Much has already been written about the plight of European utilities. They are living with the consequences of the fall in energy demand after the financial crisis, continued regulatory pressure to reduce tariffs and the proliferation of renewables and their generous subsidies.
The pain has been most greatly felt in Germany, and exacerbated by the moratorium on nuclear power as part of the country’s Energiewende decarbonisation policy.
However, UK utilities have not escaped unscathed. The pressure from the government and opposition parties on consumer prices, grid investments and competition, in an election year, has added a degree of uncertainty that has had a direct impact on investments, both foreign and domestic.
To make matters worse, the recent mild weather has depressed energy demand even more, and the low oil price has hurt earnings across the sector.
As such, the expression ‘“death spiral” is now commonly used when referring to customers migrating off the grid, or using it only as backup, while prices rise because of the cost of subsidies and renewables integration.
It appears that utilities are being hit from all angles. So, what does the future look like?
The fact is, we are at the point of no return. In market value terms, most European utilities are fundamentally smaller companies today than they were. The positive news is that Accenture’s research shows that, despite popular reports, the death spiral scenario is unlikely to occur.
It is, simply, uneconomic, despite the fact that photovoltaics (PV) are already at grid parity in many European Union member states. Going off grid is not feasible for many customers because of natural limitations, such as the availability of suitably oriented roof space to house the necessary number of solar panels, and the space and cost constraints associated with the large capacity of electricity storage that would be required to support this.
For example, in England, only about one-third of households are viable for solar panels. Our grid industry research also shows that in the next ten years, only 2.5 per cent of EU consumers will be energy self-sufficient, rising to just 11 per cent by 2035.
This is not to say that utilities are off the hook. In fact, while most of their customers are likely to stick around, the demand disruption caused by the growing adoption of PV and energy efficiency is a real threat to utilities’ business models.
The biggest impact of the growth of these energy demand-disrupting technologies is probably going to be on utilities’ revenues because of a reduction in load. This is something the industry is concerned about.
Our analysis shows that as a result of the growing adoption of these technologies, utilities face a reduction in energy demand of up to 15 per cent.
Depending on how a number of critical factors play out over the next ten years, including the timelines for the withdrawal of subsidies, the rate of the decline in technology costs, electricity price trends and the level of consumer interest in the uptake of these technologies, utilities in Europe could lose between £28 billion and £44 billion a year. In the UK, this could range between £2.8 billion and £4.6 billion.
Our analysis also suggests that the most likely scenario will mean moderate demand disruption, causing revenue loses for utilities at the lower end of the scale. Nonetheless, this is no small matter.
In addition to the pressure on revenues, it will cause significant operational challenges, increase technical stress on the grid and open the market to more competition for energy products and services.
Nearly two-thirds of utilities executives, whom we surveyed globally last year, told us they expect grid faults to increase in the next five years because of distributed generation, while more than half expect this as a result of large-scale renewables.
Although the UK grid is one of the most reliable in the world, a utility still does not know when a customer has lost power until the customer calls in, and equally, it doesn’t know when power has been restored unless the customer or an engineer confirms this. Most other industries are able to remotely diagnose or digitally access their assets.
In Europe, a significant majority of utilities executives expect more competition from new entrants. This is mainly in data-related services, distributed generation and beyond-the-meter energy efficiency and demand response, but also in a number of new areas, such as plug-in electric vehicles and associated charging infrastructure.
Fortunately, our research also shows that while specialised providers are consumers’ default choice for products and services such as solar panels, energy providers are a very close second, well ahead of new entrants such as big-box retailers, phone and cable companies or online retailers.
The question is, will utilities capitalise on this opportunity? With traditional business models at risk, leading energy providers will need to move quickly to differentiate from new entrants.
This is a “make or break” point in time – like the one that shook up the telecommunications industry when voice over IP was launched, and the same one that shook up every industry with the advent of the internet.
There is no doubt that the energy sector is undergoing massive change, and that the investment (and divestment) decisions made over the coming years will determine whether a utility thrives or struggles. The way ahead lies in transforming the traditional utility business model and investing in new capabilities. This will not come as a surprise to the industry. Utilities have been aware of the emerging threats for a while now and many have plans underway to respond.
What will separate the leaders from the pack will be how aggressively they embrace the change, and how they invest in future growth and take an active role in shaping the emerging regulatory landscape.
Specifically, this will mean the creation of distribution system capabilities to manage a more complex and distributed grid, and with a focus on engaging with regulators to secure the long-term viability of the distribution business. This includes: the adoption of new tariff structures, opening up new markets and aligning subsidies; investing in grid optimisation, such as automation, sensing devices and real-time analytics; and developing new customer products and services.
It will also mean better co-ordination and integration of the energy system across Europe. For example, recent Accenture research found that managing grid capacity, demand and network performance in a more integrated way across Europe, through advanced analytics and smart grid technologies, could save up to €15 billion a year.
Maureen Costello is managing director of Accenture’s utilities business in the UK and Ireland. Stephanie Jamison is managing director of Accenture Smart Grid Services in Europe, Africa and Latin America