European utilities feel the pinch - Distributed energy to the rescue?
The big picture is clear – or at least the story that European utilities are telling investors is clear. The centralised power plant model is no longer the bedrock of utility strategies, with the demand side - and distributed energy - already featuring highly in the ambitions of some.
Falling power prices are hurting European utilities – badly. Vattenfall recently announced a €3.4bn write-down on the back of lower power prices, and said that their brand new CCGT in the Netherlands would effectively be mothballed. One third of RWE’s power plants are losing money. E.ON is looking to shift capex completely away from conventional power plants (in Europe) by 2015, and also has a stranded shiny new CCGT in Bavaria. A mix of sluggish demand (in the UK Centrica has seen a 15% underlying fall in gas consumption since 2008), a collapse in the carbon market, and growth in renewables are causing the pain – which is unlikely to go away any time soon. French giant EDF has largely escaped so far, but may not be immune – the French are in the middle of an Energy Transition Debate, with major discussion around energy efficiency, renewables, distributed energy and the future share of nuclear.
In 2010 Delta-ee, in partnership with Accenture, carried out an in-depth study on how well prepared 19 different European utilities were in order to thrive in a low-carbon future. At the time, it was clear to us that energy services would have a major role to play. Many utilities agreed, but although some were laying early foundations, there was little sign of real thirst to rapidly grow revenue from the customer side of the meter. Two years on, the story is rather different.
Most have recognised that ‘doing nothing’ isn’t an option. All are at various stages of implementing strategies to cope, and hopefully in the longer term thrive again. RWE, E.ON and Centrica are examples of companies where the ‘customer side of the meter’ features strongly in their recent strategy announcements.
But at a time when they are cutting jobs and costs, driving strong growth in sectors that are not always in their current corporate DNA will not be easy. Success will come from deep understanding of customers and developing compelling propositions – that offer attractive margins and are highly scalable. And executing new service-based business models will require very different skills from building, running and trading on the back of a small number of large power plants.
If we wind forward two years to 2015, will the story have changed? Will some be succeeding in the ‘brave new world’ of distributed energy and energy services? Or will the story being told to utility investors prove fiction rather than fact? The distributed energy market will grow quickly, but it’s not necessarily the utilities that will be the victors – they could be the victims.