companies are anticipating distributed generation to elevate the price consumers pay for transmission and distribution. It will increase the proportion of fixed costs in the price of electricity. Only 20% of participants report fixed costs above 50% now but a third (33%) expect fixed costs to have risen above 50% of the electricity price in a decade.

In Africa (especially Sub Saharan Africa but excluding South Africa), this general trend may be slightly different due to more off grid solutions becoming available for rural areas.

If barriers are overcome, distributed generation can set the scene for widespread industry transformation –with energy efficiency, falling solar prices, demand-side management and smart grid technology, heading up the list of developments that those surveyed believe will have the biggest impact on their power markets.

The majority of survey participants in Africa and the Middle East (80%) see distributed power generation as ‘an opportunity’ versus only 20% rating it as a “threat”. “Companies will also need to address the barriers that are likely to stand in the way of them being well positioned to compete for customers in this new market landscape.”

Disruption levels vary

The least impact is expected from offshore wind and from carbon capture and storage technology which is plagued by feasibility and development problems.

Interestingly, the crucial breakthroughs required in stationary battery storage that would be needed for self-generation customers to become independent of the grid, appear too far off for most companies to foresee any significant impact for the time being. In a recent webinar, Energy Storage-Regulatory framework and market design needs, Engerati discusses how energy storage could have a key role to play in the future of the grid but market and regulatory issues have to be addressed to allow a successful storage market.

Onshore wind generation gets the highest impact rating in South America. Elsewhere in the world, energy efficiency heads the impact list of technological developments in Africa, Asia, the Middle East and Europe.

New sources of fossil fuel will also have a major impact on the power market, with shale gas and tight oil changing the economies of the energy landscape. Already, the impact of shale gas on the market is reaching far beyond the US. [Engerati-Shale gas:Unconventional gas for power generation.]

“Important quantities of shale gas also exist in other countries, such as South Africa, Jordan and Chile, which have limited conventional oil and gas or in regions such as Europe where conventional own supplies are becoming depleted,” explains Hoekstra. However, national energy policies, ‘above ground’ economics and local community politics as well as geology will be key factors determining the pattern of shale gas exploitation.

Policy-makers have their work cut out for them

Policy-makers have the difficult task of grappling with the issues of supply availability, affordability and environmental impact. Companies in Africa and the Middle East feel that policy-makers are working well with the industry to promote investment and protect customers. However, in Africa and the Middle East current developments in companies’ power markets are increasing rather than decreasing the risk of blackouts.

Certainty and clear planning are the things that the sector needs according to survey participants. “There are immense infrastructure requirements associated with just the renewal and maintenance of existing infrastructure, which is certainly true for Africa” comments Hoekstra, “but there are also new demands such as how back-up capacity is going to be provided for a system with renewable and distributed generation and within Africa how liberalization of the energy sector will take place in a controlled way and off grid solutions can be utilized”.

“Power utility companies will need to respond to these changes to not be eclipsed by technological and market change, while strategies that identify the best revenue opportunities in changed, and potentially transformed future market landscape, will be the key to survival,” concludes Hoekstra.