Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
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utILIty WEEK | 9th - 15th January 2015 | 21 Finance & Investment T he conventional utility model reflects a symbiotic relationship between the core elements of the busi- ness: balance sheet, infrastructure assets, custom- ers, people and leadership. With a myriad of market and regulatory reforms underway, changing the traditional earnings profile of assets and utilities, we are seeing new capital being invested in the European energy sector. This capital originates from diverse and exciting mar- kets, but in some cases, the investors will have limited experience of operating in the complex and competitive European energy markets. More than ever, focusing on the ability of leadership to learn quickly and react effec- tively to market changes is critical to securing returns. Performing due diligence on a business's people and leadership is challenging, prone to subjectivity and there are few established blueprints and benchmarks. So what leadership qualities should investors look for? • Experience: do they understand the complexities of the sector? Do they have a proven ability to operate within the energy and utility market? • Outcome- focused: do they have a track record of delivering results in new situations? • Engaging: do they have strong communication and engagement skills? Can they build relationships with stakeholders and work with diverse groups? Are they able to gain the trust of external stakeholders, regulators and customers? • Motivating: can they motivate and inspire people? Do they empower their teams to show initiative and deliver results? Is this evidenced by high staff retention rates and Net Promoter Scores? • Humility: are they comfortable relinquishing control to those best placed to respond? • Innovative: can they learn and adapt to change? Are they willing to experiment? Do they have the courage to drop an initiative quickly if it isn't delivering results? Dedicating time and effort to assessing quality of leadership is critical for investors, particularly in a transaction where, typically, there is a limited exposure to this part of a business. This due diligence needs to be followed rapidly by the delivery of effective retention strategies to ensure early business plans are delivered. Susie Young, director, energy retail and utilities practice, Baringa "Focusing on the ability of leadership to learn quickly and react effectively to market changes is critical to securing returns." Investor view Susie Young Some investors may have limited experience in energy markets wholesale prices – to avoid having to shut down capacity. Mothballing plant in the interim period before payments begin is one option open to generators. But combined with potential clo- sures from those plants that failed to secure a contract, the UK could find it is still bat- tling shortfalls in supply over the near term. In the longer term, if the government's auction continues to bring forward only mea- gre volumes of new gas-fired power capacity then inevitable shutdowns of the old plant currently supported by the auction could leave further gaps to fill in the 2020s. The contracts will, however, offer genera- tors some certainty to plan for an ever more uncertain energy future, according to EY. "I would suspect there's an even greater degree of confidence now as the auction shows the mechanism can support many dif- ferent types of capacity – including invest- ment in new CCGTs – and drive a competitive capacity price which will not necessarily push up consumer bills," said EY senior eco- nomic advisory executive Anthony Tricot. With Europe's governments mulling simi- lar steps to safeguard their respective ther- mal fleets, many people will be watching keenly to see what the impact of the auction is on the UK's energy utilities over the rest of the decade. Some of the key figures from the capacity auction. 64.9GW total capacity entered into the auction 3 days Duration of the reverse auction, which exceeded expectations 49.26 GW Capacity secured £19.40 Final clearing price, to be paid per kilowatt per year £956m total to be paid out to generators the biG numbers breakdoWn by capacity type and technoloGy type capacity exitinG by cmu* type capacity capacity cmus cmus capacity exited as proportion (mW) (%) (number) (%) of capacity entered in auction CCGT 8,846.950 56.31% 16 13.79 28.44 CHP & autogeneration 541.710 3.45% 7 6.03 11.34 Coal/Biomass 4,499.193 28.64% 7 6.03 32.77 DSR 429.250 2.73% 16 13.79 71.44 Hydro 0.0 0 0.0 0.0 Nuclear 0.0 0.0 12 10.34 0.0 OCGT and reciprocating engines 1,344.710 8.56% 57 49.14 39.02 Storage 48.590 0.31% 1 0.86 1.77 *CMU = Capacity Market Unit 64% Existing generating CMU 14% Refurbished CMU 16% Pre-refurbished CMU 5% New-build CMU 1% Unproven DSR CMU Capacity type Technology type 45% CCGT 9% CHP and autogeneration 19% Coal/biomass 1% Hydro 16% Nuclear 4% OCGT and Reciprocating engines 6% Storage Source: National Grid