Utility Week

UTILITY Week 22nd July 2016

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The Topic: Non-traditional business models UTILITY WEEK | 22ND - 28TH JULY 2016 | 15 NEXT TOPIC: FUNDING DECARBONISATION As the UK seeks to close the gap on its climate change targets and transitions towards a low-carbon economy, green technologies need to be developed. But with the political and financial climate proving to be far from settled, investors need some certainty and encouragement to put their money in low-carbon technology. The next Topic will take an in-depth look at how the UK's decarbonisation agenda is being funded and what mechanisms are in place to entice investment into the low-carbon sector. ≈ 10% New Eon is now focusing on renewables, energy networks and customer solutions. In RWE's case – and unlike the Eon model – the original RWE retains the core generation portfolio, namely the nuclear, gas-fired and coal-fired plants. The new business, Innogy – described by chief executive Peter Terium as "colourful, flexible, full of energy and creative ideas" – includes renewables along with grids and sales. While the restructured models may be welcomed by the participating manage- ment consultants and lawyers, there is less evidence that shareholder value will be enhanced. On the generation front, the key factor will be selling prices. In recent years, Ger- man wholesale electricity prices have been depressed, thereby sharply cutting underly- ing profits. Furthermore, output levels have been constrained by the priority given, under the feed-in-tariff mechanism, to renewables out- put. And, as 2022 nears, nuclear returns will also be cut. Furthermore, at the insistence of the government, both companies will be carrying heavy – and long-contested – pro- visions to finance nuclear plant decommis- sioning. Eon and RWE will expect that, by ring- fencing their renewables generation within their new business, a higher stock market rating will be achieved, If subsidies are changed, this is far from guaranteed. For investors, the solid grid returns will be key. However, the adoption of Energiewende means that heavy capital expenditure will be required in the next few years to enable power to be "wheeled" into central and southern Germany where sev- eral shortly-to-be-decommissioned nuclear plants are located. Although RWE's share price has rallied in recent weeks, the market remains to be convinced that these two new business models will create enduring shareholder value. Interestingly, the privatised British Gas adopted a similar strategy in the late 1990s when BG and Centrica were sepa- rated. Until oil and gas prices plunged in 2014, this strategy delivered. Both Eon and RWE will hope that British Gas's pre-2014 scenario can be suitably replicated. Nigel Hawkins, director, Nigel Hawkins Associates Eon Renewables, distribu- tion networks, and customer solutions. Ahead of market opening in April 2017, some water companies have adopted new business models. Prime among them is Water Plus, the joint venture between United Utilities and Severn Trent. This new com- pany will take on the business customers of its parent companies and aims to be different from the "old" model. Chief executive Sue Amies-King told Utility Week: "We'll be set up separately with cloud-based systems, so we can make changes and deliver new offerings to custom- ers much faster than the competition." Wessex Water has also pursued the joint venture model, taking a 51 per cent stake in independent water company Albion Water. The way Ofwat views the upstream mar- ket is also changing. At the end of May, the regulator published its Water 2020 docu- ment, setting out its decisions on the design of its regulatory framework. This includes steps to inform, enable and encourage the development of two new markets: sludge; and water resources. To adapt to these changes, water compa- nies may further fragment and evolve, poten- tially with spin-off businesses, and new entrants may enter the sector. This all chimes with what Ofwat chairman Jonson Cox said early last year. He set out a vision of vertical disaggregation, non-tradi- tional consolidation and "de-consolidation" and looked forward to a more fragmented, diverse and differentiated water sector. In reference to the upcoming opening of the water market to competition for non- household customers in April 2017, Cox said: "The logic of vertical integration no longer works." And he emphasised the importance of service delivery in a fragmented structure. It appears the days are numbered for traditional structures, with the model evolv- ing to feature a more fragmented industry. This is unlikely to mean the end for the util- ity giants, but their 2.0 iterations are likely to look decidedly different to what we've become accustomed to. Source: RWE  RWE AG  shareholders RWE Innogy  shareholders 100% RWE AG Conventional power generation Trading business ≈ 90% RWE Innogy Renewables Grid Retail RWE SPLIT EON/UNIPER Uniper Large-scale power generation and the effective management of global and regional energy supply chains. Japanese motoring giant Nissan is seeking to disrupt the electric- ity distribution model with the use of its energy storage devices, as well as its electric vehicles (EVs) and vehicle-to-grid (V2G) trials. This would shake up the traditional way electricity distribution network operators (DNOs) run their systems, espe- cially if, as has been seen, EV ownership develops in clusters. Nissan plans to connect 100 vehicle-to-grid (V2G) units across the UK in the first ever trial of using electric vehicles as Profile: Nissan goes to grid with EVs mobile energy storage devices. To do this itt has teamed up with power management company Eaton to develop the xStorage battery storage unit, which forms a central part of its V2G solution. The 4.2kWh unit will retail at £3,200 and it is being touted as the most affordable domestic energy storage solution on the market. Nissan and Eaton expect to sell 100,000 xStorage units in the next five years. Nissan will locate V2G units at places across the country agreed to by consumers and fleet owners of the Nissan Leaf and e-NV200 electric van, giving them the opportunity to plug in their vehicles and sell energy stored in their vehicle battery back to the system.

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