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18 | 10TH - 16TH APRIL 2015 | UTILITY WEEK Finance & Investment Market view M uch has already been written about the plight of European utilities. They are living with the consequences of the fall in energy demand aer the finan- cial crisis, continued regulatory pressure to reduce tariffs and the proliferation of renew- ables and their generous subsidies. The pain has been most greatly felt in Germany, and exacerbated by the morato- rium on nuclear power as part of the coun- try's Energiewende decarbonisation policy. However, UK utilities have not escaped unscathed. The pressure from the govern- ment and opposition parties on consumer prices, grid investments and competition, in an election year, has added a degree of uncertainty that has had a direct impact on investments, both foreign and domestic. To make matters worse, the recent mild weather has depressed energy demand even more, and the low oil price has hurt earnings across the sector. As such, the expression '"death spiral" is now commonly used when referring to cus- tomers migrating off the grid, or using it only as backup, while prices rise because of the cost of subsidies and renewables integration. It appears that utilities are being hit from all angles. So, what does the future look like? The fact is, we are at the point of no return. In market value terms, most Euro- pean utilities are fundamentally smaller companies today than they were. The posi- tive news is that Accenture's research shows that, despite popular reports, the death spi- ral scenario is unlikely to occur. It is, simply, uneconomic, despite the fact that photovoltaics (PV) are already at grid parity in many European Union member states. Going off grid is not feasible for many customers because of natural limitations, such as the availability of suitably oriented roof space to house the necessary number of solar panels, and the space and cost con- straints associated with the large capacity of electricity storage that would be required to support this. For example, in England, only about one- third of households are viable for solar pan- els. Our grid industry research also shows that in the next ten years, only 2.5 per cent of EU consumers will be energy self-sufficient, rising to just 11 per cent by 2035. This is not to say that utilities are off the hook. In fact, while most of their customers are likely to stick around, the demand dis- ruption caused by the growing adoption of PV and energy efficiency is a real threat to utilities' business models. The biggest impact of the growth of these energy demand-disrupting technologies is probably going to be on utilities' revenues because of a reduction in load. This is some- thing the industry is concerned about. Our analysis shows that as a result of the growing adoption of these technologies, util- ities face a reduction in energy demand of up to 15 per cent. Depending on how a number of criti- cal factors play out over the next ten years, including the timelines for the withdrawal of subsidies, the rate of the decline in tech- nology costs, electricity price trends and the level of consumer interest in the uptake of these technologies, utilities in Europe could lose between £28 billion and £44 billion a year. In the UK, this could range between £2.8 billion and £4.6 billion. Our analysis also suggests that the most likely scenario will mean moderate demand disruption, causing revenue loses for utilities at the lower end of the scale. Nonetheless, this is no small matter. In addition to the pressure on revenues, it will cause significant operational chal- lenges, increase technical stress on the grid and open the market to more competition for energy products and services. Nearly two-thirds of utilities executives, whom we surveyed globally last year, told us they expect grid faults to increase in the next five years because of distributed generation, while more than half expect this as a result of large-scale renewables. Although the UK grid is one of the most reliable in the world, a utility still does not know when a customer has lost power until the customer calls in, and equally, it doesn't know when power has been restored unless the customer or an engineer confirms this. Most other industries are able to remotely diagnose or digitally access their assets. In Europe, a significant majority of utili- ties executives expect more competition from new entrants. This is mainly in data-related services, distributed generation and beyond- the-meter energy efficiency and demand response, but also in a number of new areas, such as plug-in electric vehicles and associ- ated charging infrastructure. Fortunately, our research also shows that while specialised providers are consumers' default choice for products and services such as solar panels, energy providers are a very close second, well ahead of new entrants such as big-box retailers, phone and cable companies or online retailers. The question is, will utilities capitalise on this opportunity? With traditional business models at risk, leading energy providers will need to move quickly to differentiate from new entrants. Do or die? The utility 'death spiral' may be a melodramatic prediction, but demand disruption will still hurt and must be addressed, say Maureen Costello and Stephanie Jamison. Key points A full blown death spiral scenario – caused by consumers leaving the grid or using it only for backup – is unlikely. Over the next ten years, just 2.5 per cent of European consumers are likely to become energy self-sufficient. Growth of distributed energy generation and energy efficiency will significantly af- fect utilities' revenues. Adoption of these technologies could reduce demand across Europe by 15 per cent. Pressure on revenues will be accompanied by increased pressure on grid operation. Executives expect faults to increase. Utilities leaders know that business mod- els need to change, but we have reached a "make or break" time. Aggressive adoption of new models and engagement in shaping new regulatory structures will define leaders from losers.