How utilities worldwide can unlock €100 billion a year?
Electric utilities globally are facing significant revenue losses from the continued growth of energy-demand disrupting technologies, such as solar power, electricity storage and energy efficiency.
In fact, our research suggests that over the next 10 years the level of demand disruption could drive down utilities’ revenues by up to $48 billion a year in the United States and €61 billion a year in Europe.
Compounding this challenge, European utilities have had to face additional financial pressures resulting from reduced energy demand following the financial crisis, the nuclear phase-out in Germany and the shale gas boom in the United States, which pushed cheap U.S. coal onto European markets making local feedstock and assets less economical. Since their peak in 2008, European utilities have lost almost half their market capitalization.
With regulators around the world imposing tighter carbon emission reduction targets, more effective carbon pricing signals, increased energy efficiency and more renewables in the energy mix, utilities’ purse strings will continue to tighten.
The good news is that while many traditional value pools are at risk, new ones could be created. According to a new report from Accenture Strategy and CDP, Low Carbon, High Stakes, utilities could turn the risk into an opportunity and create up to €100 billion in new value annually by 2030 with new energy efficiency products and services and distributed generation related services.
Capitalizing on this opportunity will require the sector to transform its business models. Specifically, utilities could consider decoupling electricity generation revenues from sales volumes, divesting non-core assets and businesses, and forming more cross-industry partnerships.
Transforming their business model to deliver energy management products and services to customers, could enable utilities to capture new business value between €65 billion and €80 billion per year by 2030.
This approach will require a utility to shift its revenue model away from volume sold to benefits delivered, as well as invest in robust digital capabilities.
Fortunately, retail utilities are especially well positioned to capitalize on this opportunity because they are already recognized as reliable suppliers of energy solutions by consumers.
However, not all markets have the right characteristics for such a model. The most suitable markets are those with high electricity consumption and prices, as well as the requisite infrastructure such as smart meters, smart grids, and a growing number of end users with connected devices. These include North America, Europe, Japan and Australia.
Dutch utility, Eneco, is one company that has embraced this business model by placing the customer-centric energy management device “Toon” at the core of its strategy. The Toon is a smart thermostat and display that helps consumers control their building heating, lighting, and other smart devices, and its successful uptake has enabled the utility to create innovative products and services to help its customers better manage their energy use. For example, working with the Dutch startup Nerdalize, Eneco is testing the feasibility of using waste-heat from decentralized data servers to heat homes.
Utilities could also capitalize on the local deployment of low-carbon energy by individuals, businesses or communities through products and services that support distributed renewables—such as solar photovoltaics (PV), microgrid installation, and maintenance, as well as peer-to-peer solutions for exchanging low-carbon electricity. According to our analysis, this market could range between €10 billion and €20 billion in new revenues per year in 2030.
The biggest change required for electric utilities adopting this model is shifting to a partnership model, in which joint investments in local generation and distribution lead to shared profits and shared risks.
Two different types of markets are most suitable for this type of business model. One is a market with a large consumer base that does not currently have access to reliable energy due to off-the-grid locations or the absence of a basic energy infrastructure—such as sub-Saharan Africa. In such markets, low-carbon methods can deliver energy to customers in far less time than conventional ones. For example, Enel, a large global utility, has electrified remote communities in Africa in one year via solar, compared with the three years it would have taken with a coal-fired plant.
The other market is one with a large number of consumers who want to be engaged in communities to develop low-carbon energy generation because of commercial or environmental drivers. These include Australia, parts of Europe and North America. For example, Dutch startup Vandebron, is a new entrant in a saturated and mature market with an innovative business model that enables consumers to directly buy their electricity from local low-carbon energy suppliers at an online marketplace.
As the climate talks in Paris continue, two things are clear - the world must move quickly and ambitiously to deal with greenhouse gas emissions and that means improving energy efficiency and boosting renewables. Utilities are at the heart of that movement.
Some leading utilities are already tapping into the opportunities presented by low-carbon and as the success of these leaders grows; they will serve as inspiration for other utilities that are starting their own transformation journey. The awareness of the challenge is there, as is the path forward. Now utilities need to take action at scale and at speed.
First published in Forbes magazine.
Jean-Marc Ollagnier is Group Chief Executive of Accenture’s Resources industry group and advisory board member of the United Nation’s Sustainable Energy for All initiative, as well as the co-chair for its energy efficiency committee.