Utilities to Become ‘Energy Enablers’-PwC report

Big changes are on the horizon for utilities and traditional business models will need to become more customer-centric.
Published: Mon 12 May 2014

The energy industry is about to experience an unprecedented and rapid transition, according to global consulting firm PwC in its new report Utility of the Future.

Customers are no longer passive

The sector is about to undergo major changes in the way in which energy is generated and transmitted. In addition, many communities are generating and storing their own renewable power instead of relying on grid power. This trend is growing quickly and these communities are becoming increasingly prevalent in countries like Spain, the UK and Germany. [Read: Engerati: Spanish Communities Are Challenging the Traditional Energy Model and Ovo Energy Helps Consumers Go Off-Grid

PwC points out that electric utilities are about to face their “Kodak moment,” and the tipping point is likely to be the emergence of rooftop solar and its ability to provide a cheap source of electricity, as well other “enabling” technologies such as storage and smart software.

Mark Coughlin, power utilities leader for PwC, says that this will fundamentally change the nature of the relationship between utility and the consumer. He says that it will effectively shift the power from the utility to the customer, thereby challenging the traditional utility's viability in a very competitive environment.

Coughlin expands: “This traditional utility model where the company controls the electrons and the consumer has little choice is on its last legs. This model is struggling to meet customer needs. Once a household or a business has a solar panel on the roof or some other power source, they are no longer a passive consumer.”

Utilities will bear the brunt

The solar-powered suburban home is now the new competitor to the traditional utility. Within the next five years, consumers will take a more dominant control over energy supply, consumption, service standards and costs.

Technologies such as smart grids, smart meters and customer energy management gadgets, as well as new financing structures, are only the beginning since the door will be opened to new entrants to the energy industry. Utilities will also be likely to form new alliances and joint ventures.

With regards to data, this will include the likes of Google and Apple. In finance, it will include huge investors such as Warren Buffett and Macquarie Group. But PwC says new market players will also come from local sources. The report’s authors predict that small crowd-funded energy companies will emerge over the next three years.

Customer energy contracts are also predicted to favor the customer and there will be major changes to the way services are offered.

“In some cases, this will see customers paying more for certainty of supply. In other cases, we see the distinct possibility that costs will reduce for customers,” the report adds.

PwC says the large energy retail businesses will bear the brunt of this challenge. “The existing shape of the energy retail business will not survive in its current state, given the atrophy of retail growth in traditional markets,” the report contends.

Swing factor

PwC also predicts that the retail market will turn into a “channel fight” focused on costs and choice. The retail sector could be subsumed into other large-scale “retail engines” such as data providers and telecommunications firms, and other in-house service providers. And there is likely to be a big turf war with the network distributor companies over who owns those assets.

“The key will be who has ownership and operational control of distributed generation assets -- these will be the swing factor in [determining] who can provide the most innovative services for customers.”

Generators will struggle because of the combined impact of falling demand and the emergence of rival energy sources, such as rooftop solar. In Europe, nearly US$500 billion has disappeared from the value of utility assets, primarily those of generators, as a result of the impact of new technologies.

PwC says generators are facing the same headwinds, as indicated by the lack of profits, the write-downs, the closures and the reassignments in the coal and gas industry in countries such as Australia. This makes it clear why industry incumbents are making an effort to shut down new market mechanisms.

“Contracting for long-term demand will become increasingly difficult as time passes, given that viable alternative sources of supply will almost certainly become available within ten years.”

Further reading

PwC-Utility of the future-A customer-led shift in the electricity sector [pdf]