The growth of renewables in Europe continues to destabilise the wholesale electricity markets and key players.
This is a headline finding from Capgemini’s new study - the World Energy Markets Observatory 2017 - and will not be news to European utilities.
In 2016, European Union member states brought online more than 21GW of renewable power capacity, equivalent to 90% of Europe’s total power needs.
The business case for renewables is getting stronger - even without subsidies. The report, which is a combination of public data from 2016 and Q1 2017 and Capgemini’s energy sector expertise, cites the example of Italy signing off its first unsubsidised renewable energy project.
The Montalto di Castro project (63 MWp) comprising five utility-scale PV plants has received no government incentive and will deliver energy to Italian power trader Green Trade for a fixed price.
Energy prices from renewable sources also continue to drop, with the average selling price of a power purchase agreement in Germany decreasing from €91.7/MWh in 2015 to €69/MWh in 2016.
Meanwhile, the WEMO study, which for the first time stretches beyond Europe to provide a global snapshot of the energy transition, finds that solar PV generation was sold in Saudi Arabia this year for only 17$/MWh.
Colette Lewiner, Senior Advisor, Energy and Utilities at Capgemini, comments: “Efforts in R&D and industrialisation are boosting renewable energy development, even when considering extra network investments linked to intermittency and energy generation distribution.
“Today, their intermittency coupled with the absence of pricing reforms means the impact of renewable energy on the wholesale market prices threatens electricity supply and impacts negatively utilities’ finances.”
European utilities - declining revenues
As Lewiner highlights, low energy prices is one factor contributing to declining European utility revenues in the past five years along with political pressures such as regulatory change and the Brexit vote.
The Capgemini study finds that large European utilities - EDF, SSE, EnBW - are hovering around a zero CAGR, while most utilities experienced negative growth. France’s ENGIE saw its revenue fall from €92bn in 2012 to €66.6bn in 2016 due to portfolio reduction and price decreases.
Utility transformation slows down losses
Despite a background of increased competitiveness, regulatory constraints, and low energy prices, however, the report finds that “utilities are starting to benefit from their efforts to adapt to a new framework”.
In 2016, the overall downward trend of major European utilities’ financial performance (based on data from income statements and balance sheets) has slowed.
“EBITDA margins have stabilised at around 16% for our sample, demonstrating how utilities have adapted to tough market conditions,” states the report.
One reason that Capgemini attributes for the slowing of losses is restructuring asset portfolios to reduce exposure to risk and price volatility.
German utility E.ON SE completed its divestment of conventional power in 2016 with the creation of new company Juniper in a bid to draw a line between conventional energy sources and decarbonated ones.
Juniper, which manages hydropower, gas and coal, as well as electricity trading, has outperformed analyst expectations in 2016 and H1 2017, finds the report.
New revenue stream - utility customer services
Increasing customer and services activities following the U2ES – Utilities to Energy Services – trend is another factor that is starting to reverse declining revenues - the second key finding from the report that covers Europe, North America, Australia and South-east Asia.
Commenting on the need for established utilities heavily hit by the energy transition and customers’ evolving expectations to start large transformations, Perry Stoneman, Head of the Energy and Utilities sector at Capgemini, said: “We observe many utilities creating new customer divisions that are focused on chasing the Holy Grail: the differentiating services valued by the customer, allowing the development of new revenue streams with better margins.
“With variations from one country to another, the vast majority of players are moving in that direction, but very few, for the moment, have found the appropriate recipe.”
Created in partnership with the I4CE, De Pardieu Brocas Maffei and Vaasa ETT teams, the study notes that most of the big players have launched transformation plans particularly in North America, where utilities’ finances are less challenged than in Europe, thanks to a lower pace of energy transition and different market rules.
In addition to simplifying their internal processes, these transformation plans generally focus on the downstream business (networks, green energy and customers’ energy services), designing and managing new operations and business models.
While digital technologies are evolving continuously to provide new solutions, such as robotic processes automation, artificial intelligence, internet of things, or blockchain, which were not available a couple of years ago.
And the report finds that the value of managed data – analytics – remains also largely unexploited.