Utility Week

UTILITY Week 13th January 2017

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

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8 | 13TH - 19TH JANUARY 2017 | UTILITY WEEK 2017 Preview Analysis I f you thought 2016 was a bad year, the next is likely to be worse. Over the next 12 months, the ramifications of the major disruptions of last year will make themselves apparent and challenges arising from this will be compounded by 2017's own key mile- stones for utilities. The sector as a whole is set to continue with efforts to deregulate, innovate, improve performance and adopt new technologies. Taken in total – it doesn't look like industry executives can expect much respite in the coming months. For water, the obvious looming event is the official opening of the non-domestic water market. The date of April 2017 has been ingrained into the psyche of the water sector for more than half a decade, and now we are just a few months away from a historic moment in the sector's development. Some final testing of systems is still to take place at MOSL and the water companies before this momentous date, but the weight of activity among new retailers and the market operator has now shied away from technical preparations towards customer engagement and building competitive advantage. For some, competition will undoubtedly raise perennial utility strategy questions over the merits of bundling. Some have already tied their colours to this pan-utility mast, for instance Utilitywise and Business Stream who have partnered to offer combined water and energy deals. More enterprises of this nature are expected to follow. Also expected this year is clarification on government's intention to press ahead with plans to open the domestic water market to competition. On the regulated front for the water com- panies, things are expected to carry on in a stable fashion due to low interest rates and the fact the sector is in the middle of an AMP. The major development will be around early glimpses of the shape the PR19 price review. The regulator will reveal its methodology for this in June or July. In energy, the regulated networks will also benefit from the stability of the mid- period environment and low interest rates, which will offset returns that are predicted to modestly decline over the next few years (see above). Strategically, however, 2017 is set to be a much less comfortable year. Both gas and electricity network operators face funda- mental challenges around the future of their Happy new year? The fallout from 2016 combined with anticipated events this year are going to keep industry leaders on their toes. Mathew Beech sums up the year ahead. The year ahead for utilities Analyst view industry preparing for the digital age as well. Some of the world's largest technology giants will enter the utility market as they look to expand their play for the connected home and take advantage of consumer data, helping to deliver a modern, digital experi- ence for customers. Tariff options Time-of-use tariffs were introduced by energy suppliers such as Centrica for the first time last year, and with great success. Made pos- sible with the introduction of smart meter- ing and changes to regulations, suppliers are now able to offer customers prices based solely on their time of use. With the success of the past year in mind, we could be seeing the beginning of a new trend; something to look out for in the months ahead. Concentration of suppliers While changes to government policy have resulted in a huge rise in the number of energy retailers in the UK, 2017 is likely to see a concentration of this number. Many smaller energy retailers entered the market at a time when the cost of energy was low. As prices rise, smaller retailers might find themselves met with bankruptcy as the realities of a saturated market present themselves. Energy storage Energy storage has long been too expensive and clumsy for investment on a large scale. As the technology matures and the price comes down, we are likely to see greater investment in solutions as varied as com- pressed air energy storage, pumped hydro Connected homes This year has seen an increased interest in the connected home, but 2017 is likely to see these technologies enter the mainstream market with force. We are seeing bigger brands turn their attention to the potential of this technology, making the products available more attractive, affordable and usable. As this reliance on technology in the home develops, we will see the utilities ALLOWED RETURNS FOR NETWORK OPERATORS EARNING REAL RETURNS Source: Moody's Average return (%) in selected ex-ante European frameworks (GB, Ireland, Italy and the Netherlands) across electricity and gas for transmission and distribution Average Wacc (electricity) Average Wacc (gas) Average 10-year real bond yield (spot) Average 10-year real bond yield (10-year trailing average) 7% 6% 5% 4% 3% 2% 1% 0% -1% Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19

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