The former chief executive of Npower, Volker Beckers, has warned that incumbent energy players in the UK market are underestimating the urgency with which they must adapt their business models for a decentralised and democratised energy future.
Firms “do not have five to ten years” to decide what their strategy should be for this transformation, Beckers told Utility Week.
He also advised that for today’s chief executives of large energy companies, their hardest challenge in adapting for the future will be engaging shareholders and investors in a transition plan.
Beckers said chief executives need to understand that their main sources of income in the past, generated through regulated businesses and generation, will not be viable in a decarbonised and decentralised energy system, influenced by disruptive digital technologies.
“Which new business from the democratised and decentralised world will you replace these income streams with?” he asked.
“This is the most difficult bit for a chief executive. You must engage with your shareholders and investors, finding a transition path from the old world to the new world, considering the areas you will be divesting out from the areas you will be investing into eventually.”
Beckers said he sees three main strategies companies can employ to decide their new focus.
First, they can establish “clean sheet” enterprises without “legacy on any part of the value chain”.
Secondly, they can conduct company splits or spin offs such as those recently executed by RWE and Eon.
Or thirdly, they can attempt to turn their legacy business into a new technology company by engaging with or establishing innovation hubs.
Beckers believes the first two approaches are mostly likely to reap rewards. He described the third as being “more of a watching brief” since it is unlikely that incumbent companies will be able to rapidly the establish start-up-like cultures needed to be technology leaders.
In Beckers’ opinion “too many” large suppliers in the UK market are following the third strategy. He says many are “dipping a toe in the water…with one or two disruptive technologies, but not really driving change.
“There is a difference between being part of a transformation in the sector, and being a driving force.”
“Clean sheet” enterprises have a greater chance of establishing truly innovative cultures which can handle disruption, said Beckers. He also suggested: “Generally, investors would consider that it is better to invest in a new company that hasn’t got a legacy issue like a coal plant in the fleet or other assets which are not considered to be of as much worth as they used to be”.
Beckers made his comments alongside the launch of a new report from Forum for the Future which assess the impact that radical changes in the UK energy system will have on today’s dominant players.
The report observes the since 2008, European utilities have lost over €100billion in value. While UK utilities have generally not been hit as hard, the report notes that Centrica has seen a 50 per cent drop in its market valuation since 2013.
Attempting to make sense of the changes driving this, Forum for the Future engaged six “wise minds” to comment on the report.
These wise minds are all former industry or policy leaders. They include Volker Beckers as well as Sir Ed Davey, former energy secretary, Charles Hendry, former energy minister, Steve Holliday, former chief executive of National Grid, Ian Marchant, former chief executive of SSE and Joan MacNaughton, former director general of energy at the department for trade and industry.
Beckers told Utility Week the report communicates the “urgency” with which changes in the energy system must be taken on board by incumbent players if they are not to fail.
He said firms “have a great opportunity to be leading, but inevitably that means that some will be lagging”. Such laggards could disappear from the market, he warned.
The Forum for the Future report is titled “Wise minds: The energy transition and large companies”.