Utility Week

24 | 3RD - 9TH NOVEMBER 2017 | UTILITY WEEK Operations & Assets Market view A s Dermot Nolan, chief executive of Ofgem, outlined in a recent Utility Week interview, the energy sector in the UK is undergoing a once-in-a-generation period of transformation. Nolan spoke of his vision for an energy transition that will see innovation disrupt the market entirely. Engaging with the smart energy revolu- tion as it gathers pace offers a new era of energy provision that incorporates a fresh, technology-driven approach to generation and distribution. Products such as smart meters and battery storage are becoming an everyday feature for both commercial and resi- dential consumers, while global energy companies are adapting their business models to create a more reliable, resilient and sustainable industry. For these businesses and energy-focused investors, the opportunity is significant. New research from interna- tional law firm Pinsent Masons and Mergermarket follows the survey of 250 senior level execu- tives from investment entities, energy generation and distri- bution companies. The report, "Hungry for Change: Investing in a Smarter Energy Future", found that key players in the energy sector are pushing for change that allows them to embrace technology to build an energy sys- tem that is flexible, resilient, sustainable and profitable. While smart ecosystems – those that understand consumers better, enhance the customer experience and enable new prod- uct and service lines – might be the ultimate goal, they are built one step at a time. In the near term, the majority of respondents (30 per cent of energy companies and 24 per cent of investors) will be investing in smart meter technology, partially due to government- mandated rollout programmes, with data analytics also a priority for the next one to two years. Cloud-based management systems and virtual power plants are high on the agenda, with 32 per cent believing these technologies will see the biggest rollout over the next six- ten years. Access to new technology Energy businesses are taking a pragmatic approach to building new capabilities. Despite the fact that access to new technol- ogy is the biggest investment driver for inves- tors (46 per cent) and utilities (30 per cent), energy generation and distri- bution companies acknowl- edge that the large size and oen international manage- ment structure of their busi- ness does not make it easy to make dynamic decisions to develop this new technol- ogy. Sixty-two per cent say they will not be investing in smart energy research and development in-house, cit- ing reasons ranging from high set-up costs to a scar- city of talent. Instead, for most in the industry, building new tech- nological capabilities is to be achieved through partner- ships or acquisitions, with 90 per cent seeking either a joint venture, acquisition, or both to take the next step in smart energy technology. Acquisitions can help shape future plans for growth in a util- ity company, helping them adapt the way they operate and how they develop products to aid survival in future markets. Of those that are opting for in-house research and development, 65 per cent are looking to develop smart meter or end-user communications technology, with 38 per cent planning investments in the comple- mentary field of data analytics. A time for deals The research also found 85 per cent of respondents expect mergers and acquisi- tions to increase in the next 12 months, with the UK, Germany and China named as the top three target countries for smart energy investment. None of the participants expects to see a decline in deal activity. Respondents identified a number of dif- ferent factors spurring deals, including the need to adapt to the increasing prevalence of renewables, changing customer expecta- tions, the desire for efficiency gains, and the need to combat competitive pressures. There is also evidence that investors previ- ously focused on fossil fuels are seeking to diversify their portfolios to boost returns in response to continued oil price volatility. Barriers to investment Policy and regu latory obstacles are the big- gest headaches when it comes to getting smart energy projects off the ground. For investors, a lack of cohesive energy policy and legislation is the primary investment blocker for 28 per cent of respondents, fol- lowed by monopolised electricity markets (22 per cent) and inexperienced public officials (14 per cent). Energy companies, by contrast, see monopolised electricity markets as the main barrier to investment (24 per cent). When asked what they want to see from government to help drive investment in smart energy generation, power companies pre- ferred feed-in-tariffs (18 per cent), capacity markets (16 per cent) and tax breaks (15 per cent). Investors, on the other hand, preferred a market-driven price regime (24 per cent), tax breaks (22 per cent) and opportunities for public-private partnerships (18 per cent). Overall, the report shows that utilities and investors have demonstrated their hun- ger to innovate. Given that it is the energy companies, investors and – ultimately – the public, who will foot the bill for energy trans- formation, governments have far more work to do in creating a stable and predictable regulatory landscape for investment. What is needed now is a favourable regulatory and policy landscape to help satisfy that hunger and take smart energy to the next level. Paul Rice, partner and global head of energy, Pinsent Masons Playing it smart The energy sector is on the verge of profound change, but how do senior utility managers plan to embrace the smart system revolution? Paul Rice presents research that aimed to find out. 30% of utilities see access to new technology as the biggest driver of invest- ment. 62% of utilities will not be investing in smart energy research in-house. 85% of utilities expect M&A activity to increase in the coming months. KEY NUMBERS

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