Utility Week

UTILITY Week 15th July 2016

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Finance & Investment 16 | 15TH - 21ST JULY 2016 | UTILITY WEEK Market view E lectricity demand in Europe is down 5 per cent on 2010 levels, with up to 8 per cent declines in the major markets. US power consumption has been stagnant over the same period. Energy demand in devel- oped markets is being driven down for many reasons, chiefly environmental, but the key fact is GDP growth in developed markets is no longer based in energy-intensive industries. Utility chief executives are therefore look- ing to grow their top line outside the tradi- tional asset base. The answer appears to lie downstream, in taking advantage of shis in the energy mix and customer usage. Distrib- uted generation in homes and businesses threatens utility revenues, and equipment OEMs are quick to take advantage of customer access to bundle power and gas contracts into installation and maintenance deals, but service provision in this field is also a new income source. Energy efficiency and management services offer further sustain- able growth. Revenue growth for European utilities is estimated at 3-4 per cent overall in energy management and up to 8 per cent in energy efficiency services, versus declining revenue from commodity supply (see figure). We see five essential focus areas: • Get the basics right in the core business. This might sound like common sense, but the reality in large incumbent utilities is that they need to serve millions of cus- tomers and handle regulatory changes as they occur. Recent examples indicate that managing a customer care, billing and collection organisation without errors is not as simple as it seems. • Even large companies cannot compete with everyone – they need to pick their battles. However, incumbents are facing competition from other, similar players as well as from new, nimbler and focused rivals around each particular product or service. A focus on current strengths and competencies to develop value proposi- tions is the pragmatic strategy. While large companies might have the resources to pursue many types of oppor- tunities, some of the leading players in Europe are choosing to pursue one of the three following models: a) Reliability of energy supply and related services; b) Sales channel effectiveness to sell adjacent products and build a 'sales machine'; c) Leveraging relationships and reputa- tion with local customers and authori- ties to build presence in other services. • Reorganise to build focused and perform- ing businesses. The sales business of the future must change to align business potential, priorities and KPIs, along with the resources and capabilities for differ- ent types of businesses and ventures. Service development units innovate on new services based on engineering capabilities, soware or hardware, or data combined from solution offerings. Product units develop and market stand- ardised or customised solution offerings – commodity, services and integrated offerings as 'modules'. Customer-facing units specialise to sell by main segment or channel, combining commodity and bundled services sales for B2C, B2B and the wholesale market. New services may need new channels or models, or even separate branding. Delivery comes from the operations and infrastructure unit, providing products and service value on central and distributed bases. • New services o en require new business models, and these business models some- times require partnerships with others. Partnering can be an effective way to lev- erage others' capabilities while focusing the organisation's efforts on the aspects that are most relevant for the business. • Make a commitment. Given the size of the opportunity but also the challenges, complete transformation of the business is required, from strategy, business mod- els, people and processes to partners. This means full commitment of own- ers and executive management to drive transformation from the top. There is a large amount of uncertainty and a port- folio of options might look to be a good strategy for a large incumbent. However, instead of spreading risk, the outcome has historically been dilution of success. In ten years' time, the traditional commod- ity-focused retail business will not exist in its current shape. There is a window of opportunity in the next five years to achieve a strong position to pursue growth, or risk losing out to others as the integrated energy services player. This means a complete trans- formation of the business, to become agile, learning and more efficient. Kirsty Ingham, principal, David Borràs, partner, and Matthias von Bechtolsheim, partner, Arthur D Little How utilities can create value Falling demand for energy means utilities must seek alternative sources of revenue. Kirsty Ingham, David Borràs and Matthias von Bechtolsheim examine how they can achieve sustainable growth. ENERGY SERVICES OPPORTUNITIES Source: ADL analysis, US DoE, IEA, RWE, EON, IRRC Institute Commodity supply Optimised end-use energy supply Improved energy efficiency Primary energy Technologies Secondary energy Technologies Application Wholesale power Wholesale gas Biogas, water, hydrogen Heating Cooling Process steam Pressured air Low-voltage power Boilers Combined heat and power Photovoltaics Local wind Transformers Compressors Power storage/ batteries Heat storage Energy management systems Building automation Industrial automation Heat piping and radiators HVAC Lighting Drives, pumps Elevators Data centre Building energy Process production Discrete manufacturing Logistics/transport Computing Others -8-10% +2-4% +3-8% Others

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