Impacts of weak power demand, decentralization and the emergence of renewables capacity are reshaping Europe’s energy system. What must European utilities do to quickly adapt to a more complex and fragile future?
European utilities have traditionally created value by building extra generation capacity. The financial crisis of 2008 changed all that. Hit by weakened consumer demand and increasingly challenged by decentralization, concerns over energy affordability, and intervention to support the growth of renewables, European utilities’ market capitalization has been slashed by half—from €800 billion in 2007 down to €400 billion by the end of 2013—at a time of peak expansion planning.
Without a significant improvement forecast for margins on the horizon, many utilities have looked to broad-based cost-cutting programs—combined targeted savings of €18-20 billion per year by 2016 are in the works—but these efforts are not sustainable. Identifying new sources of value creation has become an urgent priority for the industry.
The existing integrated utility model is unlikely to remain appropriate. What is needed are industry dynamics to become more flexible, agile and digital, with utilities understanding where they want to fit into the emerging energy value chain, and adapting business models accordingly.
So how can utilities get started on the journey toward new value creation? To help them identify priorities, Accenture recently undertook in-depth analysis of the region’s industry choke points and financial challenges. From this analysis, we see nine value creation themes along the value chain, where we believe maximum benefit can be achieved:
Harmonize energy policies on a pan-European basis.
Optimize long-term generation mix.
Execute capital projects in generation and in distribution and transmission on time and on budget.
Create the future utilities infrastructure.
Create new revenues from consumer digitalization.
Develop new trading capabilities.
Accelerate bottom-line improvements.
Drive inorganic growth in emerging/regulated markets.
Address investor expectations on capital structure.
Three of the themes rank particularly high. First, harmonization of energy policies on a pan-European level. Policy intervention, including new taxes and levies, can have a significant impact on investment decisions and energy costs. Analysis by Accenture and EURELECTRIC shows that pan-European optimization of the energy system could save up to €81 billion in annual energy expenditure by 2030 as well as injecting much-needed predictability into the market. The success of any drive toward integrated capacity markets and consistent renewables policies hinges on all stakeholders adopting a collaborative approach.
Next, creating the future utilities infrastructure. Ageing transmission and distribution networks, increased adoption of renewables and distributed generation mean that, by 2020 alone, an investment of €400 billion is needed for grid upgrades. To enable an efficient, sustainable and reliable European energy supply for the future, utilities must focus on driving value from the smart grid and enabling greater interconnectedness.
Third, creating new revenues from consumer digitalization. With retail margins dropping, utilities must capture opportunities for significant forecast revenue growth. Accenture New Energy Consumer research shows that new energy consumers want products/services that go beyond the meter (e.g., home energy management, maintenance and repair, consulting around energy efficiency, financing and insurance solutions). To compete with disruptive new entrants, utilities must leverage new channels for digital interaction and adopt innovative business models to meet new consumer demands—from home energy management systems to electric vehicle infrastructures.
With further disruption, uncertainty and complexity in the industry, European utilities face an uncertain future. However, by addressing the most relevant value creation themes, adapting their business models and becoming more nimble, agile and decentralized players, utilities have a strong opportunity to electrify value creation now and in the future.