Utility Week

UTILITY Week 2nd October 2015

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18 | 2ND - 8TH OCTOBER 2015 | UTILITY WEEK Finance & Investment Analysis O ne of the Oxford Institute for Energy Studies' leading academics, Jonathan Stern, is concerned about the utilities industry. "I don't want to sound too dramatic but these utilities are facing an existential threat," he says. In the past two years utilities have been forced to contemplate dramatic changes to their business models to adapt to a changing (and challenging) environment. And there's no guarantee these bets will pay off. Stern told delegates at a recent British Institute of Energy Economics conference that the debate about state versus private ownership of utilities could become redun- dant because a government buyout might become an unavoidable measure. "These companies may go broke unless something dramatic happens," he warned. Upstream oil and gas activities are no longer lucrative and fossil fuel power genera- tion is under pressure in terms of both prof- its and politics. It's out with the old and in with the new, cleaner ways to deliver energy to consumers. And consumers, in the new world order, are key. Companies have reacted accordingly with planned moves towards an increasingly customer-centric business approach with limited exposure to their previous capital- intensive, centralised energy activities. But charting a new path is easier than walking it, as Eon recently discovered. Eon The German utility giant's plans to siphon off its loss-making business units to create a 'bad bank' style energy company have been le in tatters aer the German government's legislative check-mate. Eon hoped to buoy its bottom line by casting off loss-making thermal generation, upstream activities and the burden of its state-sanctioned nuclear shutdown. But the government plans to close a legal loophole, which will keep the costs of nuclear dismantling on Eon's books indefinitely. Eon's share price fell 5 per cent within the first half hour of trade aer the announce- ment was made and it now stands almost 30 per cent below its trading value on 1 Sep- tember. It's a chilling warning for other energy companies that the planning is the easy part. RWE The second-largest German utility faces the same hostile market environment as rival Eon, and has admitted that it may follow suit with a radical business split if conditions worsen. In the meantime, the utility has hedged its bets on growing innovation in the downstream market. The company sent a team to Silicon Val- ley earlier this year to investigate the possi- bility of harnessing distributed generation models, including smart meter and smart grid technologies. But will the company have the necessary government support to imple- ment its plans? The German company may struggle in its domestic market, which is one of the few European nations to take a slow and cautious approach to residential smart meter rollouts. And in the UK market, Npower may struggle to establish the customer trust needed to play a greater role in British homes. Despite a suc- cessful B2B supply business, the residential supply unit has consistently appeared at the bottom of the customer satisfaction surveys. The company recently admitted to losing 300,000 customers in a year as profits dived 65 per cent. In addition, Npower has lost its chief executive Paul Massara, who stepped down in August "by mutual consent". If the UK business does manage to hold its share in the retail market, the smart meter revolution itself, which is dogged by delays, could hin- der its plans further. Centrica Aer a six-month review, in July Centrica announced plans to turn away from its struggling upstream assets and redirect £1.5 billion towards its "strengths" as a customer-facing business. As the parent company of the UK's largest energy supplier, Centrica's punt on British Gas may seem like a safe bet. Market analysts welcomed the move as a step in the right direction but the share price nonetheless crashed as the mar- ket took on board the sheer scale of change required by the company. And operating in the hotly politicised consumer market will pose its own chal- lenges. From the much-criticised smart meter rollout and lingering concerns of a cost of liv- ing crisis, Centrica will also need to negoti- ate a revived appetite for renationalisation following Jeremy Corbyn's successful Labour leadership bid. But perhaps the greatest threat to British Gas as the country's largest supplier would be a price intervention by the Competition and Markets Authority (CMA). Centrica has admitted the company could face "material impacts" on profits if plans to control stand- ard variable tariffs are put in place. SSE and Scottish Power The Scottish utilities have signalled a shi away from coal-fired generation towards cleaner assets – but both will remain reliant on hand-outs from either government sub- sidies or National Grid contracts to remain economic. In May this year, SSE said it will react to the changing UK energy landscape by reshaping its asset portfolio in favour of its cleaner, more flexible generation capa- city with more gas-fired power, which could receive financial support through the capacity market or National Grid contracts. Without a supportive supply-side regime, thermal generation will continue to make meagre profits, as evidenced by the closure of SSE's 1GW Ferrybridge coal-fired power plant and Scottish Power's Longannet coal- fired plant, which failed to secure a supply contract with National Grid. Iberdrola-owned Scottish Power also faces an uphill battle in its bid to press for- ward with onshore and offshore wind power deployment aer the anti-renewables Con- servative government came to power issuing a ra of cuts to wind power support. In the retail market, there are differ- ent challenges. As with British Gas, SSE's large customer base means the company is Is the end nigh for the big six? As an energy academic warns that utilities are facing an 'existential threat', Jillian Ambrose analyses what they are doing to avoid going broke in an industry leaning towards customers and cleaner assets.

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