Utility Week

UTILITY Week 22nd July 2016

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

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Page 9 of 31

The Topic: Non-traditional business models NON-TRADITIONAL BUSINESS MODELS THE TOPIC 10 | 22ND - 28TH JULY 2016 | UTILITY WEEK T he days of the monolithic, verti- cally integrated utility company are numbered. With new market entrants, new technologies and new pro-market regulation on the rise, new utility business models are a requirement, not a nice to have. In recent years we have seen this impera- tive become more apparent. In the energy sector, the growth of new entrants, though halting at first, has swelled to see them cap- ture close to 20 per cent market share. These alternative utilities do not just offer customers a more intimate version of the same service they got from their old incumbent. Municipal energy companies, community energy companies, green energy companies, techy energy companies – there is now a multitude of flavours on offer, including not-for-profit, so long the sole domain of Welsh Water in the utility world. Furthermore, while vertically integrated giants with decades-worth of cumbersome legacy IT systems struggle to adjust their eco- nomics for a world in which carbon-rich bal- ance sheets are no longer the asset they once were, their unencumbered rivals are exploit- ing the agility of cloud computing and scal- able enterprise. The big beasts are responding. Eon, RWE and Centrica have all unveiled plans to over- haul and recalibrate their business mod- els for an era of clean, mass-customised, technology-enabled energy services. Many, New structures for an old industry: the rise of NTBMs though, are still struggling to find a way for- ward that does not leave them with stranded assets – not least energy networks, whose ability to balance a decentralising, decarbon- ising energy system is being tested. In the water sector, meanwhile, the change to business architectures locked in at privatisation has been more sudden and definitive. The imminent opening of the non-domestic market to competition has prompted a flurry of joint ventures, market exits and customer book sales. As Ofwat's plans to deregulate markets like sludge and water resources take hold, it is likely we will see business models shi further, with more room for third parties in the value chain. The role of utility regulators in facilitating business model change is key, and in recent years both Ofwat and Ofgem have made it clear they do not wish to stand in the way. With principles and outcomes-based regu- latory approaches, and the introduction of measures to promote innovation, they have set the scene for a new era of business model change in UK utilities. WHAT'S IN THIS ARTICLE? l What the regulators are doing, p11 l Germany's Energiewende revolution, p12 l Community energy, p12 l The battery revolution, p13 l Rethinking traditional structures p14 l New beginnings for RWE and Eon, p14 This year marks 15 years since Welsh Water became the UK's first, and still only, not-for-profit water company. It is owned by Glas Cymru, a single purpose company with no shareholders, and is run solely for the benefit of custom- ers. It also aims to reduce Welsh Water's asset financing cost, the water industry's single biggest cost. Financing efficiency savings to date have largely been used PROFILE: Welsh Water adopts not-for-profit model to build up reserves to insulate Welsh Water and its custom- ers from any unexpected costs and also to improve credit qual- ity so that Welsh Water's cost of finance can be kept as low as possible. The move came aer the com- pany's previous owner, Hyder, found itself under immense financial strain and was forced in effect to put itself up for sale. This compromised the long- term outlook until Jones and fellow Welsh Water director Nigel Annett decided to go back to the drawing board and radi- cally reinvent the company as a not-for-profit enterprise, with no shareholders and an intrinsically customer-first ethos. "It was a blank sheet of paper, and it was a kind of once in a lifetime opportunity." Chris Jones, chief executive, Dwr Cymru Welsh Water

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