Utilities Should Assess Their Core Business

Utilities need a good understanding of their core business so that appropriate strategies can be implemented.
Published: Fri 28 Mar 2014

Utility leaders don’t have it easy. Today, utilities face a long and varied list of new threats and obstacles which is forcing them to carefully examine their core business.

A vicious circle

Fundamental economics is posing a major challenge for utilities. Many developed countries are growing slowly and loads have to match this. The infrastructure in many regions is aging, and maintenance and upgrade costs are high.

As resources are put under strain, energy will become more “political.” When this happens, the margins from the core business will continue to be squeezed.

While some utilities struggle with overcapacity; others have to increase capacity in certain areas, especially when it comes to renewable integration and meeting state mandates. However, without load growth or at least a more progressive economy, there is pressure to keep rate increases down which limits investment capital.

Technology uncertainty

The development of commodity and technology trends are introducing uncertainty into the electricity market. Shale gas, for example, has forced gas prices down and has the potential to transform the US energy market as it takes a share in power generation from coal and blocks the stream of additional nuclear or renewable capacity. However, the environmental and regulatory risks of shale gas have yet to be fully realized and there is still uncertainty around gas exports which may result in gas prices to escalate.

Similarly, digital technologies, such as home smart meters, present utilities with new but relatively untested opportunities to offer creative electricity pricing and home-services businesses tied to energy management and conservation.

Distributed generation, particularly from renewable energy sources, creates another potential technology disruption. The costs of established technologies like solar photovoltaics and its installation continue to decline [Read our article Cheaper Solar Installations-Watershed Moment for Distributed Generation and Renewables], while upstarts like Bloom Energy have won high-profile commercial customers such as Wal-Mart, FedEx and Coca-Cola. [In our article, Retail Takes Control of its Energy Consumption, we discuss how the retail sector is aiming to take control of energy generation and the management thereof].

If Distributed Generation technologies become competitively priced with centralized generation, they could redefine the entire grid-from generation to transmission to distribution.

Regulation

Regulation is often viewed as a potential game-changer as it affects local rates, state-mandated renewables and federal gas export or carbon cap-and-trade policies, for instance. These issues—fuel price volatility, shifts in consumer technologies and tastes, and new regulations, all have the potential to undermine a utility’s prospects and profitability.

Opportunities recognized

While this environment may seem turbulent, utilities need to tap into the opportunities and pursue the most appropriate strategies and execute them effectively.

A good example of this is European utility RWE which understands that the structural changes of the current market environment-especially the rapid, strongly subsidised expansion of renewable energies- has lead to a massive decline in cash flow for conventional generation. In response to this pressure, the utility has made the decision to contribute to the inevitable transformation of the European energy system. The utility is investing heavily in renewable energy and is also selling innovative products and services to remain viable in a competitive market.

Another is E.ON-the firm was one of the first companies to demonstrate that surplus energy can be stored in the gas pipeline system in order to help balance supply against demand. E.ON inaugurated a power-to-gas (P2G) unit in Falkenhagen in eastern Germany last year.

According to Bain and Company, the utility’s best chances for sustained, profitable growth relies on three strategic principles:

  • Realize the full potential of the core business

  • Invest thoughtfully in select, close-in adjacent markets

  • Proactively scan the environment to identify potential disruptions that create either challenges or opportunities and would drive a change in strategy

Our Engerati panel discussion, What is Driving the Business Model Forward?, discusses how market awareness, coupled with technological developments and consumer education, will help a business to develop further.

In order to adhere to these principles, utilities need to prepare a “strategic options roadmap” to help guide both current and potential future actions. This can only be done by understanding the core business.