A revolution is underway in the utilities industry that will fundamentally alter the way we buy, sell, use, and dispose of energy. The ramifications – whether they be economic, environmental, or geopolitical – affect us all. For the players in the utilities sector, however, five points stand out: rising commodity prices; threatened climate change objectives; evolving business models; a changing utilities landscape; and China fast becoming an ever greater force on the global energy arena. In our latest edition of the Capgemini World Energy Markets Observatory, we explore these aspects in detail and provide recommendations for how to address them. It is my pleasure to summarize our findings for you here.
Price rise for all commodities: oil, coal, gas, and electricity
In September 2018, oil prices were at their highest since 2014, ultimately because there was less oil in the market as a result of economic growth and geopolitical tensions. This situation is likely to change in the coming months, even if the US boosts supply. Though not as direct as it once was, the loose link between oil and gas prices remains. As a result, gas prices, too, remain robust, if discrepant, as demand remains high and export capacity is limited by bottlenecks in the supply chain of LNG coming from the US. In Europe, cold winters, market tensions, growing demand, and low availability of nuclear reactors in Belgium and France have kept electricity spot prices high. High spot market prices bode well for utilities, notably for producers.
Climate change objectives are threatened
2017 saw a significant rebound in CO2 and GHG emissions and 2018 is likely to follow suit, seriously jeopardizing the Paris Accord, which requires annual decreases of 3% until 2050. The same is true of the EU’s energy efficiency objectives (20% improvement over 2005). In terms of renewables, Europe aims to source 20% of electricity from renewables such as biomass, hydro, solar, and wind by 2020. Some countries are ahead of the curve in meeting this goal while others lag significantly behind. In this situation, 2030 objectives are a clear challenge, especially as long as Europe remains divided on the need to increase its 2030 climate target.
New business models are progressing
Our recent research in conjunction with IDC shows that new business models are in the works as competition and the need to differentiate drives utilities to expand their portfolios and add new revenues streams. The fact that “as-a-Service” will become mainstream and new business models, such as auto-consumption will likely represent from 5% up to 20% of utilities’ revenues in the next three to four years is good news. But what will the most successful business models be? Most utilities, and other players, including electric equipment manufacturers, classical retailers, telco, builders, start-ups, and niche boutiques are hedging their bets on electric vehicles and their infrastructure and batteries. The takeaway is that players can no longer operate in a vacuum. Ecosystems and digitization are key success factors and utilities companies should cooperate with outside sector players and, of course, ultimately lead this game and build ecosystems to provide value-added services to their customers.
Utilities landscape is changing
In Europe, revenues are up for the first time in five years. Of the 16 major utilities players we monitor, 11 have finally witnessed revenue growth. Margins are stabilizing, as are debts, albeit very slowly. The important question is whether utilities companies will have the capex to invest in renewables, grids, nuclear plant refurbishment, and battery storage – the entire value chain. In all likelihood, they will have to choose whether to maintain or lower their dividends if they want to sustain their investment leads. However, stock market performance was excellent in 2017, thanks to transformation, growing wholesale market prices, and rising consumption. It remains to be seen whether this growth will be sustainable. Other positive changes in the utilities landscape include an improving financial situation in Germany, which has jumpstarted investing, and the fact that CO2 intensity has decreased by 6–7% per year on average, throughout Europe. This is good for the planet and for the players because it is easier to find money to invest in green and clean energy generation assets than in growing coal plants.
China is becoming a dominant player
China is already a major electricity player in Europe, investing heavily in grids, and other technologies. The world leader in wind turbines, solar panels and “clean” coal plants, it also controls the majority of the world’s rare earths and metals supply (35%) and production (95%). As such, China holds the reins to the energy transition of the world. China is also the world’s largest consumer and emitter of CO2 and GHGs. With plans to build vast wind farms in the west of the country, China is well positioned to lay the paving stones for a new electrical Silk Road that would produce and sell energy to the rest of the world.
Our key recommendations
- To reach climate change objectives, the EU should establish a significant carbon floor price. Only a range of 50–100 euro per ton of CO2 will convince investors to avoid non-green energy assets.
- We should strive for a low-carbon energy mix objective that includes renewable and dispatchable (nuclear or gas) energy.
- The role of distributors has changed due to energy transition and distributed energy and DSOs have a new role to play as local electricity system operators.
- Electricity transformation and deployment is key to the decarbonization of the planet to meet decarbonized energy objectives. Timeframes are vague due to the need to build the infrastructure, but automobiles will be 100 % electric in 10–20 years.
- It is up to the EU Member States rather than the utilities, to address gas dependency on Russia as this is an issue of the security of supply, given that this gas comes through Ukraine.
- Utilities have achieved good transformation plans but should boost and accelerate these plans.
- Utilities must also deploy digitization more rapidly and transform their business and operating models with digitization.
- China is aggressively pursuing a dominant role in energy transition and western countries must take appropriate measures to keep their independence in this vital sector.
World energy markets face a score of mounting challenges. Amidst ever-growing demand for energy, geopolitical tensions, technological developments, and environmental concerns are driving change. Players in the utilities arena must be ready to face these developments head-on. An in-depth analysis can be found in the 2018 World Energy Markets Observatory or you can contact me for more information.