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The Topic: Non-traditional business models NON-TRADITIONAL BUSINESS MODELS THE TOPIC 14 | 22ND - 28TH JULY 2016 | UTILITY WEEK The end of traditional structures? Monolithic vertical integration has served utilities well, from their public service inception through three decades of privatisation, but changing political and commercial considerations are forcing a fundamental rethink, says Mathew Beech. T he behemoths of the energy and water sectors developed as we know them in the post-privatisation world. But many have a history dating back more than a cen- tury. Their structures derive from the link- ing up of the wholesale and retail elements of their businesses and this has long been deemed a common sense approach. But now this is being questioned. Global decarbonisa- tion and suspicion from both customers and politicians that vertical integration allows profiteering have caused the model to fall out of fashion. That last charge was rejected by the Com- petition and Markets Authority (CMA) in its probe into the energy market. Back in early 2015, the CMA said it did not find any disad- vantages to the energy market from big, ver- tically integrated companies. This opinion was reaffirmed by the CMA and the industry at an Energy and Climate Change committee meeting this month. The chair of the CMA energy market investigation panel, Roger Witcomb, told MPs that vertical integration is "not a prob- lem" and that "there are possibly some inter- nal advantages to companies to be vertically integrated, but that does not translate into damage to consumers". Energy UK director of energy supply Audrey Gallagher added that "there is only a modest benefit to vertical integration". Which? head of campaigns Pete Moorey ech- oed this, saying: "I do not see it as a particu- lar tension." However, while the vertical integration of energy companies has not been condemned, RWE and Eon have moved away from this traditional structure anyway (see graph- ics, right). The move has been driven by the changing environment for traditional gen- eration rather than by the retail market, and the desire to prevent stranded assets holding back the business as a whole. The water sector is filled exclusively by traditionally structured and vertically inte- grated companies, bar Welsh Water (see pro- file, p10). However, the Water Act and its provision for retail competition in the non-domestic market has led to some changes. So too could the regulator's plan to introduce more upstream competition. A TRADITIONAL WHOLESALE/RETAIL WATER COMPANY AND MARKET STRUCTURE "The logic of vertical integration no longer works." Jonson Cox, Ofwat chairman T he massive earthquake that hit eastern Japan in 2011 and crippled the Fuku- shima nuclear reactor has had many consequences well beyond the Far East. In Germany, it was the prime factor for the government's U-turn whereby all nuclear plants would be closed by 2022, and their effective replacement by the controversial Energiewende policy. When combined with the panoply of cli- mate change initiatives, which have ousted coal-fired output from its long-established baseload status, the impact on Germany's two energy leviathans, Eon and RWE, has been profound. From their peaks in late 2007, shares in both companies have plunged by over 80 per cent. Hence, radical action has been required. Both companies have announced far-reaching changes in the structure of their business operations. The details vary but business separation is the common mantra. In Eon's case, it has transferred its supply operations, its conventional generation – approximately 40GW of dispatchable hydro, natural gas and coal capacity – and its energy trading into a new business, Uniper. Uniper is due to be partly spun off later this year. Comment: Eon and RWE hope that radical restructuring will mark new beginnings after some lean years. Wholesale water Wholesale wastewater Terms of access Customers Retail services Water treatment Treated water distribution Raw water distribution Water resources Sludge disposal Sludge treatment Sewage treatment Sewage collection Retail services