The utilities industry is on the cusp of a period of great change, as we were reminded by the signing of the Paris climate agreement last week. The low carbon transition is well underway in the energy sector, the Competition and Markets Authority is due to set out its final remedies for the retail market in the coming weeks, and a competitive transformation is on the horizon in the water sector.
Our growing climate change challenges and targets will impact all utilities, heralding new approaches to resilience and sustainability – particularly around urban areas with expectations for further significant populations growth.
Market evolutions, meanwhile, are bringing opportunities to shape and reshape the utility whole arena with new business models, modes of competition and consumer interaction.
The fundamentals of the sector come 2030 will remain unchanged: water, electricity and gas will still need to be provided to customers in the UK. However, the way the industry operates to deliver these modern life essentials will be very different.
The retail space for the energy and water companies, already starting to show the signs of change, could be transformed, with industry figures predicting that new entrants could offer complete, whole-house solutions, with the likes of Amazon and Google potentially taking on the traditional players.
The distribution network arena could also look different, with the continued growth of variable, low carbon and decentralised energy increasing the difficulties of managing the system, and the ingress of storage providing a potential solution.
Generation, supply and the wholesale side for the utilities will also undergo a change, with further decentralisation possible, the development of water trading and additional reforms set to shake up the sector.
Utility Week assesses what the industry could look like, and examines the key trends and themes that will shape the sector in 2030.
New business models
Eon and RWE have split their businesses in response to the low carbon agenda and the challenging conditions for traditional, thermal generation energy companies.
This is part of a move to ensure they are fit to operate in a future world where there is a larger focus on innovation and renewables, and experts predict more change is likely to follow across the sector. Eon’s spin-off company, Uniper, will take control of the German energy giant’s centralised energy to allow Eon to focus on its more profitable customer-facing business.
RWE announced at the end of last year plans to separate its retail, networks and renewables interests to form a new company with stronger growth potential than its centralised thermal generation and nuclear-focused interests.
Holger Lösch, a board member at the Federation of German Industries, said the new business models “require companies to be more agile and flexible about trying new things”. With the same challenges facing traditional thermal generation, further splits – or at least a shift in focus towards more profitable areas, such as retail services – could follow for other utilities.
The competitive water markets, domestic and non-domestic, should be firmly established by 2030. With moves already underway – the United Utilities and Severn Trent joint venture being a prime example – some of the larger companies are looking at new models.
Whitman Howard analyst Angelos Anastasiou told Utility Week further alliances are “certainly feasible”, although they will probably be in the form of a water and sewerage company (WASC) taking over a water-only company, with more WASC-WASC deals also likely.
Wholesale markets transform
Coal-fired generation is set to be completely off the system by 2030, while new low carbon generation – potentially including new nuclear projects such as Hinkley Point C – should be on stream as the UK seeks to hit the 100g of CO2/kWh target.
The transition to this low-carbon energy mix will result in the sector looking substantially different from how it does today.
Renewable generation will have undergone continued growth and will, according to Ben Caldecott, director of the Sustainable Finance Programme at the University of Oxford, be “completely dominant”.
This is also likely to feature the use of green gas, which will help to meet the continuing demand for gas for heating and cooking, while reducing carbon emissions.
Mike Thompson, head of carbon budgets at the Committee on Climate Change (CCC), told Utility Week: “We need to move to a point where the majority of power, about three-quarters of the energy mix, comes from low carbon technology.”
Thompson added that, to improve system management and deal with the issues of the variability of renewables generation, storage and demand-side response (DSR) will play significant roles.
“There is a lot of scope for DSR, and it will be on a much larger scale,” he said, adding that DSR could be implemented across households and non-domestic customers
This chimes with a comment from National Grid’s head of commercial operations, Duncan Burt, who told Utility Week that Grid will rely on demand-side measures for “well over 50 per cent of the time” by 2030.
Storage is also expected to have undergone significant growth by 2030, helping to fulfil generation roles via pumped storage meeting peak demand, managing network frequency, and helping distribution network operators to manage the high levels of distributed and renewables generation that are predicted to be on the system.
However, to achieve this growth in storage, Simon Roberts, chief executive at the Centre for Sustainable Energy, says regulatory changes are needed and should have been implemented by 2030.
In the water sector, the wholesale changes revolve around the introduction of the competitive market. Water trading between companies could be in place – something that CCC chief executive Matthew Bell believes should happen.
There are also further upstream reforms that should be well established by 2030, including in the sludge market, while other areas within the sector may be opened up.
Ofwat chief executive Cathryn Ross has said: “The sludge market seems to us – and indeed to some of the companies who are at the cutting edge of sludge treatment – to have real potential for value creation.” She also called for the sector to “think broadly” about resilience and how it treats wastewater.
Retail revolution
The utility retail sector could look very different in 2030 from now, with new entrants, new technologies and a potential shift in emphasis for the businesses.
A Lazarus report assess the potential change in the energy market and states a change in focus is likely for the traditional suppliers. Centrica is highlighted as “the best-placed UK utility to lead the transition to service provision”, with its British Gas Services business, which provides boiler cover among other services.
The shift from being a sole commodity provider to a service provider is also a view shared by David Tuohy, senior vice president at energy services management firm Tendril.
“There is the opportunity to rethink what is logical to expect from an energy company,” he tells Utility Week. “There is an opportunity for brand expansion because there will be no difference between a commodity supplier, a service provider and potentially providing solar panels – they will all be part of the same company.”
There is also the expectation that the likes of Google and Amazon will look to enter the utilities market; these technology giants have already made tentative steps with the development of the smart thermostat and energy storage solutions.
Tuohy adds that these, and other entrants, may offer a one-stop solution to customers, whereby their utility, telecom and TV demands are met by a single company, with this model taking up a “significant proportion” of the market.
However, he believes the traditional utility company will continue to have a role because customers may seek a “best in segment” supplier, rather than a single service provider.
Within the water sector, competition could be long established, with non-domestic competition into its 13th year, and household competition potentially in its second decade.
For the water companies, the retail price – at least on the non-domestic side – could be set by the market, with Ofwat chief executive Cathryn Ross recently suggesting this area could be deregulated once the market has become established.