PwC global power & utilities

The road ahead Gaining momentum from energy transformation

Megatrends and disruptions are having profound implications for the strategies and future role of companies all along the power utility value chain.

We map the impact on the power sector and look ahead at what it might mean for future market and business models.

Making the right moves now will be vital if companies are to be a successful part of energy transformation.

www.pwc.com/utilities The forces of transformation 3 Disruption dynamics 6 Looking ahead: future market and business models 11 Discover more 29

Introduction

The impact on the power sector from the convergent forces of changes in customer behaviour, new forms of competition, renewable and distributed energy and regulation is creating new opportunities and challenges. The root causes for these developments are global megatrends that are affecting all markets and are having particular impacts on power.

This report looks at the overall trends that are shaping tomorrow’s market environment and the market designs and business models that might ensue. It looks at the disruptions affecting companies and introduces PwC’s Energy Transformation framework. The framework helps companies map the effect on them all the way from the root causes through to impacts on future market designs and business models, addressing questions such as: • What will the future market design look like? • Who will be your competitors? • What will customers want? • How might regulation be responding?

Norbert Schwieters • What are the implications for the Global Power & Utilities Leader company’s purpose, role and positioning? • What will be the winning business models?

The changes affecting the power utilities sector have provoked some apocalyptic phrases from headline writers. We’re much more optimistic. True, if companies don’t stay ahead of change, the dangers they face will intensify. But if they make the right moves to address the challenges they face and embrace the opportunities, they can be a successful part of energy transformation.

2 The road ahead Gaining momentum from energy transformation The forces of transformation

Energy transformation is being driven by five global megatrends interacting with and amplified by a set of shifts taking place within the power sector. The five megatrends – technological breakthroughs; climate change and resource scarcity; demographic and social change; a shift in global economic power and rapid urbanisation – are challenges for all businesses.

But in the power sector their impact is made Some of the changes arise from the Together these megatrends and the all the greater by a number of simultaneous megatrends – for example the regulatory changes taking place in and around disruptions, involving customer behaviour, encouragement of renewables in the sector have profound implications competition, the production service model, response to climate change concerns for the strategies and future role of distribution channels, government policy – while others heighten the impact of companies all along the power utility and regulation. The extent and nature of particular megatrends – for example value chain. They are combining to these disruptions vary from market to the potential for rapid urbanisation to have a disruptive impact which will market. But in many markets, their intensity accelerate the roll-out of distributed lead to the development of new market is making their impact transformational energy and micro-grids. models and require companies to pursue rather than incremental. new business models (see figure 1).

Figure 1: PwC energy transformation framework

How are megatrends affecting the energy sector? Technological Climate change and Demographic Shift in Accelerating breakthroughs resource scarcity changes economic power urbanisation

Customer Production Distribution Government and Competition What are the behaviour service model channels regulation disruption factors impacting the power sector? Disruption dynamics

What could this mean for future market models? Green command Ultra distributed Local Energy Regional and control generation Systems supergrid

What business models Business Operating model/ Financial Purpose HR model are likely to evolve? model capabilities performance What transformations are necessary? Power & utility company transformation

The road ahead Gaining momentum from energy transformation 3 Global forces – Technological Climate change and five megatrends breakthroughs resource scarcity Technological innovation is at the heart The energy sector is on the frontline impact power of the shifts that are occurring in the of concerns about climate change. power sector. Advances are happening in The sector as a whole accounts for more many parts of the sector – for example, than two-thirds of global greenhouse-gas in large-scale technologies such as offshore emissions1 with just over 40% of this wind and high-voltage DC transmission, stemming from power generation. in distributed and smaller-scale customer- Resource scarcity or availability, and the based energy systems and on the load associated geopolitics and economics of side. Power is being transformed from a gas, oil and coal supply, are key factors top-down centralised system to one that shaping power market policy. is much more interactive but also decentralised and fragmented. Elements A growing emphasis on renewables is a of the old centralised system are becoming response to both climate change and stranded and there’s a need to find an security of supply concerns. In the US alternative investment model that alone, over 30% of new electricity recognises technological advances. generation capacity added in 2010–2013 involved solar and wind power, up from In many jurisdictions, renewable power is less than 2% in 2000–2003.2 Solar replacing or has the potential to replace photovoltaic (PV) is now present on more fossil fuel generation. Smart grids are than 1.2 million Australian homes and delivering the potential for greater producing over 3.3GW per annum.3 interactivity with customers. And the In Germany, renewables accounted for scope for even more transformative 24% of gross electricity consumption in technological breakthroughs is being 20134, placing the country slightly above taken more and more seriously all the the growth trajectory needed to reach its time. A breakthrough in the cost and 2025 target of 40 to 45%. practicality of battery storage technology could be a quantum leap enabler, opening Energy efficiency has also risen up the up the possibility of off-grid customer policy and customer agenda. Together, self-sufficiency when used in combination renewable technologies, energy saving with ‘own generation’. ‘Power to gas’ is and a different customer outlook are also a potential transformative technology. leading to a transformation of the All bring opportunities for incumbent electricity environment. They are causing power companies but many also have the the value chain to shift, away from large effect of eating away at a utility company’s conventional power plants towards local traditional revenues and undermining the power generation, and a greater focus on traditional utility business model. distributed energy and demand management. Other technologies, notably the combination of the internet, mobile Transformation is also very relevant to devices, data analytics and cloud developing countries, many of which face computing with smart grids and smart the triple challenge of being unable to metering, present opportunities for utility meet existing demand for electricity while companies to get closer to the customer, also facing huge demand growth and the play an enhanced ‘energy partner’ role need to extend access to those who don’t and exploit data opportunities. Analytics have electricity. The need for good demand capabilities, which today are generally management is already very familiar in of a low to moderate standard within countries such as South Africa where utilities, will need to be a core strength managed outages and demand restrictions in the future if companies are to fend are commonplace. Technological advances off competition from new entrants who will enhance this response as well as already have these capabilities at the present the opportunity for expansion of heart of their business. power in ways that may leapfrog the traditional grid evolution route.

4 The road ahead Gaining momentum from energy transformation Demographic changes Shift in economic power Accelerating urbanisation Within the next minute the global The focus of global growth has shifted. population will rise by 145. By 2025, Looked at historically, we come to realise Over the next two decades, nearly all of we’ll have added another billion that western economic strength is a the world’s net population growth is people to reach about eight billion. relatively recent phenomenon and the expected to occur in urban areas, with Explosive population growth in some current developments we see are essentially about 1.4 million people – close to the areas set against declines in others a rebalancing of the global economies. population of Stockholm – added each makes for very different power market week.5 growth potential in different parts of As fast-growth economies become exporters the world. Africa’s population is of capital, talent and innovation, the By 2050, the urban population will projected to double by 2050 while direction of capital flows is being adjusted increase by at least 2.5 billion, reaching Europe’s is expected to shrink. in a way that is quite different from the two-thirds of the global population.6 traditional routes from developed-to- Fast urban expansion presents a major The growth prize for power companies emerging and developed-to-developed challenge and an opportunity for power of serving expanding populations is countries. utility companies. The speed of urban a big one. For example, Nigeria’s growth puts a big strain on infrastructure population is expected to exceed We are already seeing significant east-west development. In Africa, already large cities America’s by 2045. But the infrastructure and east-south investment flows in power such as Lagos, Kinshasa and Cairo are challenge in many countries is immense markets, involving both financial investors going to become megacities, with more and not all growth markets are readily and power sector corporate investors. than 15 million people. The population in open to international expansion. For example, Chinese state-owned power Nairobi is set to more than double between Companies seeking to reposition their and utilities companies have been active now and 2025. geographic footprints towards faster- in their search for suitable international growth countries will also need to have power utility and grid investment Power companies can play a pivotal role a clear view on the impact of energy opportunities. Europe, South America, in ensuring future cities become ‘urban transformation on these countries. Australia and other parts of Asia have all smart’ rather than ‘urban sprawl’. The prospect of bypassing the grid and been targets for expansion. Sovereign wealth They have the potential to be lead players leapfrogging to new local distributed funds and pension fund investments in the at the heart of future city infrastructure technologies and market models is not sector have also become multi-directional. but it will require a new mindset and the unrealistic if the pace of technological The challenge for many power companies is development of new partnerships. advances and cost reductions continues. access to scarce capital from this global flow And, of course, the pace and nature of of capital, minimising the risk of stranded urbanisation in fast-growth and investments and seeking innovative ways of developing economies takes a different securing investment in replacement assets. form than in the west. In the former, the challenge is very fast growth on top of already stretched or absent infrastructure. In the west, rural urbanisation is a trend Snapshot: Faster technology alongside big city growth. development, falling costs

The time it takes to go from breakthrough technology to mass-market application is collapsing. In the US, it took the telephone 76 years to reach half the population. The smartphone did it in under ten years.

The price of new technologies is falling equally rapidly. An analysis by UBS predicts shrinking battery and solar costs will make the combination of electric vehicles, solar panels and stationary batteries for excess power a compelling proposition in many markets within the next ten years. It estimates the combination of an electric vehicle + solar + battery should have a payback of 7–11 years, depending on the country-specific economics.7 After that, the electricity generated is truly ‘free electricity’ for the remainder of the lifetime of the equipment.

Falling costs have the potential to introduce a new challenge to the power utility business model. If they translate into actual falls in the price of electricity itself, the industry will have to move away from the default assumption of ever-rising prices, on which many of its deals and investment are based.

The road ahead Gaining momentum from energy transformation 5 Disruption dynamics

The disruption taking hold in the power sector is just the start of an energy transformation. It’s not a question of whether the business models pursued in the sector will change but rather what new forms they will take and how rapidly companies will have to alter course. Companies need to be sure they have fully factored into their strategic planning the megatrends and changes discussed in the previous chapter.

The pace of change will be different in We see five areas in which disruption is each market and each specific situation. having an impact and where it will be The important thing for companies is that important for companies to assess their they assess their strategy and implement strategies: the changes they need to make in time or, even better, ahead of time. Already, of • customer behaviour course, many have reset their compasses • competition with a switch in priorities and emphasis. But will this be enough and what more • the production service model needs to be done? • distribution channels • government and regulation.

Together they form the context in which future market and business models will be framed. For each one it is possible to identify developments that are happening now and which, if they accelerate or impact in combination, could intensify disruption dynamics.

Snapshot: Google eyes power opportunity

Addressing a recent PwC roundtable on customer transformation,8 Google’s Chief Technology Advocate Michael T. Jones described the internet as “machines talking to machines. It can develop in all sorts of ways whether it is components on a 747 or your roof tile sending an SMS saying ‘replace me, I’m starting to leak’.” Moving on to the world of power, he observed: “All electronic devices will talk about their power needs to an aggregator and you can have an auction for the power for each one. All you need is someone to identify what the rates are.”

Google already holds a wholesale power licence in the US. Its January 2014 acquisition of Nest Labs for US$3.2bn also gives it a position in home automation with ownership of a company that has built a position selling thermostats and smoke alarms for the home. At the time of the acquisition, Tony Fadell, CEO of Nest, said: “Nest will be even better placed to build simple, thoughtful devices that make life easier at home.”

6 The road ahead Gaining momentum from energy transformation Customer behaviour Competition Engineering and technology companies such as GE, Siemens and Schneider We’re already seeing a gradual erosion Energy transformation is shifting the Electric have long been important players of power utility company revenues as opportunity for good margins into new as equipment providers in larger-scale distributed energy gains an increasing parts of the value chain. But lower segments of the distributed energy market. foothold. Some commentators go so barriers to entry in these areas of the The growth and extension of distributed far as to predict that customers will be value chain and the need for new energy is likely to blur the boundaries saying “goodbye to the grid” in the capabilities mean there is the prospect between such companies and the power future. In some places, it’s already of existing companies being outflanked utility sector, both at the individual happening. Significant changes in and outpaced as more nimble and able customer and community levels. the economics and practicalities of competitors seize key revenue segments. self-generation and storage are needed Demand management services are another for such a scenario to occur on any kind New roles for companies come into view. key area and, already, we see companies of scale. In a distributed energy community with such as Kiwi Power in the UK providing its own micro-grid, players other than services to industrial and commercial But even if customers don’t literally say power utilities can play an energy clients, offering demand reduction goodbye to the grid, power utility management role. This could be for local strategies that they claim might typically companies face the prospect of playing the systems such as transport networks, see larger businesses reduce their role of being providers of secondary or residential communities or industrial electricity bills by around £100,000.10 back-up power to customers. Instead, they communities. could become part of the change by In addition, there is considerable interest being more active participants in the For example, distributed energy is a key from companies seeking to explore the self-generation market, providing advice focus both for incumbent power utility opportunities that come from existing on equipment, metering and using the companies and for new entrants. It’s a big home and online services as well as opportunity to secure more of the home market space, worth tens of billions. future smart grid and distributed energy and business services space. It covers a wide spectrum of opportunities, provision. “The battleground over the from energy controls and demand next five years in electricity will be at the The growth in self-generation can create a management activities that save energy, house,” David Crane, CEO of NRG Energy, reinforcing dynamic. As well as the decline to local generation, both small-scale and told Bloomberg Businessweek. “When we in revenues to decentralised sources, there larger-scale, embedded in own use or local think of who our competitors or partners is the impact of cost pressures on the networks, through to distributed storage will be, it will be the Googles, Comcasts, centralised system which, in turn, reinforces that can shift loads or, ultimately, end AT&Ts who are already inside the meter. the movement to decentralisation. grid dependency. We aren’t worried about the utilities, The reaction of some in the industry has because they have no clue how to get been to press for new regulatory policies beyond the meter, to be inside the house.”11 to allow for some form of cost recovery in recognition of utilities being left with the fixed cost of the grid but a shrinking revenue base. But as one academic study points out: “In the short run, these steps very well could insulate the utility from solar PV competition but at the same time create substantial medium- and long-term “Utility companies need to align their risks, including those of customer backlash, deferral of adaption, and ambitions with those of their customers stimulation of enhanced competition.”9 in a new energy future, ensuring their Both in terms of regulatory relations and services are relevant and cost-effective.” customer relations, utility companies need to align their ambitions with those of their customers in a new energy future, ensuring their services are relevant to and cost-effective for as many customer situations as possible.

The road ahead Gaining momentum from energy transformation 7 “Do power utility companies risk losing out to new entrants from the world of online data and digital technology?”

The production Disaster risk led to all of Japan’s nuclear Distribution channels service model reactors being gradually taken offline after the 2011 Fukushima disaster and In a digital-based smart energy era, the they remained offline three years later. expectation is that the main distribution The production service model of Across the world in Germany, the reaction channel will be online and the energy centralised generation and grids is being to Fukushima was to begin to phase out retailing prize will hinge on innovative joined by a much more disintermediated nuclear power altogether. Official policy digital platforms to secure the energy and distributed model. New supply in Japan is to bring plants back into automation, own generation and energy sources requiring centralised operation, with the first restart expected efficiency customer space. infrastructure, such as offshore wind, to be announced in late 2014, as and when are coming onstream but the danger the atomic regulator deems new stricter Already, many companies are shifting their for utilities is that other assets and safety standards are being complied with. positioning to cluster energy management infrastructure are left stranded. But opinion polls have consistently shown offerings around a central energy The centralised infrastructure that has that a majority of Japanese are opposed to efficiency and energy saving proposition long been a source of strength of the restarting reactors and nuclear assets are and using new channels such as social industry can be a source of weakness unlikely to regain the same role in Japan’s media to engage with customers. But do vulnerable to market, policy or disaster energy system as they had before power utility companies risk losing out to risk. And we’re seeing all three of these Fukushima. new entrants from the world of online risks currently playing out in Europe, data and digital technology? the US and Japan. In the US, one can draw a direct line from environmental policy to the stranded A risk for energy companies is that their In Europe, the changing economics of asset risk faced by many of the country’s distribution channel to end customers generation brought about by a coal generation plants. Coal-fired power becomes disintermediated in ways that combination of the rise of renewables, the plants are subject to the Mercury and are not dissimilar to what has happened collapse in the carbon market and cheaper Air Toxics Standards (MATS), which to incumbent publishers and booksellers international coal prices has left much gas require significant reductions in emissions with the advent of Amazon. Not only is generation out of the market. Even modern of mercury, acid gases, and toxic metals. the channel to market for incumbents plants, completed as recently as 2013, have The standards are scheduled to take dominated by the new platform but the had to be temporarily mothballed and effect in 2015 and 2016, with generators actual demand for product is eroded as many others have been taken out of the needing to install costly pollution-control the platform acts as an aggregator for market more permanently. In total, over equipment if they want to keep their self-publishing and second-hand sales. the course of 2012–13 ten major EU coal plants running. The US Energy And, of course, the offering is now utilities announced the mothballing or Information Administration expects much wider than just books, with the closure of over 22GW of combined cycle about 60GW of coal generation to shut combination of a trusted brand and gas turbine (CCGT) capacity in response to down between 2012 and 2018 – a sheer presence providing a marketplace persistently low or negative clean spark 13 reduction of about a fifth. A further joining consumers to a wide range of spreads, of which 8.8GW was either built threat to coal comes in the form of the product providers. or acquired within the last ten years.12 proposed Clean Power Plan, which will require carbon emission from the power Smart grids, micro-grids, local generation sector to be cut by 30% nationwide and local storage all create opportunities below 2005 levels by 2030. to engage customers in new ways. Increasingly, we are seeing interest in These developments highlight the risk of the power sector from companies in the over-reliance on a concentrated centralised online, digital and data management power generation asset mix. The wrong world who are looking at media and type of asset mix can leave companies entertainment, home automation, energy vulnerable to rapid transformation, saving and data aggregation opportunities. arising from market or policy forces or In a grid-connected but distributed power the forces of events, in the case of nuclear. system there are roles for intermediaries Such forces provide a wake-up call which who can match supply and demand rather is likely to accelerate the move to than meet demand itself. alternative power systems.

8 The road ahead Gaining momentum from energy transformation A key consideration for incumbent power Government and The political context shapes the utility utilities is if their brands are perceived business model. Changes in that context as being part of the past that is being regulation can dramatically impact utilities. This has broken away from rather than the future always been the case but, in a more for customers. An energy saving or Energy is by its nature a key economic dynamic energy transformation context, demand management proposition may be and political issue. More than in many political and regulatory decisions become perceived as more credible coming from other sectors, firms in the power sector even more significant. The different a new entrant rather than an incumbent, depend on the political context for their political approaches to energy so use of the brand needs to be carefully licence to operate and public trust in transformation in different countries are considered. their activities is a big factor. key to explaining why the impact on fossil and nuclear generation has been faster Another important challenge for The cost of power is an important and more dramatic in Europe compared companies arises from the need to be element in household budgets as well as to elsewhere. expert at managing data in a smart business and industrial competitiveness. home, smart city and smart company The availability of power is a ‘make or A more dynamic environment also environment. As well as data from smart break’ matter for everyone. And its elevates the importance of public trust devices and the grid, additional layers infrastructure is the centre of often and perception. Energy transformation of information about demographics, controversial planning debates. is extending the scope for the public to behaviour, customer characteristics and vote with their feet, not just by switching other factors will often be required to best So it’s inevitable that the activities of suppliers but by reducing dependence exploit the data opportunity. Many power power utility companies are never far on utility companies altogether. utility companies already use sophisticated from the centre of the public and political data analytics for customer segmentation spotlight. Recent and current events in purposes which can be built on and different countries discussed in the earlier supplemented by enhanced analytics, section on the production service model big data from social media and learning highlight the potential for the public and from other industries. political will to alter the nature of the business.

Snapshot: A weakened capital base

In Europe, the erosion of utility company earnings has had an inevitable impact on investment attractiveness. The Economist reported that “in 2008 the top ten European utilities all had credit ratings of A or better. Now (in 2013) only five do.”14 Share prices were similarly hit over the same period.

In the US, the power utility share price story has been much healthier but the association representing US shareholder-owned electric utilities has sounded a warning note about the capital implications of energy transformation: “When customers have the opportunity to reduce their use of a product or find another provider of such service, utility earnings growth is threatened. As this threat to growth becomes more evident, investors will become less attracted to investments in the utility sector. This will be manifested via a higher cost of capital and less capital available to be allocated to the sector.”15

The road ahead Gaining momentum from energy transformation 9 “Sector transformation could shrink the role of some power utility companies to providers of back-up power.”

The need for innovation Business model innovation is just one Avoiding a capital crunch element of the innovation required but is Incumbent companies that don’t innovate likely to be a key part. The difficulty is As well as innovating, utilities need to could risk seeing themselves succumbing that business history tells us that the make sure that a weakened investment to the pressure points and being eclipsed majority of business model innovations are case doesn’t close off growth routes. in the same way that incumbents like introduced by newcomers and incumbents Energy transformation is eroding the Kodak, Blockbuster video stores and high often find it hard to respond successfully. capacity of utilities as investors. Some have street booksellers were in other sectors. Incumbent companies sometimes try to suffered rating downgrades. Others have Certainly, sector transformation could hold on to the existing model for too long had to deleverage, reducing debt relative shrink the role of some power utility or fall between two stools as they try to to cashflow, to maintain credit ratings. companies to providers of back-up power. manage two competing business models These developments, primarily affecting at the same time – the original business companies in Europe and some in Africa, In our most recent Global Power and model and the new model. come at a time when they also face major Utilities survey, only a minority of our capital investment challenges to replace survey participants expect centralised One way to avoid this trap is to separate ageing infrastructure as well as make generation and transmission to play the out responsibility for developing new energy transformation investments such lead role in meeting future demand business models and value propositions. as smart grids. In parallel, many such growth across the main markets of Asia, For example in banking, this is what HSBC utilities need to deploy capital to pursue Europe and North America.16 Instead, did in the UK when it developed its highly diversification away from mature, low or energy transformation will gather pace successful First Direct telephone, and now flat-growth markets towards fast-growth and we expect that growth will become internet, banking service in the 1990s. regions. more innovation-dependent, with success Not only was branding separate from its coming to those companies that use then ‘Midland/HSBC’ traditional branch Global competition for capital is intense, innovative technologies, products, banking brand but the service operated and all the more so because the capital services, processes, and business models largely independently of the parent constraints faced in some markets stand in to gain competitive advantage, to stay company. Another route for separation is contrast to other markets. In the US, the ahead of change and create new markets by outsourcing to a community of new challenge for power companies has been for their products and services. In Africa entrants and smaller firms. The incumbent to convince investors that peak stock innovation will be driven in part by the utility can then nurture these innovations valuations can be maintained, a key part fact that power utilities will not be able and help scale up the emerging dominant of which will be to demonstrate that they to support the increasing demand for products or services. can negotiate the challenges of energy electricity supply and businesses will transformation without facing the kind evaluate other solutions, such as looking of conditions that have engulfed their at different means of co-generation. European peers. Innovative and alternative approaches to financing are becoming more commonplace in the sector. Partnerships and strategic tie-ups with sovereign wealth funds, insurance and pension funds, already becoming more numerous, are likely to increase in importance.

“We expect that growth will become more innovation-dependent, with success coming to those companies that use innovative technologies, products, services, processes, and business models to gain competitive advantage.”

10 The road ahead Gaining momentum from energy transformation Looking ahead: future market and business models

No-one can predict the future but it is important that companies take a clear view on the ways in which their marketplace is likely to evolve and their company’s place in the various different possible scenarios.

PwC’s energy transformation programme At its heart, this means addressing key • What are the implications for people includes joint activities with companies questions such as: and operational change? to support their future strategies and map out the risks and opportunities • What will future market design look • What will existing and new competitors involved. like? be doing? • What are the implications for my • How best to continue to deliver company’s purpose, role and shareholder value throughout the positioning? transformation process? • What are the business models that I need to pursue?

Figure 2: The power sector has reached an inflection point where its future direction is much less predictable

Few disruptive elements Less predictable future

Demand Arab oil destruction embargo Market reform and ‘Golden age’ of utility reinvention? liberalisation

Flat and declining grid value?

Broad Emergence industrialisation of new ‘Death spiral’ from disintermediation, technologies technology disruption and customer evolution?

Expansion of Fukushima nuclear and gas nuclear generation emergency

1970 1990 2010 2030

The road ahead Gaining momentum from energy transformation 11 ‘Business as usual’ with the maintenance Green command of a classic centralised ‘command and Future market control’ energy system may continue and control designs to be an option for some countries, although we expect to see an increased The Green Command and Control market focus on technology and innovation as scenario represents a market in which We foresee a number of market models this model develops. But already over the government owns and operates the emerging. Unlike markets for many last two decades or so, many countries energy sector and mandates the adoption other products and services, the role have moved away from this ‘classic of renewable generation and digital of governments is significant given the model’ and, through a combination of technology. importance of power to everyday life regulator-led and market-led innovation, and economic activity. So the exact have created markets characterised by In this scenario, we see vertical integration market shape for individual countries different ownership structures with as the norm (particularly between will depend on policy direction as well varying degrees of market liberalisation, generation and retail), and investment as on other local factors such as the customer choice and technology decisions made as a response to regulatory extent of competition and customer adoption. direction. It is a market in which choice, access to fuel, the nature of renewables may be cost-competitive or existing infrastructure, the degree Current change has so far, on the whole, supported under renewable policy of electrification and degrees of been incremental and stopped short of initiatives, whilst stranded thermal assets interconnectedness or isolation from ‘transformative change’, although may remain operational even when private neighbouring territories. And, of many would see aspects of current sector owners would have taken closure course, a crucial factor will be the developments in Europe as decisions. Ongoing capital investment pace of global technological change. transformative. But we believe that, would be subject to policy approval and if the pace of innovation leads to would feed into regulated tariffs. widespread adoption of renewable and smart energy technologies, we are likely The market may combine a central grid to see the emergence of a number of new with distributed networks where the latter market models. Each market scenario support social policy initiatives such as can be described by a unique set of rural electrification or reducing the level of characteristics and illustrates different capital investment in major transmission points along a series of transformation infrastructure. There is likely to be an curves. We have considered a wide increased level of investment in range of characteristics in developing distribution networks to support back-up the scenarios, including ownership capacity in localised areas of the grid. structures, the level of adoption of Consumer tariffs will reflect policy renewable technology, level of decisions and recovery of stranded costs, deregulation, level of engagement in and may be smeared across central and the wholesale market by customers, distributed networks. regulatory and policy involvement in market structure and operations, use of There may be some limited opportunities digital media and the mix of large-scale for new market entrants – potentially as and small-scale generation. outsource partners supporting state-owned companies with operations of distributed We outline below four new market networks, or as compliance advisors scenarios which represent transformative to the regulator supporting tariff change – a significant shift from where determinations and investment case we are today. Power utility companies business approvals. Outsourcing support are unlikely to be in only one of these opportunities might offer local small-scale scenarios but, instead, experience a as well as large project opportunities. blend of them with perhaps one being For example, in South Africa the dominant. The most appropriate path Department of Energy has mandated the for any given company will depend on roll-out of a national solar water heater local, as well as global, factors. programme with the goal of one million installations on households and commercial buildings over a period of five years, providing significant potential for local capacity-building.

12 The road ahead Gaining momentum from energy transformation How might this market arise? Ultra distributed There are significant opportunities for We see two routes. In the first, it might generation new entrants in addition to investment in develop directly from a traditional, renewable and distributed generation. centralised “classic model” where the We expect to see growth in participants The Ultra Distributed Generation (DG) government takes policy decisions to invest providing aggregation services, both for market scenario represents a market in in renewable generation, smart technology small-scale distributed generation and for which generators have invested in and local energy hubs. In the second, the load management. Offshore TSOs or distributed renewable generation, with market may have undergone some degree private sector, localised DSOs linked to a investment decisions based on policy of liberalisation and/or new entrants in portfolio of distributed generation will incentives and/or economic business generation or retail, but policy decisions become more prevalent. There may be new cases. It is a market with full unbundling result in control reverting to the public roles for managing the interconnection and strong customer engagement, both sector. This might be the case, for example, between local networks or for managing in retail and as micro-generators. in the event of a political decision to and interpreting generation data. renationalise or when a company fails and Market operation becomes more complex private sector entities are not prepared to How might this market arise? for both transmission and distribution step in. We see the main driver of this model operators, given the increased volume of being policy decisions which result in a distributed and renewable generation and We would see private sector players significant increase in small-scale the continued operation of large-scale exiting the market and may see mergers distributed capacity over a relatively short thermal generation, but remains centrally of generators and/or retailers to support period of time. This might be led by operated and does not fragment. government policy preferences (for retailers encouraging their consumers to Regulatory oversight and revenue price example, a state-owned generator reduce demand through becoming a controls are likely to address efficiency of operating stranded assets as back-up prosumer owning micro-generation, by system operation and equitable treatment for renewable generation, another state- proactive consumers or by generators of generation in dispatch and system owned company operating small-scale sizing investments to meet local community support. In particular, determining which renewable generation and supplying needs at a distribution grid level. market participants pay for the central customers within distributed networks). transmission grid becomes a critical Integrated investments in new regulatory question. Which countries might adopt communities that include distributed this market scenario? generation and a back-up connection to We expect to see stranded thermal assets In our view, a green command and control the grid also support an Ultra DG market as distributed resources become cost- market scenario is most likely to evolve in scenario. The Ultra DG model could also competitive and, in part, due to the lower markets where there remains significant arise through an evolving spiral of flexibility of some distributed generation public ownership, single-buyer models or developments, where there has been no and the ensuing volatility of wholesale limited interest from the private sector in conscious policy decision but investments prices. Risks to security of supply increase investment, e.g. in China, selected South over time have led to the closure of and we are likely to see continued policy American, Middle Eastern and African uneconomic thermal plant, prosumers and regulatory intervention to maintain an markets. Further, in some countries, reducing local demand requirements and appropriate level of thermal capacity on renewable energy dominates the energy rebalancing the system operations roles the system. Generators with distributed mix, such as hydropower in Bhutan or of the TSO and DSOs. capacity will have increased volumes of Norway. In such situations, it makes sense operational data to manage as they match for governments to encourage green power Which countries might adopt their physical and trading positions. for own use, thereby reducing any import this market scenario? Retailers will need to continually review of fossil fuels, and for earning extra In our view, an Ultra DG model is most their trading and hedging strategies to revenue from export of green power. likely to arise in markets where there is manage price volatility and to determine already significant investment in distributed the tariffs that can be offered to different generation but where there is a strong categories of consumers – particularly national infrastructure supported by policy prosumers who offset their demand objectives, e.g. Germany or California. through micro-generation. It could also arise in markets where the opportunity for significant investment in This scenario presents considerable small-scale renewables or larger-scale challenges for system operators with distributed generation could support local complexities such as reverse flows, voltage networks or isolated developments which management, fault maintenance etc., would only require periodic back-up placing even greater importance on data generation from the transmission grid, management capabilities. Generators, e.g. Middle Eastern markets or Australia. transmission system operators (TSOs) and distribution system operators (DSOs) will need to revisit the capability and skills required from their staff and we expect to see an increased emphasis on technology specialists over time.

The road ahead Gaining momentum from energy transformation 13 Local energy systems We see a need for new approaches to Which countries might adopt security of supply, which we would expect this market scenario? The Local Energy Systems market to be provided by DSOs in the main, We see Local Energy Systems as having scenario represents a market in which providing interconnections between most relevance in developing countries we see significant fragmentation of the localised grids. The role for the TSO would without a strong national transmission existing transmission and distribution be greatly reduced and would result in infrastructure. The fall in costs of grids and local communities demand significant overcapacity in transmission. renewable generation and the improved greater control over their energy supply, technology to support distributed grids or a market in which a local approach is The market provides a new set of means that isolated communities could be adopted for serving remote communities. challenges for the regulator, particularly electrified without the need for major in relation to a customer protection capital investment in transmission or fuel The market is likely to have undergone obligation. Regulators will need to address infrastructure. We would expect to see full unbundling and experienced strong interconnections between local energy combinations of solar, wind, biomass and customer engagement, both as consumers systems, review the risk of disconnection storage technologies used in these and micro-generators, but recognises the and put in place reporting oversight markets, for example in Africa, where a benefits of vertical integration for off-grid mechanisms to check that customers are number of such systems have already been solutions. Financial viability of distributed not being overcharged. Where a territory put into place. But in a country like India, generation and distributed grids is a has existing transmission capacity, the where almost all generation capacity is prerequisite. Strong policy support for regulator might also need to determine grid-connected, local energy systems fragmentation is required, either to allow appropriate charging mechanisms for the based on renewable energy are likely to local initiatives or to encourage and transmission grid, both in terms of which be limited to island systems such as in incentivise local communities and customers should pay and what proportion the Sundarbans or Lakshadweep. businesses to take control and build and of the stranded capacity should be operate their own local energy systems. included. We see Local Energy Systems as being particularly suitable for isolated island In its purest form, there would be a limited There are a number of new roles that systems, such as are found in Indonesia role for large-scale generation connected could arise within a Local Energy Systems and the Philippines. The prerequisite is to a central transmission grid. It would market. Generators may wish to become likely to be cost-competitive storage continue to support industrial customers local energy operators providing a full technology to support distributed with large, secure, long-term loads and range of generation, network and retail renewable technology, CHP generation would be able to provide back-up for services across a range of technologies. and limited thermal generation. security of supply reasons. We would Technology companies are also likely to The benefits would be in replacing expect significant levels of stranded look at the option of becoming local carbon-intensive diesel generation, for capacity, which may close without policy energy system operators. Market example in Alaska or the Philippines. support. participants may look at the opportunities In India, a new local approach to energy to link the power and gas markets. is taking root in some states in the form We see generators focusing on developing Grid companies may decide to provide of retail supply outsourcing, whereby the and operating small, distributed O&M services to micro-grids to maintain DSO contracts out part of its licence area generation assets, sized to support the capability and skill base required to to franchisees. domestic communities or commercial support their stranded assets. customers and most likely connected to distribution networks. Tariffs may well How might this market arise? vary across the country as the costs of We see the main driver for Local Energy supply would be based on the local Systems to be policy decisions, based generation assets. Customers may be able on an objective to increase rural to invest in the generation assets so that electrification, reduce the emissions they have an incentive to manage their caused by using diesel generation in demand at times when the local capacity isolated communities or to deal with margin is tight. currently unreliable/intermittent supply. Coupled with technology improvements in electricity storage and reductions in the capital investment costs of solar and wind generation (for example), tariffs become affordable and Local Energy Systems become practical.

14 The road ahead Gaining momentum from energy transformation Regional supergrid The intermittent nature of some renewable India has proposed the development of a generation is likely to mean volatility in renewable energy grid, the ‘Green Energy The Regional Supergrid market market prices, particularly with long- Corridor’, with support from the German scenario represents a market which is distance transmission, and managing the government. It aims to handle growth in pan-national and designed to transmit pricing differentials between different renewable energy from the current 30GW renewable energy over long distances. countries will be crucial. Skilled regional to 72GW by 2022. In southern Africa, with It is likely to embrace some degree of traders will be vital, particularly for the support of the Southern Africa Power unbundling and customer choice. merchant generators. Pool (SAPP) and the different utilities in It requires large-scale renewable the region, a supergrid called Zizabona generation, interconnectors, large-scale National TSOs will enter into agreements is being established between Zimbabwe, storage and significant levels of with other TSOs in the region or, if Zambia, Botswana and Namibia, providing transmission capacity. agreement can be reached between for the import/export of electricity via countries, a regional TSO will manage the either PPAs or day-ahead trading through The main challenge that will need to be overall system. Decisions on where new the SAPP. overcome is regional regulation that transmission capacity is required to applies across borders. National regulators improve the efficiency of the system will will have limited responsibilities and will be taken on a regional basis, and will be required to oversee national markets require a new charter to be developed within the regional context. In some to lay out the objectives, rules and situations, geopolitical risk will also be a operational processes of the regional major factor, for example if supply relies market. Distribution businesses will on generation located in neighbouring but remain national or local but are likely to politically sensitive regions. require restructuring so that their focus shifts to management of small-scale local We will see a new approach to generation renewables and of the interface with the Combined models investment decisions, where generators or transmission grid. governments will consider a regional Each of the four potential market scenarios merit order and interconnector access How might this market arise? outlined above represents a transformative requirements as part of their business case The main driver for a Regional Supergrid move away from current markets. There assessment (for example, South Africa and is policy, jointly created and pursued by are common themes across the models the Democratic Republic of the Congo in neighbouring governments who recognise and we can see how, in practice, countries the case of the Inga hydro dam project). the benefits of harnessing renewable might adopt certain components from The emphasis on large-scale renewable generation sources and linking them to more than one model. generation means that we are likely to see distant demand centres. It could arise from stranded thermal assets, which would market coupling initiatives, where the The seeds are in place for transformative require regulatory support to remain governments and regulators determine change but there is still a lot of inertia available for national or local grid support that each market would become more in the system. The pace of change will for security of supply reasons. efficient and pricing signals would become vary from territory to territory. more appropriate if the two markets Some will see a gradual evolution while We will see a shift in approach from became one. others will see parts of the sector retailers, who will either become regional undergoing faster transformative change. retailers or will enter into partnerships Which countries might adopt Such transformative change might be to access customers in other countries. this market scenario? defined by locality or by the part of the Brand management and customer We see forms of a Regional Supergrid, value chain. segmentation will become more complex but without common regulation in the as retailers embed their products and USA, so there is the potential for further We believe that these transformative services in multiple countries. aggregation and adoption of common energy market scenarios provide a future approaches. Looking at where a Regional in which market participants and new Both generators and retailers will place Supergrid could arise through investment, entrants can thrive and the role of policy an increased emphasis on trading and we think that the Middle East has the makers and regulators is clear. The most risk management. The presence of potential to adopt this model. The EU appropriate market scenario will come constraints, for example through limited has an objective of a single European out of an assessment of the impact of the interconnector capacity, means that electricity market which would effectively major disruptors and the local factors that locational pricing is the most likely become a Regional Supergrid, but the apply in each individual situation. outcome, so market participants will need complexities of implementing common to manage both national market prices and regulation across multiple countries with market prices in neighbouring countries. different legal structures makes the pure model less likely to be achievable. A hybrid market adopting certain aspects would be a more realistic option.

The road ahead Gaining momentum from energy transformation 15 Within the next decade we anticipate that In defining future business models, step-change milestones will be reached companies need to first understand and Future utility in at least some of the key disruptive challenge their company purpose and business models technologies – grid parity of solar positioning in the markets of the future. distributed generation, lower cost and We call this ‘blueprinting the future’ and mass-scale storage solutions, vibrant it consists of several fundamental steps, Companies need to determine the and secure micro-grids, attractive starting with defining ‘where to play’ in future direction of their own markets, electric vehicle options and ubiquitous terms of business segments, markets, how these markets are affected by behind-the-meter devices. In this new products and, services (see figure 4). technological advancement and what technology-enabled, customer-engaged Core, adjacent and growth market this means for their business strategies. marketplace, companies need to define participation areas are assessed based While the urgency of their responses their desired purpose (see figure 3). on attractiveness, capability to compete may vary by location and value chain We foresee a distinction between energy and potential for profitable success. presence, we believe companies can’t suppliers, integrators, enablers and Next comes assessing ‘how to play’ in afford to wait as the next decade optimisers with different points of focus these selected areas, which defines the is crucial. along the value chain. go-to-market strategies to be adopted by participants in pursuing their market Incumbents and new entrants need to aspirations, e.g. new products, innovative ask themselves how they intend to unbundled pricing. position themselves as market participants, i.e. the ‘role’ they will play We then focus on the most important in market development, customer dimension of the blueprint, ‘how to win’. engagement and business execution. This element defines the particular Companies have distinct options on this tailored approach that is most appropriate spectrum ranging from ‘passive and for a company to achieve competitive market-following’ to ‘innovative and market success, e.g. partnering or channel market-making’. Defining the future role expansion. of the entity is fundamental to shaping the business model to deliver on aspirations.

Figure 3: Future role evolution

Emergent roles Energy Supplier Integrator Enabler Optimiser

‘Asset-focused’ ‘System-focused’ ‘Value-focused’ ‘Insight-focused’

Primary segment Generation Transmission/ Distribution/ Customer focus distribution customer • ‘Have to do’ if asset • ‘Will do’ regardless • ‘Should’ migrate into • ‘Could’ evolve into as heavy or short in of new area depending on role new business models supply participation mature

Key focus areas • Ensuring assets are • Facilitating grid • Enhancing the • Enabling customers optimised in the interconnection with value of the grid to better leverage market to match other transmission to all stakeholders behind-the-meter price signals developers technology • Addressing how to • Achieving the right • Extending the leverage technology • Broader engagement balance of asset-based deployment of to enhance system with the customer by and notional technologies or performance and providing value transactions within equipment into customer engagement through advanced risk parameters the distribution data analytics network

16 The road ahead Gaining momentum from energy transformation To fully evaluate the above choices, Figure 4: ‘Blueprinting the future’ companies need to examine their current core capabilities against the type and level necessary to effectively compete and Determine our ‘purpose’ and desired outcomes, prosper in a more decentralised and ‘Where do we play’? disaggregated marketplace. In particular, e.g. ‘end-to-end’ participation incumbents and new entrants need to take or selected areas stock of which capabilities are distinctive and differentiable, e.g. asset management or regulatory prowess, and which may Establish the ‘positioning’ How competitors need to be developed or strengthened, we wish to achieve, choose to ‘How do we play’? e.g. innovation or commerciality. e.g. ‘full offering portfolio or play impacts highest value product these choices The energy value chain of the future will be more interconnected than ever before. This value chain forms an integrated Define the ‘role’ we ecosystem of unique elements that are would like to perform, ‘How do we win’? highly interrelated, notwithstanding the e.g. sole player or ‘partner specific focus of these individual elements of partners’ (see figure 5). Incumbents will need to focus on extending beyond independent views of each value chain element into a more integrated view of how these Future strategy elements can interact with each other in the future, e.g. how the benefits of increased knowledge about system performance can bridge the gap to enhance the customer experience. Non-traditional entrants will need to determine how they interact between incumbents and customers in a manner that does not ‘island’ assets or ‘diminish’ customer relationships. Just as we are Figure 5: A networked model now entering the era of the ‘connected customer’, we are also seeing the broader emergence of the integrated grid. Actively manage the grid

Distribution Link supply Engage with to load Transmission Retail customers

Focus on Bulk Become an active Customer baseload generation participant New market paradigm Customers become Distributed Offer new products New entrants producers generation and services

Customers become Demand Customers go Micro-grids active consumers response off grid

Storage

Storage used to manage grid

The road ahead Gaining momentum from energy transformation 17 The range of future Some market participants – incumbents or In this traditional model, both tangible new entrants – may be prevented from assets and franchise customers were business models playing in all segments, while others may considered important to preserve the seek to specialise in selected segments or benefits of physical integration, economies Much comment has been directed at the integrate into broader market areas. of scale and access simplicity. As policies business model of the future. We do not Whatever the case, the adopted business encouraging competition emerge, to take believe there will be a single winning model(s) need(s) to be tailored to enable advantage of market options or regulatory business model but rather that there will companies to succeed in three key ways – mandates, specific segments of the value be a range of business models that will strategically, financially and competitively. chain became available for specialisation deliver success in the new market and for new entry. Now, unbundling environments. Just as we see a number opportunities are starting to extend deeper of transformational market models, we Traditional core model into the value chain and enable more see a range of business models that build specialist participation. on existing models or fill new service or Alternative business models of the future product needs. We outline eight business may be very different from the traditional models which we believe will emerge model that dominated power and gas individually or in combination (see figure delivery for decades. In the past, operating 6). These individual business models cover an integrated utility from generation the full power sector value chain; each has through to customer supply was well individual characteristics and several are understood because the utility controlled based on integration and/or collaboration the entire value chain. However, this with non-traditional partners. model has been supplanted in many countries through market restructuring and may be rendered further obsolete through the convergence of distributed technology and customer engagement.

Figure 6: Business model choices

Value chain Generation T&D Retail

More integrated Less integrated

Value-added enabler Product innovator Network Pure play manager merchant Traditional ‘Virtual utility’ core business ‘Partner of Gentailer partners’ Grid developer

Asset-based Service-based

18 The road ahead Gaining momentum from energy transformation In the traditional model, making We have identified eight alternative money was easy to understand – invest business models, which we describe below and earn a return on invested capital. with respect to their scope, rationale, basis In emerging business models, although for competition, and source of earnings we consider that this feature may still (see figure 7). This should help utilities apply in selected segments, we believe think through which business model a greater emphasis will be placed on options might be right for them and the obtaining higher margin from key decisions required to enable them to prices/revenues rather than cost develop their new market position in reduction to get higher earnings and sufficient time. profit growth.

Depending on how a traditional utility thinks the electricity industry may evolve in its country/region and what market models may emerge, it needs to evaluate where to play across the value chain. Should a traditional utility leverage multiple business models? And if so, which ones and how should they transform their business to be successful? “Beyond the traditional model, we foresee eight different future business models that could emerge either individually or in combination.”

Figure 7: Business model elements

Business models Business focus Business alignment Profitability basis

Traditional core business Assets – customers Generation – T&D – retail ROIC

Gentailer Assets – customers Generation – retail Competitive margin

Pure play merchant Assets Generation Competitive margin

Grid developer Assets Transmission Regulated ROIC

Network manager Assets Transmission – distribution Regulated ROIC

Product innovator Customers Retail Competitive margin

‘Partner of partners’ Customers Retail Competitive margin

Value-added enabler Customers Retail Competitive margin

‘Virtual’ utility Customers Distribution – retail Competitive margin

The road ahead Gaining momentum from energy transformation 19 Description This model has also developed in areas A gentailer utility operates at both ends where traditional IPPs have moved into of the value chain by owning generation retail energy sales as energy markets have assets and selling retail energy to deregulated. NRG Energy and NextEra customers in a competitive market. Energy are two examples of utilities Gentailers pay a charge to transmission operating in this model in the United and distribution system operators to States that developed or acquired retail deliver this power and also buy and sell capabilities to complement their 1 energy on the futures and spot markets generation positions. to manage any forecast or real-time Gentailer model differences between load and supply. Capabilities This business model is a by-product of the On the generation side, a successful Relevance for transformative design of the local market and not relevant gentailer has strong capabilities in demand market scenarios to all markets. Advantages of the gentailer and market insights, project development, model are that it provides a natural hedge project finance and asset management. Green command and control Low for the business, i.e. a ‘sink’ for capacity When planning to add new capacity, a when the generator is ‘long’ and a ‘source’ gentailer applies its strong market Regional supergrid Medium for the retail business when it is ‘short’. knowledge to determine cost-competitive A key risk to the gentailer model is that generation technology choices based on Ultra distributed generation High retail consumers may gradually switch to fuel markets, operating constraints and competitors or invest in behind-the-meter consumer preferences. On the retail side, Local energy systems Low distributed energy resources, which could a successful gentailer has strong potentially strand part of the gentailer’s capabilities in energy trading and hedging, generation assets over time. origination and product development, pricing, customer acquisition and customer Market/model examples management. Strengths in these areas The gentailer model is typically applicable enable a gentailer to cost-effectively in markets where the generation and acquire and maintain customers while retail portions of the value chain are delivering higher margin services. competitive and the transmission and distribution companies operate as a What utilities should do now regulated monopoly. Australia, the UK Monitor and understand the way different and New Zealand are countries that have customer segments use smart technology successfully deployed this model. In New and assess how to harness these Zealand, the five major generators are preferences into mobile and/or tariff also the top five retailers. This type of solutions. Identify potential partners to market development often has regulatory help develop behind-the-meter distributed implications which are likely to influence energy resource business plans. Review future development of this business make/buy decisions to support their asset model. position and investment requirements under alternative market scenarios to determine what generation products to offer in the future. Invest in understanding customer segmentation and what that means for switching rates and retaining the most profitable customers.

Maximising competitive position against potential competitive threats

Gentailer actions Competitor threats addressed Future gentailer profitability drivers

• Develop a behind-the-meter • High penetration of customer • Offer, bundle, price, and cost- distributed energy resource or third-party owned effectively deliver a wide range of business, organically or through behind-the-meter distributed energy products (low cost, high networks partnerships or energy resources renewables, local premise-based acquisitions generation etc.) with selected • Regulatory change enabling value-enhancing partners • Increase customer engagement transmission and distribution via new energy management operators to develop, own, and • Energy trading approaches to hedge solution offerings and intelligent operate distributed energy business risk tools resources • Cost-effectively plan, develop, • Develop alternative pricing • New entrants offering finance, construct, and operate the packages and approaches that products/services that increase right asset mix provide greater optionality or customer engagement in risk/reward tariffs to customers managing their energy needs through mobile tools or social media

20 The road ahead Gaining momentum from energy transformation Description Capabilities A pure play merchant utility owns and Similar to a gentailer, a successful operates generation assets and sells power pure play merchant utility has strong into competitive wholesale markets at capabilities in demand and market market clearing prices, or through insights, project development, project negotiated bilateral contracts with other finance and asset management. generators or large industrial consumers. Additionally, a successful player has This entity occupies a very narrow portion strong market origination, trading, 2 of the value chain and competes within the hedging and risk management riskiest part of the business when markets capabilities, including the ability to Pure play merchant are volatile and positions are uncovered. execute a variety of complicated model Assets are built and financed by investors purchase and sales agreements on a speculative basis, pre-contracted in (e.g. using derivatives) that effectively part or in full or acquired from another Relevance for transformative lock in the price of fuel and electricity generator. Pure play merchants have market scenarios to eliminate as much market risk as traditionally developed baseload or possible. As more low-carbon energy peaking plants with mature generation Green command and control Medium enters a market, mitigating market risk technologies from gas, which also enables becomes more challenging because participation in ancillary grid services Regional supergrid Medium market prices become more volatile, markets. However, wind merchant plants so a merchant’s strategy needs to be have increased in popularity over the last Ultra distributed generation Medium flexible and adaptive. decade and solar merchant plants are starting to emerge. Local energy systems Low What utilities should do now Implement world-class operational Market/model examples procedures to minimise costs of Merchant players prefer liquid markets operations, manage price and volume with rising and/or high peak wholesale risk exposure. Develop robust investment energy prices and high price volatility. plans to create a balanced generation Examples include deregulated regions like portfolio, either across technologies or Texas, California and New England in the markets. Investigate alternative products US and countries in emerging markets like to offer from the generation portfolio to Chile. Areas with low natural gas and coal mitigate against market change or merit prices are typically not well suited for order structure. merchant players because these low-cost inputs often depress wholesale energy prices and do not provide significant ‘spread’ for merchants to leverage.

Maximising competitive position against potential competitive threats

Merchant actions Competitor threats addressed Future merchant profitability drivers

• Assess feasibility of expanding • High penetration of behind-the- • Identification of profitable regions capacity of traditional fossil fuel meter distributed energy resources for future merchant potential and plants with solar or energy and solutions like demand response key early investments (e.g. land) storage to expand ability to play that reduce peak demand using same grid interconnection • Ability to cost-effectively plan, • Development of disruptive grid-level develop, finance, construct, and • Explore options for developing solutions such as energy storage operate the right asset mix distribution level or behind-the- that compete with merchant meter projects (e.g. solar, charging generators • Strong analytics and energy trading infrastructure). capabilities to hedge business risk • Development of ultra-efficient • Evaluate investment to enhance generation and excellence in plant operational capabilities to operations capture value of flexible thermal capacity

The road ahead Gaining momentum from energy transformation 21 Grid developers must constantly assess In wholesale markets, they have very the ability of their systems to adequately strong capabilities for managing electricity meet current and future needs and plan demand and supply in real time and in cost-effective system upgrades to meet ensuring reliability standards are fulfilled. those needs, usually governed by Grid developers are also very good at regulation which may incorporate engaging with key stakeholders, including incentive mechanisms. Where these landowners, communities, local and state transmission developers construct or officials, customers and equipment 3 maintain assets with an organised suppliers to facilitate siting and permitting. regional transmission operator present, Newer grid developers typically have Grid developer model close coordination with that operator strong relationships with investors and is necessary to achieve grid coordination joint venture partners to enable access to Relevance for transformative and support the regional market model. low-cost capital and to leverage creative market scenarios financing and ownership arrangements. Market/model examples As remote generation capacity increases Green command and control High Grid developers are typically established and a larger proportion of connections by regulation in areas with existing are made at distribution network levels, Regional supergrid High infrastructure. Examples of this model the number of interfaces a grid developer include transmission system operators needs to manage will increase and the Ultra distributed generation Low (TSOs) in Europe and independent system obligations and responsibilities will operators (ISOs) in the US. Additionally, become more complex to oversee. Local energy systems Low new grid developers may be formed in areas that lack sufficient transmission What utilities should do now infrastructure between generation and Identify new locations (within their own load centres. market or in new markets) for large-scale Description renewable generation, flexible thermal This utility acquires, develops/constructs, For example, a grid developer may be generation and associated transmission owns and maintains transmission assets created to build and operate transmission build. Work with alternative owner classes, that connect generators to distribution lines between remote generation assets e.g. financial sponsors, to shape market system operators. In most cases, it operates like a hydropower facility or wind farm bidding processes where competitive as a natural monopoly, although there and a distant urban area, or to provide transmission protocols will exist in the may be multiple grid developers within a new transmission infrastructure where future. Review existing contracting and single market. Some grid developers seek there are transmission constraints. procurement procedures to assess whether to build new transmission lines to connect Examples of the newer grid developers in they are maximising value for money, remote renewable generation to load the US include Electric Transmission Texas risk allocation and whether they reflect centres, while others will also maintain (ETT) and Clean Line Energy Partners. regulatory settlements. Streamline grid lines and infrastructure that have been in connection processes to improve resource operation for years. If a grid developer Capabilities productivity and lower operating costs. operates in a wholesale electricity market, A successful grid developer has a very Consider whether alliances with DSOs it must manage the stability of the power strong operating track record and excellent may provide economics of scale and system in real time and coordinate capabilities in designing, operating and increased scope for new investment. electricity supply and demand to avoid maintaining high-voltage transmission imbalances and supply interruptions. lines and supporting infrastructure.

Maximising competitive position against potential competitive threats

Grid developer actions Competitor threats addressed Future grid developer profitability drivers

• Develop close relationships with • High penetration of distributed • Access to low-cost capital distribution system operators and energy resources in urban areas regulators to support large-scale combined with strong distribution • Partnering with generation generation growth plans system operators and micro-grids, developers to expand project access reducing the need for transmission • Robust operations to cost effectively • Convince investment partners support to invest in large scale, low-cost manage transmission and renewable project developments • Other grid developers obtaining infrastructure upgrades that require new transmission first-mover advantages in new • Identification of profitable regions to urban areas markets for future expansion • Implement world-class • Regulatory imposed incentives • Innovative contracting with the operational procedures to where risks cannot be managed by supply chain to manage risks improve cost-effectiveness and the grid developer alone develop new forms of contracts with generators, load managers and the supply chain that incentivise strong performance and cost management

22 The road ahead Gaining momentum from energy transformation Description Capabilities A network manager operates transmission Similar to grid developers, network and distribution assets and provides access managers have strong capabilities in to their networks to generators and retail designing, constructing, operating and service providers. Similar to some maintaining transmission and distribution incumbent grid developers, they typically lines and supporting infrastructure. operate as natural monopolies. Network They also have strong capabilities for managers also manage power stability in managing electricity demand and supply 4 the network in real time and coordinate in real time and integrating power from electricity supply and demand to avoid different central and distributed Network manager imbalances and supply interruptions. generation resources. These network model A new role for network managers is managers also have deep skills in system emerging in the area of an ISO-like operations data analytics that can entity that will assume responsibilities Relevance for transformative enable insight into asset and network as a ‘distribution system operator’ and market scenarios performance and optimisation. These have specific, expanded responsibilities capabilities are provided through the for network integration of incumbent Green command and control Low deployment of ‘smart grid technologies’ systems and distributed energy resources. that utilise multiple sensors to monitor As distributed generation increases, the Regional supergrid Medium and collect system performance data to opportunity for an entity to manage all enable enhanced analysis of power interfaces between local energy systems Ultra distributed generation High flows, equipment failure risks and asset and traditional distribution grids deterioration. increases. Local energy systems Medium What utilities should do now Market/model examples Invest in the evolution of the network The network manager models typically and the deployment of ‘smart grid exist in regions where the generation and technologies’ throughout the system. retail portions of the value chain are Move toward the next stage of ‘big data’ competitive and the transmission and management and the analytical evaluation distribution companies operate as a of power quality, equipment failure, circuit regulated monopoly. Australia, the UK risks and investment priorities. Anticipate and New Zealand are countries that the deployment of distributed energy have successfully deployed this model, resources, i.e. storage, micro-grids, though with the expansion of distributed distributed generation, electric vehicles, generation and micro-grids, we expect etc., and prepare for integration into the this role to expand and become more network and management of all deployed relevant in many global regions. resource impacts. In some markets, instigate discussions with the regulator to develop and implement appropriate mechanisms to facilitate the new services. Implement world-class operational procedures to manage costs.

Maximising competitive position against potential competitive threats

Network manager actionsCompetitor threats addressed Future network manager profitability drivers

• Work with regulators to approve • High penetration of behind-the • Access to low-cost capital investments focused on -meter distributed energy resources advancing system capabilities and micro-grids, reducing the need • Investment recovery mechanisms (smart grid) for a network manager to deliver • Data analytics systems power • Harden the infrastructure through • Predictive failure software targeted investment • Regulatory mandates that create an independent entity that assumes • Distributed energy resource • Advance reliability standards traditional DSO roles integration and awareness • Develop partnerships with distributed generation developers to install, operate and manage network connections

The road ahead Gaining momentum from energy transformation 23 Description Capabilities A product innovator is a company that A successful product innovator will be offers electricity as well as behind-the- highly effective at customer acquisition meter products to customers. This model and retention as well as cross-selling focuses on expanding the role of the products. Keeping operating costs energy retailer and changing the level of competitive will be essential to preserving customer expectations. We expect behind- an acceptable margin. To this end, the the-meter products to evolve into a mix product innovator needs competitive 5 of retail supply packages, e.g. the provision contracts with energy suppliers and other of ‘green energy’ options, the development operational efficiencies, and contracts Product innovator of service and pricing ‘packages’ that with technical asset providers for customer model offer more flexibility to customers and support and management of faults. A key the provision of behind-the-meter smart question is whether the product innovator devices, e.g. power monitors, smart Relevance for transformative can succeed in offering a compelling set thermostats. The products offered market scenarios of products at the right price. Companies will empower the connected customer to participating in this space will need manage its energy control and provide a Green command and control Low exceptional skills in customer knowledge, link to the network to advance insights product development, channel into consumption patterns and impacts on Regional supergrid Low management, pricing and product network stability. We anticipate that many bundling. Product innovators will also product innovators will seek to be active Ultra distributed generation High need robust customer data analytics and players in electric vehicle charging, the buying propensity insights to shape the provision of premises-based infrastructure Local energy systems High right offerings to the market. and the management of roof-top solar and fuel cell markets. What utilities should do now Focus on knowing their customers’ needs, Market/model examples their customers’ willingness to pay for The product innovator model will be most solutions, and the value of their own relevant in markets where the regulatory brand. Assess whether a new brand would framework allows choice and the level of be more successful, perhaps through customer acceptance of new technologies partnering with a product provider or and products is high. A market with a creating a separate business unit (or high penetration of distributed energy will corporate structure). Market research be attractive for a product innovator who will provide views of what product can help provide products that enable or expansions have been successful or failed complement distributed energy. Examples in different markets in the past, and the of product innovators that have moved potential products that could be offered in beyond pure energy supply include Direct smart homes or through mobile devices. Energy and TXU Energy in the US and We expect that companies will enter into Powershop in New Zealand. discussions with providers from other markets, e.g. Google Nest, to discuss how to partner around customer product development and provisioning, rather than default to automatic competition.

Maximising competitive position against potential competitive threats

Product innovator actionsCompetitor threats addressed Future product innovator profitability drivers

• Develop a compelling product • Multiple new entrants offering a • Keep customer acquisition costs low suite including everything from range of new energy products to and operating costs overall low the commodity to the home customers (e.g. attractive energy supply contracts device or own energy supply) • Incumbents and new entrants • Develop opportunities for innovating on specific customer • Diversify the product portfolio superior products that integrate offers beyond commodity products to with other needs, such as home preserve margin or building security or • Regulatory change enabling retail automation energy sales • Establish partnerships to enhance product range • Invest in data analytics tools to • Bundling of offerings to enhance develop excellence in customer product attractiveness • Focus on retention of profitable acquisition and retention and high-volume customers and • New tariffs offering risk/reward minimise switching • Enhance brand reputation to opportunities for customers support product expansion

24 The road ahead Gaining momentum from energy transformation Description Capabilities Incumbent utilities will need to assess A successful ‘partner of partners’ will be whether they have the requisite experience highly effective not only at customer and portfolio breadth to address future acquisition, but also provide superb service customer needs for products and services. delivery. A distinguishing characteristic of A ‘partner of partners’ utility is a company these companies will be their ability to that offers not only standard power and innovate in a manner that customers gas products and associated services, but would not expect from their traditional 6 also a range of other energy-related power retailer. These companies will also services, from life-cycle EV battery change- possess deep customer insights and a ‘Partner of partners’ out, to home-related convenience services commitment to satisfy customers across model like new service set-up coordination, to all touchpoints. A ‘partner of partners’ management of net metering-driven grid may find that many customers want a sell-back. These services can be provided Relevance for transformative simple, low upfront cost approach, solely by the utility but are more likely to market scenarios enabling these utilities to not only install gain customer acceptance when they but also continue to own certain assets, can be bundled through an expanded Green command and control Low for example installing and then servicing relationship with high quality branded a solar system, or installing and providers, like Vivint, OPower, Honeywell, Regional supergrid Low continuing to manage energy GE, Tesla or Solar City. management equipment. One challenge Ultra distributed generation High will be for companies to determine the Market/model examples most appropriate brand with which to The ‘partner of partners’ model is most Local energy systems High go to market, overcoming customers’ relevant in markets where there is a high perceptions of the constraints on services proliferation of energy technology and that can be successfully offered by a choice and customers are seeking ways to utility company. simplify their lifestyle while lowering upfront costs. A market with a high What utilities should do now penetration of distributed energy is Evaluate brand strength to understand attractive for a ‘partner of partners’ who constraints and the need for innovative can help provide simple and innovative partnerships. Invest in data analytics service-based solutions. One example of a products to understand customer needs ‘partner of partners’ model is NRG Energy and demand elasticities. Identify potential in the US, with its eVgo and Sunora partners with complementary technology offerings. Few utilities have embraced or customer management products and this model as it involves non-traditional services and engage in introductory partnership arrangements. conversations. Understand the impact of new products and services on customer switching, margins and long-term growth objectives.

Maximising competitive position against potential competitive threats

‘Partner of partners’ actionsCompetitor threats addressed Future ‘partner of partners’ profitability drivers

• Develop a compelling suite of • Increasing choice and complexity in • Keep cost of service low, services and identify the right the market in terms of technologies e.g. cross-selling multiple products solution provider partners and providers to a single customer • Create a range of relationships • Multiple new entrants offering • Keep customer satisfaction high by with solution partners range of new energy and associated establishing clear customer service services to customers standards, pinpointing and quickly • Expand the range of channels to addressing customer pain points, market that can be leveraged • Incumbents and new entrants and offering a wide range of innovating on service delivery innovative yet convenient services • Develop bundles of offerings models targeted at the connected customer • Regulatory change enabling retail energy sales • Enhance brand value

The road ahead Gaining momentum from energy transformation 25 Description Others, such as Google Nest, are playing A value-added enabler leverages its in a similar vein with the objective of fundamental capacities for information providing customers a ‘set and forget’ management to expand the role that a experience, leveraging their massive data utility can provide on behalf of its centres to provide real-time and predictive customers. While many customers seek to energy consumption data. This space is gain more control over energy consumption relatively wide open to utilities, or more choice with respect to energy particularly if they understand how to 7 supply, these customers do not share a leverage system and customer data to uniform desire to always be ‘hands-on’ in provide premise and action-based insights Value-added enabler making decisions regarding their energy and solutions. Utilities may also benefit model use patterns. Many customers are ‘inert’, from constraints on third party data usage i.e. they do not easily adapt to the under data privacy laws, enabling them to existence of choice or accept the role of offer solutions or to become a partner of Relevance for transformative ‘high touch’ in energy management. This is choice for solution providers. market scenarios where an incumbent can play a new and valuable role that is difficult for other Capabilities Green command and control Low providers to fulfil. Utilities collect and Managing large amounts of data in a manage massive amounts of data from manner where insights can be rapidly Regional supergrid Medium two primary sources – system operations gleaned to guide customer energy and customer load. These data provide decisions and behaviours will be Ultra distributed generation High insights into energy usage patterns that fundamental to success in this business are valuable to the customer and from model. In addition, skills in customer Local energy systems High sources that a customer cannot access. education and decision guidance will be Thus, the utility has the ability to become key to delivery of value to the customer. a value-added energy manager for Beyond these analytical and interface customers given the ‘customer knowledge’ capabilities, utilities will need to provide it possesses and the customers’ lack of a customer experience where value is desire to perform these same activities readily demonstrated so that customers themselves. feel comfortable sourcing their energy decision-making to a utility rather than Market/model examples a non-traditional entrant. Utilities will Most utilities have performed value-added need to demonstrate to customers that roles that are knowledge-based in the past, they can keep personal data secure and specifically around energy efficiency risks of data leakage are remote. programmes or energy management in industrial processes. The level of What utilities should do now knowledge-based energy management Utilities looking to become a value-added anticipated in this model, however, enabler need to harness the data that dramatically extends the scope and scale they already possess and determine how of these activities into the mass market to extract value from this information. to a much deeper level. These companies will need to invest in additional information technology capacity Manufacturers such as Honeywell and to support, leverage and protect this data. Mitsubishi are focused on addressing Customer acceptance of the utility in a certain control elements, like power non-traditional role will require both a monitors and smart thermostats. campaign to expand customer awareness and appropriate dialogue with regulators to establish the parameters of the value-added services to be provided. Maximising competitive position against potential competitive threats

Value-added enabler actionsCompetitor threats addressed Future value-added enabler profitability drivers

• Build-out ‘big data’ platforms • Low-priced/free behind-the-meter • Robust data analytics systems devices • Educate customers on energy • Pricing mechanisms for performance management options • Regulatory change preventing utilisation of customer data • Decision tools for customer adoption • Design innovative methods for sharing customer benefit • Leverage of third-party brand • High quality data security for market entry management systems and protocols • Deploy data synthesis methods and tools • Develop data security protocols • Enter into partnerships with data managers to improve competitive position

26 The road ahead Gaining momentum from energy transformation Description Capabilities A virtual utility can aggregate the A successful virtual utility will be highly generation from various distributed efficient at energy sourcing, managing systems and act as the intermediary or interfacing with local distribution between and with energy markets. networks, real-time balancing of demand A virtual utility can also act as an and supply, and providing intelligent integrator of non-traditional services tools for managing customer engagement. provided to customers by third parties, Sustainability and increased reliability 8 e.g. distributed energy resources outside (back-up power) may be offered as its traditional service territory. In this additional products, beyond the traditional Virtual utility model model, the utility does not own assets reliable and affordable grid power. but merely provides integration services To develop the additional capabilities, Relevance for transformative on behalf of the supplier, provider or the virtual utility will need to build market scenarios performer. A primary focus of companies partnerships with developers, system in this space is to optimise the sourcing of integrators, energy service/energy savings Green command and control Low energy, with respect to costs, sustainability companies (ESCOs), software/technology and customer needs, and to manage the vendors and online energy marketplaces. Regional supergrid Low distribution system. The virtual utility can also undertake demand-side management What utilities should do now Ultra distributed generation High functions for commercial and industrial Companies wishing to become virtual loads and smart residential appliances, utilities should develop an aggregation Local energy systems High to help balance demand and supply, either service offering to small, distributed in the wholesale market or contracting generators, merchant generators and load with the TSO or DSOs. reducers. Build capabilities to monitor development of innovative technologies Market/model examples and potential partners to leverage to Markets with high penetration of expand solution offerings for the generation connected at distribution level wholesale market and for balancing (Germany, US states of Hawaii and services. Additionally, they should California) or a regulatory setting that determine pricing structures that provide offers a high degree of freedom for appropriate incentives for the energy customer choice (US states of New York or providers and a sufficient margin for their Texas, the UK and Australia) are ideal for own operations. In some markets, utilities the virtual utility model. Island systems should instigate discussions with the and remote systems are also ideal markets regulator to develop and implement for this business model. Utilities may appropriate mechanisms to facilitate the combine distributed generation with their new services. own generation, providing a route to market for independent generators and expanding their own asset portfolios.

Maximising competitive position against potential competitive threats

Virtual utility actionsCompetitor threats addressed Future virtual utility profitability drivers

• Participate in distributed • High penetration of non-utility- • Offer structure and pricing of a wide generation and storage projects owned distributed generation range of energy products (low cost, and storage systems high renewables, local generation etc.) • Develop partnerships with technology-based providers • Regulatory change enabling • Ability to trade energy (sourcing and retail energy sales consumption) • Increase customer engagement via intelligent tools • New entrants offering • Partnering with key players across products/services that increase the energy value chain • Define future roles for customer engagement in incumbents in concert with managing their energy needs regulators

The road ahead Gaining momentum from energy transformation 27 Where do we go Regardless of the business model chosen, Similarly, utilities are a natural utilities need to understand how they can collaborator with regulators in the from here? leverage their current business position shaping of responsive policies to and the external market to enhance their accomplish public interest objectives, Utilities may choose from a range of paths future competitive positioning. While not including how to enable customers to to move forward from where they are always obvious, companies have several achieve greater control and choice. today. But frankly, business model clarity levers that can be used to advance their Utilities are also attractive partners to may be difficult to achieve as a lot of readiness for the future and position new entrants that wish to offer high-value uncertainty exists on how future markets themselves for success (see figure 8). products but do not wish to support them may develop and mature. And multiple in the manner customers are used models may need to be deployed to meet Incumbent companies may not be as to from their utility. diverse market needs or specific regulatory nimble or focused as some new entrants. structures in various countries, or even But they have a number of potential Utilities will need to determine ‘where’ it jurisdictions. Companies will need to be advantages with regard to data, policy, makes sense for them to participate in agile in designing their future business relationships, pricing, partnering and the future energy market and ‘how’ they model and recognise that an imperfect regulatory decisions. These can help can best position themselves for success. view of the future will likely lead to an leverage the successful development of No single business model will be the unfinished product that evolves through their future business models. At the same panacea for utilities. Rather, they will time. time, it’s important for companies to have to be adaptive to the development recognise that future markets are likely of the marketplace and the evolution of to create networks of participants in the connected customer. Just as utilities new partnerships and collaborations are unsure of market direction, customers that become a norm of the go-to-market are equally uncertain of what really models. matters to them in energy decision- making. These gaps between foresight Companies can take advantage of these and expectations provide the ‘open seas’ levers to strengthen their starting point where utilities can forge new business for defining their future roles and for models that fundamentally reshape the subsequent market participation. historical relationship with customers and For example, utilities already hold large position incumbents for a broader and quantities of data that have not been more value-creating future. effectively utilised, giving them the opportunity to add value through better utilisation and communication of this data.

Figure 8: Future business model levers

Data Pricing Data Ownership of grid and customer Shifts in traditional cost- information can provide a recognition models can provide knowledge platform that greater certainty to cost recovery Regulatory Policy enhances the value proposition. and additional flexibility to rate design. Policy Mandates and legislation can Partnering Key levers shape the playing field and Enhanced creative and delivery enhance the incumbent’s ability capabilities can extend the to compete. incumbent’s existing platforms Partnering Relationships and market reach. Relationships The natural interfaces of the Regulatory Pricing incumbent with customers, Decisions can provide both suppliers, stakeholders and offensive (exploit) and defensive other providers create a (preserve) mechanisms to natural platform. enhance market competitiveness.

28 The road ahead Gaining momentum from energy transformation Discover more

Contact us to learn more about PwC’s energy transformation programme and give your viewpoint on the themes and scenarios discussed in this report.

Global contacts Global subject matter Territory contacts experts Norbert Schwieters Asia-Pacific Global Power & Utilities Leader Market design Telephone: +49 211 981 2153 Australia & East Cluster Email: [email protected] Karen Dawson Mark Coughlin Telephone: +44 20 7804 4591 Telephone: +61 3 8603 0009 Jeroen van Hoof Email: [email protected] Email: [email protected] Global Power & Utilities Assurance Leader Telephone: +31 88 792 14 07 Paul Nillesen China Email: [email protected] Telephone: +31 88 792 72 37 Gavin Chui Email: [email protected] Telephone: +86 10 6533 2188 David Etheridge Email: [email protected] Global Power & Utilities Advisory Leader Companies’ business models Telephone: +1 925 519 2605 India Email: [email protected] Kameswara Rao Brian Carey Telephone: +91 40 6624 6688 Telephone: +1 650 248 8469 Olesya Hatop Email: [email protected] Email: [email protected] Global Power & Utilities Marketing Telephone: +49 211 981 4602 Indonesia Tom Flaherty Email: [email protected] Sacha Winzenried Telephone: +1 214 746 6553 Telephone: +62 21 52890968 Email: [email protected] Email: [email protected]

Japan Yoichi Y Hazama Telephone : +81 90 5428 7743 Email: [email protected]

Korea Michael Kim Telephone : + 82 2 709 0707 Email: [email protected]

The road ahead Gaining momentum from energy transformation 29

Europe Italy Middle East and Africa Giovanni Poggio Austria Telephone: +39 06 570252588 Middle East Michael Sponring Email: [email protected] Jonty Palmer Telephone: +43 1 501 88 2935 Telephone: +971 269 46 800 Email: [email protected] Netherlands Email: [email protected] Jeroen van Hoof Belgium Telephone: +31 88 792 1328 Anglophone & Lusophone Africa Koen Hens Email: [email protected] Angeli Hoekstra Telephone: +32 2 710 7228 Telephone: +27 11 797 4162 Email: [email protected] Norway Email: [email protected] Ståle Johansen Central and eastern Europe Telephone: +47 9526 0476 Francophone Africa Adam Osztovits Email: [email protected] Philippe Girault Telephone: +36 14619585 Telephone: +33 1 5657 8897 Email: [email protected] Poland Email: [email protected] Piotr Luba Denmark Telephone: +48227464679 Per Timmermann Email: [email protected] The Americas Telephone: + 45 39 45 91 45 Email: [email protected] Portugal Argentina/Latin America Joao Ramos Jorge Bacher Finland Telephone: +351 213 599 296 Telephone: +54 11 5811 6952 Mauri Hätönen Email: [email protected] Email: [email protected] Telephone: + 358 9 2280 1946 Email: [email protected] Russia Brazil Tatiana Sirotinskaya Roberto Correa France Telephone: +7 495 967 6318 Telephone: +55 31 3269 1525 Philippe Girault Email: [email protected] Email: [email protected] Telephone: +33 1 5657 8897 Email: [email protected] Spain Canada Manuel Martin Espada Brian R. Poth Jean-Christophe Bertrand Telephone: +34 686 491 120 Telephone: +1 416 687 8522 Telephone: +33 1 5657 6171 Email: [email protected] Email: [email protected] Email: [email protected] Sweden United States Germany Anna Elmfeldt Michael A. Herman Norbert Schwieters Telephone: +46 10 2124136 Telephone: +1 312.298.4462 Telephone: +49 211 981 2153 Email: [email protected] Email: [email protected] Email: [email protected] Switzerland Greece Marc Schmidli Vangellis Markopoulos Telephone: +41 58 792 15 64 Telephone: +30 210 6874035 Email: [email protected] Email: [email protected] Turkey Ireland Murat Colakoglu Ann O’Connell Telephone: +90 212 326 64 34 Telephone: +353 1 792 8512 Email: [email protected] Email: [email protected] United Kingdom Israel Steven Jennings Eitan Glazer Telephone: +44 20 7212 1449 Telephone: +972 3 7954 830 Email: [email protected] Email: [email protected] Steve Mullins Telephone: +44 753 205 8626 Email: [email protected]

30 The road ahead Gaining momentum from energy transformation 1 12 Redrawing the Energy-Climate Map: Caldecott B. and McDaniels J. Stranded References World Energy Outlook special report, 2013, Generation Assets: implications for European OECD/IEA, Paris. capacity mechanisms, energy markets and climate policy. Working Paper, January 2014. 2 Smith School of Enterprise and the The Global Commission on the Economy and Environment, University of Oxford. Climate, The New Climate Economy Report, 2014, p. 46, from US Energy Information 13 Administration, 2014. EIA projects modest US Energy Information Administration, needs for new electric generation capacity. Annual Energy Outlook 2014 (AEO2014) Today in Energy, 16 July 2014. reference case.

3 14 PwC, Utility of the Future: a customer-led shift The Economist, European Utilities: how to lose in the electricity sector, an Australian half a trillion euros, 12 Oct 2013. perspective, April 2014. 15 4 Edison Electric Institute, Disruptive Challenges: AGEE-Stat and AGEB, Federal Statistical Office financial implications and strategic responses (Destatis Statistisches Bundesamt), 2014. to a changing retail electric business, January 2013. 5 Seto and Dhakal, 2014. 16 Chapter 12: Human Settlements, Infrastructure, PwC, Energy Transformation: the impact on and Spatial Planning. In Climate Change 2014: the power sector business model, 2013. mitigation of climate change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change.

6 United Nations (UN), 2014. World Urbanization Prospects, the 2014 revision. UN Department of Economic and Social Affairs, Population Division.

7 UBS Q Series®, Global Utilities, Autos & Chemicals: Will solar, batteries and electric cars re-shape the electricity system? 20 August 2014.

8 PwC, Staying ahead in an era of game-changing customer transformation, 2014.

9 Grapy E. and Kihm S., Does disruptive competition mean a death spiral for electric utilities? Energy Law Journal, vol. 31, no. 1, 2014.

10 www.kiwipowered.com

11 Bloomberg Businessweek, Why Google, Comcast, and AT&T are making power utilities nervous. May 29 2014.

The road ahead Gaining momentum from energy transformation 31 PwC helps organisations and individuals create the value they’re looking for. We’re a network of firms in 157 countries with more than 184,000 people who are committed to delivering quality in assurance, tax and advisory services.

The Global Energy, Utilities and Mining group is the professional services leader in the international energy, utilities and mining community, advising clients through a global network of fully dedicated specialists.

For further information, please visit: www.pwc.com/utilities

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2014 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.