Gazing Into the Crystals: How U.S. Power Producers Can See Into (and Avoid) the Future

Published: Mon 04 Apr 2016
A blog entry by Haresh Patel

Contributed by:

Haresh Patel
CEO
Mercatus Inc.

Haresh Patel's Blog

American utility providers need not look farther than to their neighbours across the pond to see what their future holds - that is, if they don’t change their ways.

Earlier this month, European utility giants E.ON and RWE recently reported major losses in their fossil fuel businesses. Declining profits, dividends and cash flows can all be credited to the deterioration of this power sector, and are expected to steep even further. As a result, European energy providers are quickly shifting their focuses towards renewables in hopes to soften the blow of losses still to come.

This downturn should serve as a loud and clear wakeup call to American power producers. While most are in denial, and have long- been resisting the switch to renewables, utility executives need to look no further than across the Atlantic to see what their impending future holds. However, it’s not too late. Let American utility executives heed these misfortunes as a lesson, and avoid the pain that their European counterparts are currently experiencing by embracing renewables – before they succumb to the Uber effect.

 

To Uber or Be Ubered? That is the Question

As Dr. Ingrid Braunschmid, Head of RWE’s Innovation Hub explained, RWE would rather take an Uber than “be-Ubered” – meaning, adapt to change rather than be obliterated by it. The infamous technology company, who singlehandedly transformed urban transportation in only a few short years, now seems to be the go-to reference an industry disrupted. This isn’t the first time we’ve seen the disastrous result of an industry’s failure to spot a disruptive trend and adapt to changing markets. Over the last decade, the same thing happened to all the major media industries- from television, to music, to print. In their reluctance to adapt to the changing markets and technologies, they fell hard to their digital competitors.

The correlation to the energy industry should be clear here. Similar to how Uber has disrupted (really disseminated) the taxi and car rental industry, distributed generation is disrupting the utilities industry today. We’re already seeing this in the American “utility death spiral,” where the resistance to DG is only accelerating their own collapse. However, the energy industry is still in the forefront of their own transformation, and has the foresight to not repeat the mistakes of past industries. The mistakes of our European neighbors should serve a valuable lesson to all American utility providers.

However, if the U.S. centralized utility industry chooses to remain conservatively content, the foreseeable future looks unfavourable in light of their reluctance to change. No crystal ball or fortune teller needed.

 

Europe Commits to Renewables

It’s no secret that European fossil fuel fleets have been underperforming for quite some time, with wholesale energy prices dropping to their lowest in almost 15 years. While European energy producers have been way ahead of Americans in the renewables game for quite a while, these recent declines are causing them to pivot even further in the green direction. Both E.ON and RWE have largely shifted their focus towards renewable energy efforts – namely solar, PV and wind. According to a recent statement made by RWE’s CEO, Peter Terium, "Renewables are increasingly becoming a main pillar of our business. Besides the operational business, our entire focus in 2016 will be on restructuring the group to lay the foundations for further growth." In light of market trends favouring distributed generation, utility providers are realizing that’s where the success of their future lies; even though distributed generation is just as fundamentally disruptive to their utilities industry as they are to our own. 

 

U.S. Utilities Are Not Exempt   

While this is the major predicament in the European energy scene today, American utility companies are not far behind. “Utilities in Western Europe are losing hundreds of billions of dollars in market capitalization as DG reaches higher levels of penetration in leading countries such as Germany, the United Kingdom, and Italy,” said Dexter Gauntlett, a senior research analyst with Navigant Research. “The prospect of similar losses by utilities in the United States is prompting a struggle amongst utilities, the DG industry, and regulators over the future of DG models,” (Think Progress).The biggest mistake that U.S. utilities could make is in thinking that this scenario does not apply to them. While U.S. power producers historically have been slow to adopting DG, and taken the familiar fight-flight-adapt approach, it’s now become unavoidable. Today, the demand for renewables in the U.S. is on the rise:

Electricity generation from renewable sources provided 13% of U.S. electricity in 2013, and is expected to grow to 18% by 20140

Wind and solar generation account for nearly two-thirds of the growth in renewable generation, with 2015 being the largest growth year for the solar industry.

The Clean Power Plan aims to transform U.S. power generation,  calling for the reduction of carbon dioxide emissions by 32 percent and the increase renewable energy production by 30 percent by 2030.

For the first time, renewables are beginning to give fossil fuels a serious run for their money on the market. In the years to come, as fossil fuel supplies run lower, renewables will become significantly cheaper. This should tell you that the time to act is now, and that the lack of U.S. utility strategy in addressing the growth in DG will be detrimental if they don’t get on board.

 

With Change Comes Challenge

What we’re experiencing in the 21st century is an overall technological revolution- a fundamental shift in how not just businesses, but entire industries, are beginning to operate with technology. As in any industry, adopting new strategies and adapting to new environments presents operational challenges. This is especially the case for distributed generation, which requires new tactics and tools to successfully operate in the changing energy market. Without having a proper execution strategy to tackle these changes, failure is imminent. Needless to say, the reality of today’s utility industry is no longer “business as usual.”
The second lesson from this story, essentially, is not to bite off more than you can chew. European utility tactics now rely heavily on digitizing their operations in order to exist in the highly competitive renewable energy space. To compete in today’s market, energy producers need to have a tool to execute these renewables strategies, and embrace digitalization in the workforce to have a nimbler and faster organization. Mercatus provides not only digitization, but efficiency. With best in class tools, Mercatus’ energy investment management (EIM) platform makes it easier for energy providers to make fast, insightful decisions, clarify risk factors and ultimately gain competitive advantage in the marketplace.