European utilities are currently undergoing significant reinvention due to a rapidly changing market and political environment. The traditional energy generation model is under fire, while at the same time demand is shrinking due to changing habits. The industry desperately needs to develop new business models to ensure new top-line growth. How can this be achieved, and how can utilities create value once again? This article discusses the imperatives and opportunities driving change in the market.
There is no doubt that the business model of power utilities operating in developed markets is currently poised for major transformation. As we have discussed in previous Prism articles, The Future of Energy Utilities (2/2013) and Radical Changes for European Power Utilities (2/2014), the traditional vertically integrated, centralized, asset-heavy, generation model is being questioned from many angles, not least economically. As a consequence, valuations of most leading utilities have been severely reduced, reflecting the loss of value in generation portfolios. As anticipated, we are witnessing different types of reorganization by some leading players as they shift away from this model. The most publicized is perhaps E.ON’s formation of Uniper, separating conventional power generation (coal, natural gas and hydro) midstream gas and global energy trading activities from the ”New E.ON“, which will focus on renewables, energy networks and customer solutions. They are not alone: RWE, Centrica, ENEL and NRG, to name but a few, are also reorganizing in different ways to shift their focus away from conventional generation.Once the asset depreciation and reorganizations have taken place, the question is then how to create value once again. In a continuing context of stagnating or even decreasing demand in many markets, there is no need for further capacity investments to meet new needs, while replacing old power plants is fraught with uncertainties – and by its nature will not be a growth solution. Our previous articles highlighted the fact that, other than investing in renewable generation assets, most of the opportunities for growth in developed markets lie downstream, in the trends and shifts affecting consumer energy usage and its energy mix. This article discusses some imperatives to grow the top line in those activities.