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Finance & Investment UTILITY WEEK | 15TH - 21ST JULY 2016 | 17 Market view T he rate of change in the UK utilities industry is unprecedented and accel- erating. UK coal-powered generation halved in the first quarter of 2016, with solar PV moving from a negligible output in 2010 to 12GW of capacity so far this year. According to the Office for National Statistics, roughly £46.2 billion or 1.3 per cent of all non-financial activity in the UK in 2014 came from Britain's low-carbon and renewable energy sector. Smart meters are due to be rolled out to all UK households by 2020, bringing poten- tial new product and tariff innovations. Since 2010, more than 30 new entrant retailers, without legacy thinking and systems, have entered the market. Transmission and dis- tribution players continue to prosper despite increasingly challenging regulation. Yet in the future these businesses will see pressure on their financial returns, which should provide greater incentives to innovate and deliver improved customer services. Nothing now or in the future will be stable. Today's consumers are more informed than ever before about the environmental impact of energy creation and consump- tion. Increased consumer knowledge cou- pled with the need for the UK power sector to reduce greenhouse gas emissions by up to 85 per cent between now and 2040 adds additional pressure on utility companies. The upheaval is immense both in the UK and internationally. For example, Germany's change in energy policy, the "Energiewende" (see Analysis, p10), has seen earnings for the large generators more than halve in five years because a third of the power that used to be produced by these companies is now produced by private individuals. At the same time, the German consumer shows 74 per cent approval ratings for the policy change – despite the fact they are paying retail prices that are more than 50 per cent higher than in the UK. The next decade will be focused on the transformation that storage will bring – making renewables more economic, reducing costs within transmission and distribution companies, and reducing bills for consumers. Dynamic frequency response will balance the network automatically and instantly. The upheaval is already under way in the US, with Tesla announcing its intention to acquire SolarCity to control the end-to-end storage value chain. Looking 25 years ahead, we see price parity for wind, solar and tidal power. The huge investments in tidal, such as the Swansea Bay Tidal Lagoon, will move our thinking forward on this essential natural source of power. Just over half of our generation will come from "centralised" sources made up of a mix of nuclear, gas, tidal and offshore wind. Distributed generation will make up Opportunity from uncertainty To endure in this time of unprecedented change, utilities must rethink their roadmaps and define their strategies to defend territory and gain footholds in new areas, says James Basden. ESTIMATED INVESTMENT IN LOW-CARBON ELECTRICITY GENERATION CAPACITY, 2010-14 Electricity generation technology Estimated investment in electricity generation capacity 2010-14 (2012 prices) Onshore wind £7.9 billion Offshore wind £9.5 billion Biomass and bioenergy £8.8 billion Marine £0.1 billion Solar PV £11.4 billion Hydro £0.3 billion Other renewable £1.7 billion Renewables generation capacity investment £39.6 billion Nuclear £2.5 billion CCS – Renewables, nuclear and CCS generation capacity investment £42.1 billion Source: Decc the difference, with the ubiquity of battery storage balancing the network through a system operator at a local level and block- chain technologies revolutionising how we buy, contract and manage energy. While demand-side response will con- tinue to make us more efficient and know- ledgeable about our use of power, overall demand will continue to increase as new devices and applications connect to the net- work. The largest change will be in the trans- port sector, with the increase in popularity of electric vehicles. This will trigger similar huge write-downs in market capitalisation for some companies as fossil fuel vehicles are gradually phased out. The challenge for utilities today is to decide where, when and how to play. They already have the advantage of knowledge, experience and access to data that their customers and other players value. However, greater focus needs to be placed on shaping how markets evolve. Technology and professional services companies pro- vide invaluable examples that utilities can draw upon when defining their strategies to defend existing territory and gain footholds in new areas. This is the time for organisations to rethink their roadmap. Failure to move now means that in five years' time utilities could be dancing to the tune of others rather than setting the music. James Basden, partner, Oliver Wyman HOW MUCH DOES ELECTRICITY COST? Average national electricity prices in US cents/kWh (2011) Source: Ovo Energy India China Canada Russia US Brazil France UK Japan Australia Spain Germany Denmark 8¢ 8¢ 10¢ 11¢ 12¢ 17¢ 19¢ 20¢ 26¢ 29¢ 30¢ 35¢ 41¢