The road ahead: Gaining momentum from energy transformation · PDF fileThe road ahead Gaining...

The road ahead Gaining momentum fromenergy transformation

www.pwc.com/utilities

PwC global power & utilities

Megatrends anddisruptions are havingprofound implications forthe strategies and futurerole of companies all alongthe power utility valuechain.

We map the impact onthe power sector and lookahead at what it mightmean for future market andbusiness models.

Making the right movesnow will be vital ifcompanies are to be asuccessful part of energytransformation.

IntroductionThe impact on the power sector from the convergent forces of changes in customer behaviour, new forms of competition, renewable and distributed energy andregulation is creating new opportunities and challenges. The root causes for thesedevelopments are global megatrends that are affecting all markets and are havingparticular impacts on power.

This report looks at the overalltrends that are shaping tomorrow’smarket environment and the marketdesigns and business models thatmight ensue. It looks at thedisruptions affecting companies and introduces PwC’s EnergyTransformation framework. The framework helps companiesmap the effect on them all the wayfrom the root causes through toimpacts on future market designsand business models, addressingquestions such as:

• What will the future market design look like?

• Who will be your competitors?

• What will customers want?

• How might regulation be responding?

• What are the implications for the company’s purpose, role and positioning?

• What will be the winning business models?

The changes affecting the powerutilities sector have provoked someapocalyptic phrases from headlinewriters. We’re much more optimistic.True, if companies don’t stay aheadof change, the dangers they face willintensify. But if they make the rightmoves to address the challenges theyface and embrace the opportunities,they can be a successful part ofenergy transformation.

Norbert SchwietersGlobal Power & Utilities Leader

2 The road ahead Gaining momentum from energy transformation

The forces of transformation 3Disruption dynamics 6Looking ahead: future market and business models 11 Discover more 29

The road ahead Gaining momentum from energy transformation 3

Energy transformation is being driven by five global megatrends interacting withand amplified by a set of shifts taking place within the power sector. The fivemegatrends – technological breakthroughs; climate change and resource scarcity;demographic and social change; a shift in global economic power and rapidurbanisation – are challenges for all businesses.

The forces of transformation

But in the power sector their impact is madeall the greater by a number of simultaneousdisruptions, involving customer behaviour,competition, the production service model,distribution channels, government policyand regulation. The extent and nature ofthese disruptions vary from market tomarket. But in many markets, their intensityis making their impact transformational rather than incremental.

Some of the changes arise from themegatrends – for example the regulatoryencouragement of renewables in response to climate change concerns – while others heighten the impact ofparticular megatrends – for example the potential for rapid urbanisation toaccelerate the roll-out of distributedenergy and micro-grids.

Together these megatrends and thechanges taking place in and around the sector have profound implicationsfor the strategies and future role ofcompanies all along the power utilityvalue chain. They are combining to have a disruptive impact which will lead to the development of new marketmodels and require companies to pursuenew business models (see figure 1).

Demographic changes

How are megatrendsaffecting the

energy sector?

What are the disruption factors

impacting the power sector?

What could thismean for future market models?

What business models are likely to evolve?

What transformations are necessary?

Customer behaviour Competition

Production service model

Green command and control

Ultra distributedgeneration

Local Energy Systems

Regionalsupergrid

Distributionchannels

Government andregulation

Shift in economic power

Acceleratingurbanisation

Climate change and resource scarcity

Technological breakthroughs

PurposeBusiness

modelOperating model/

capabilities HR modelFinancial

performance

Disruption dynamics

Power & utility company transformation

Figure 1: PwC energy transformation framework


Global forces – five megatrendsimpact power

Climate change andresource scarcity

The energy sector is on the frontline of concerns about climate change. The sector as a whole accounts for morethan two-thirds of global greenhouse-gasemissions1 with just over 40% of thisstemming from power generation.Resource scarcity or availability, and theassociated geopolitics and economics ofgas, oil and coal supply, are key factorsshaping power market policy.

A growing emphasis on renewables is aresponse to both climate change andsecurity of supply concerns. In the USalone, over 30% of new electricitygeneration capacity added in 2010–2013involved solar and wind power, up fromless than 2% in 2000–2003.2 Solarphotovoltaic (PV) is now present on morethan 1.2 million Australian homes andproducing over 3.3GW per annum.3

In Germany, renewables accounted for24% of gross electricity consumption in20134, placing the country slightly abovethe growth trajectory needed to reach its2025 target of 40 to 45%.

Energy efficiency has also risen up thepolicy and customer agenda. Together,renewable technologies, energy saving and a different customer outlook areleading to a transformation of theelectricity environment. They are causingthe value chain to shift, away from largeconventional power plants towards localpower generation, and a greater focus ondistributed energy and demandmanagement.

Transformation is also very relevant todeveloping countries, many of which facethe triple challenge of being unable tomeet existing demand for electricity whilealso facing huge demand growth and theneed to extend access to those who don’thave electricity. The need for good demandmanagement is already very familiar incountries such as South Africa wheremanaged outages and demand restrictionsare commonplace. Technological advanceswill enhance this response as well aspresent the opportunity for expansion ofpower in ways that may leapfrog thetraditional grid evolution route.

Technologicalbreakthroughs

Technological innovation is at the heart of the shifts that are occurring in thepower sector. Advances are happening inmany parts of the sector – for example, in large-scale technologies such as offshorewind and high-voltage DC transmission, in distributed and smaller-scale customer-based energy systems and on the load side. Power is being transformed from atop-down centralised system to one that is much more interactive but alsodecentralised and fragmented. Elements of the old centralised system are becomingstranded and there’s a need to find analternative investment model thatrecognises technological advances.

In many jurisdictions, renewable power isreplacing or has the potential to replacefossil fuel generation. Smart grids aredelivering the potential for greaterinteractivity with customers. And thescope for even more transformativetechnological breakthroughs is beingtaken more and more seriously all thetime. A breakthrough in the cost andpracticality of battery storage technologycould be a quantum leap enabler, openingup the possibility of off-grid customer self-sufficiency when used in combinationwith ‘own generation’. ‘Power to gas’ isalso a potential transformative technology.All bring opportunities for incumbentpower companies but many also have theeffect of eating away at a utility company’straditional revenues and undermining thetraditional utility business model.

Other technologies, notably thecombination of the internet, mobiledevices, data analytics and cloudcomputing with smart grids and smartmetering, present opportunities for utilitycompanies to get closer to the customer,play an enhanced ‘energy partner’ role and exploit data opportunities. Analyticscapabilities, which today are generally of a low to moderate standard withinutilities, will need to be a core strength in the future if companies are to fend off competition from new entrants whoalready have these capabilities at the heart of their business.


Shift in economic power

The focus of global growth has shifted.Looked at historically, we come to realisethat western economic strength is arelatively recent phenomenon and thecurrent developments we see are essentiallya rebalancing of the global economies.

As fast-growth economies become exportersof capital, talent and innovation, thedirection of capital flows is being adjustedin a way that is quite different from thetraditional routes from developed-to-emerging and developed-to-developedcountries.

We are already seeing significant east-westand east-south investment flows in powermarkets, involving both financial investorsand power sector corporate investors. For example, Chinese state-owned powerand utilities companies have been activein their search for suitable internationalpower utility and grid investmentopportunities. Europe, South America,Australia and other parts of Asia have allbeen targets for expansion. Sovereign wealthfunds and pension fund investments in thesector have also become multi-directional.The challenge for many power companies isaccess to scarce capital from this global flowof capital, minimising the risk of strandedinvestments and seeking innovative ways ofsecuring investment in replacement assets.

Demographic changes

Within the next minute the global population will rise by 145. By 2025, we’ll have added another billionpeople to reach about eight billion.Explosive population growth in someareas set against declines in othersmakes for very different power marketgrowth potential in different parts ofthe world. Africa’s population isprojected to double by 2050 whileEurope’s is expected to shrink.

The growth prize for power companiesof serving expanding populations is a big one. For example, Nigeria’spopulation is expected to exceedAmerica’s by 2045. But the infrastructurechallenge in many countries is immenseand not all growth markets are readilyopen to international expansion.Companies seeking to reposition theirgeographic footprints towards faster-growth countries will also need to havea clear view on the impact of energytransformation on these countries.The prospect of bypassing the grid andleapfrogging to new local distributedtechnologies and market models is notunrealistic if the pace of technologicaladvances and cost reductions continues.

Acceleratingurbanisation

Over the next two decades, nearly all ofthe world’s net population growth isexpected to occur in urban areas, withabout 1.4 million people – close to thepopulation of Stockholm – added eachweek.5

By 2050, the urban population willincrease by at least 2.5 billion, reachingtwo-thirds of the global population.6

Fast urban expansion presents a majorchallenge and an opportunity for powerutility companies. The speed of urbangrowth puts a big strain on infrastructuredevelopment. In Africa, already large citiessuch as Lagos, Kinshasa and Cairo aregoing to become megacities, with morethan 15 million people. The population inNairobi is set to more than double betweennow and 2025.

Power companies can play a pivotal role in ensuring future cities become ‘urbansmart’ rather than ‘urban sprawl’. They have the potential to be lead playersat the heart of future city infrastructurebut it will require a new mindset and thedevelopment of new partnerships. And, of course, the pace and nature ofurbanisation in fast-growth anddeveloping economies takes a differentform than in the west. In the former, thechallenge is very fast growth on top ofalready stretched or absent infrastructure.In the west, rural urbanisation is a trendalongside big city growth.

Snapshot: Faster technology development, falling costs

The time it takes to go from breakthrough technology to mass-market application is collapsing. In the US, it took the telephone 76 years to reach half the population. The smartphone did it inunder ten years.

The price of new technologies is falling equally rapidly. An analysis by UBS predicts shrinking battery and solar costs will make the combination of electric vehicles, solar panels and stationarybatteries for excess power a compelling proposition in many markets within the next ten years. It estimates the combination of an electric vehicle + solar + battery should have a payback of 7–11 years, depending on the country-specific economics.7 After that, the electricity generated istruly ‘free electricity’ for the remainder of the lifetime of the equipment.

Falling costs have the potential to introduce a new challenge to the power utility business model. If they translate into actual falls in the price of electricity itself, the industry will have to move away from the default assumption of ever-rising prices, on which many of its deals and investmentare based.


The disruption taking hold in the power sector is just the start of an energytransformation. It’s not a question of whether the business models pursued in the sector will change but rather what new forms they will take and how rapidlycompanies will have to alter course. Companies need to be sure they have fullyfactored into their strategic planning the megatrends and changes discussed in the previous chapter.

Disruption dynamics

The pace of change will be different ineach market and each specific situation.The important thing for companies is thatthey assess their strategy and implementthe changes they need to make in time or,even better, ahead of time. Already, ofcourse, many have reset their compasseswith a switch in priorities and emphasis.But will this be enough and what moreneeds to be done?

We see five areas in which disruption ishaving an impact and where it will beimportant for companies to assess theirstrategies:

• customer behaviour

• competition

• the production service model

• distribution channels

• government and regulation.

Together they form the context in whichfuture market and business models willbe framed. For each one it is possible toidentify developments that are happeningnow and which, if they accelerate orimpact in combination, could intensifydisruption dynamics.

Snapshot: Google eyes power opportunity

Addressing a recent PwC roundtable on customer transformation,8 Google’s ChiefTechnology Advocate Michael T. Jones described the internet as “machines talkingto machines. It can develop in all sorts of ways whether it is components on a 747or your roof tile sending an SMS saying ‘replace me, I’m starting to leak’.” Movingon to the world of power, he observed: “All electronic devices will talk about theirpower needs to an aggregator and you can have an auction for the power for eachone. All you need is someone to identify what the rates are.”

Google already holds a wholesale power licence in the US. Its January 2014acquisition of Nest Labs for US$3.2bn also gives it a position in home automationwith ownership of a company that has built a position selling thermostats andsmoke alarms for the home. At the time of the acquisition, Tony Fadell, CEO of Nest,said: “Nest will be even better placed to build simple, thoughtful devices that makelife easier at home.”


Customer behaviour

We’re already seeing a gradual erosion of power utility company revenues asdistributed energy gains an increasingfoothold. Some commentators go so far as to predict that customers will besaying “goodbye to the grid” in thefuture. In some places, it’s alreadyhappening. Significant changes in the economics and practicalities of self-generation and storage are neededfor such a scenario to occur on any kindof scale.

But even if customers don’t literally saygoodbye to the grid, power utilitycompanies face the prospect of playing therole of being providers of secondary orback-up power to customers. Instead, theycould become part of the change by being more active participants in the self-generation market, providing adviceon equipment, metering and using theopportunity to secure more of the homeand business services space.

The growth in self-generation can create areinforcing dynamic. As well as the declinein revenues to decentralised sources, thereis the impact of cost pressures on thecentralised system which, in turn, reinforcesthe movement to decentralisation. The reaction of some in the industry hasbeen to press for new regulatory policies to allow for some form of cost recovery in recognition of utilities being left withthe fixed cost of the grid but a shrinkingrevenue base. But as one academic studypoints out: “In the short run, these stepsvery well could insulate the utility fromsolar PV competition but at the same timecreate substantial medium- and long-termrisks, including those of customerbacklash, deferral of adaption, andstimulation of enhanced competition.”9

Both in terms of regulatory relations andcustomer relations, utility companies need to align their ambitions with those of their customers in a new energy future,ensuring their services are relevant to and cost-effective for as many customersituations as possible.

Competition

Energy transformation is shifting theopportunity for good margins into newparts of the value chain. But lowerbarriers to entry in these areas of thevalue chain and the need for newcapabilities mean there is the prospect of existing companies being outflankedand outpaced as more nimble and ablecompetitors seize key revenue segments.

New roles for companies come into view.In a distributed energy community with its own micro-grid, players other thanpower utilities can play an energymanagement role. This could be for localsystems such as transport networks,residential communities or industrialcommunities.

For example, distributed energy is a keyfocus both for incumbent power utilitycompanies and for new entrants. It’s a bigmarket space, worth tens of billions. It covers a wide spectrum of opportunities,from energy controls and demandmanagement activities that save energy, to local generation, both small-scale andlarger-scale, embedded in own use or localnetworks, through to distributed storagethat can shift loads or, ultimately, end grid dependency.

Engineering and technology companiessuch as GE, Siemens and SchneiderElectric have long been important playersas equipment providers in larger-scalesegments of the distributed energy market. The growth and extension of distributedenergy is likely to blur the boundariesbetween such companies and the powerutility sector, both at the individualcustomer and community levels.

Demand management services are anotherkey area and, already, we see companiessuch as Kiwi Power in the UK providingservices to industrial and commercialclients, offering demand reductionstrategies that they claim might typicallysee larger businesses reduce theirelectricity bills by around £100,000.10

In addition, there is considerable interestfrom companies seeking to explore theopportunities that come from existinghome and online services as well as future smart grid and distributed energyprovision. “The battleground over the next five years in electricity will be at thehouse,” David Crane, CEO of NRG Energy,told Bloomberg Businessweek. “When wethink of who our competitors or partnerswill be, it will be the Googles, Comcasts,AT&Ts who are already inside the meter.We aren’t worried about the utilities,because they have no clue how to getbeyond the meter, to be inside the house.”11

“Utility companies need to align their ambitions with those of their customers in a new energy future, ensuring their services are relevant and cost-effective.”


The production service model

The production service model ofcentralised generation and grids is beingjoined by a much more disintermediatedand distributed model. New supplysources requiring centralisedinfrastructure, such as offshore wind, are coming onstream but the danger for utilities is that other assets andinfrastructure are left stranded. The centralised infrastructure that haslong been a source of strength of theindustry can be a source of weaknessvulnerable to market, policy or disasterrisk. And we’re seeing all three of theserisks currently playing out in Europe, the US and Japan.

In Europe, the changing economics ofgeneration brought about by acombination of the rise of renewables, thecollapse in the carbon market and cheaperinternational coal prices has left much gasgeneration out of the market. Even modernplants, completed as recently as 2013, havehad to be temporarily mothballed andmany others have been taken out of themarket more permanently. In total, overthe course of 2012–13 ten major EUutilities announced the mothballing orclosure of over 22GW of combined cyclegas turbine (CCGT) capacity in response topersistently low or negative clean sparkspreads, of which 8.8GW was either builtor acquired within the last ten years.12

Disaster risk led to all of Japan’s nuclearreactors being gradually taken offline after the 2011 Fukushima disaster andthey remained offline three years later.Across the world in Germany, the reactionto Fukushima was to begin to phase outnuclear power altogether. Official policy in Japan is to bring plants back intooperation, with the first restart expectedto be announced in late 2014, as and whenthe atomic regulator deems new strictersafety standards are being complied with.But opinion polls have consistently shownthat a majority of Japanese are opposed torestarting reactors and nuclear assets areunlikely to regain the same role in Japan’senergy system as they had beforeFukushima.

In the US, one can draw a direct line fromenvironmental policy to the stranded asset risk faced by many of the country’scoal generation plants. Coal-fired powerplants are subject to the Mercury and Air Toxics Standards (MATS), whichrequire significant reductions in emissionsof mercury, acid gases, and toxic metals. The standards are scheduled to take effect in 2015 and 2016, with generatorsneeding to install costly pollution-controlequipment if they want to keep their coal plants running. The US EnergyInformation Administration expects about 60GW of coal generation to shutdown between 2012 and 2018 – areduction of about a fifth.13 A furtherthreat to coal comes in the form of theproposed Clean Power Plan, which willrequire carbon emission from the powersector to be cut by 30% nationwide below 2005 levels by 2030.

These developments highlight the risk ofover-reliance on a concentrated centralisedpower generation asset mix. The wrongtype of asset mix can leave companiesvulnerable to rapid transformation, arising from market or policy forces or the forces of events, in the case of nuclear.Such forces provide a wake-up call whichis likely to accelerate the move toalternative power systems.

Distribution channels

In a digital-based smart energy era, theexpectation is that the main distributionchannel will be online and the energyretailing prize will hinge on innovativedigital platforms to secure the energyautomation, own generation and energyefficiency customer space.

Already, many companies are shifting theirpositioning to cluster energy managementofferings around a central energyefficiency and energy saving propositionand using new channels such as socialmedia to engage with customers. But dopower utility companies risk losing out tonew entrants from the world of online data and digital technology?

A risk for energy companies is that theirdistribution channel to end customersbecomes disintermediated in ways that are not dissimilar to what has happened to incumbent publishers and booksellers with the advent of Amazon. Not only is the channel to market for incumbentsdominated by the new platform but theactual demand for product is eroded as the platform acts as an aggregator for self-publishing and second-hand sales.And, of course, the offering is now much wider than just books, with thecombination of a trusted brand and sheer presence providing a marketplacejoining consumers to a wide range ofproduct providers.

Smart grids, micro-grids, local generationand local storage all create opportunitiesto engage customers in new ways.Increasingly, we are seeing interest in the power sector from companies in the online, digital and data managementworld who are looking at media andentertainment, home automation, energysaving and data aggregation opportunities.In a grid-connected but distributed powersystem there are roles for intermediarieswho can match supply and demand ratherthan meet demand itself.

“Do power utility companies risk losing out to new entrants from the world of online data and digital technology?”


A key consideration for incumbent powerutilities is if their brands are perceived as being part of the past that is beingbroken away from rather than the futurefor customers. An energy saving ordemand management proposition may beperceived as more credible coming from a new entrant rather than an incumbent, so use of the brand needs to be carefullyconsidered.

Another important challenge forcompanies arises from the need to beexpert at managing data in a smart home, smart city and smart companyenvironment. As well as data from smartdevices and the grid, additional layers of information about demographics,behaviour, customer characteristics andother factors will often be required to bestexploit the data opportunity. Many powerutility companies already use sophisticateddata analytics for customer segmentationpurposes which can be built on andsupplemented by enhanced analytics, big data from social media and learningfrom other industries.

Snapshot: A weakened capital base

In Europe, the erosion of utility company earnings has had an inevitable impact on investment attractiveness. The Economist reported that “in 2008 the top ten European utilities all had credit ratings of A or better. Now (in 2013) only five do.”14 Share prices were similarly hit over the same period.

In the US, the power utility share price story has been much healthier but the association representing US shareholder-owned electric utilities has sounded a warning note about the capital implications of energy transformation: “When customers have the opportunity to reduce their use of a product or find another provider of such service, utility earnings growth is threatened. As this threat to growth becomes more evident, investors will become less attracted to investments in the utility sector. This will be manifested via a higher cost of capital and less capital available to be allocated to the sector.”15

Government andregulation

Energy is by its nature a key economicand political issue. More than in manyother sectors, firms in the power sectordepend on the political context for theirlicence to operate and public trust intheir activities is a big factor.

The cost of power is an important element in household budgets as well asbusiness and industrial competitiveness.The availability of power is a ‘make orbreak’ matter for everyone. And itsinfrastructure is the centre of oftencontroversial planning debates.

So it’s inevitable that the activities ofpower utility companies are never far from the centre of the public and politicalspotlight. Recent and current events indifferent countries discussed in the earliersection on the production service modelhighlight the potential for the public andpolitical will to alter the nature of thebusiness.

The political context shapes the utilitybusiness model. Changes in that contextcan dramatically impact utilities. This hasalways been the case but, in a moredynamic energy transformation context,political and regulatory decisions becomeeven more significant. The differentpolitical approaches to energytransformation in different countries arekey to explaining why the impact on fossiland nuclear generation has been faster and more dramatic in Europe compared to elsewhere.

A more dynamic environment also elevates the importance of public trust and perception. Energy transformation is extending the scope for the public tovote with their feet, not just by switchingsuppliers but by reducing dependence on utility companies altogether.


The need for innovation

Incumbent companies that don’t innovatecould risk seeing themselves succumbingto the pressure points and being eclipsedin the same way that incumbents likeKodak, Blockbuster video stores and highstreet booksellers were in other sectors.Certainly, sector transformation couldshrink the role of some power utilitycompanies to providers of back-up power.

In our most recent Global Power andUtilities survey, only a minority of oursurvey participants expect centralisedgeneration and transmission to play thelead role in meeting future demandgrowth across the main markets of Asia,Europe and North America.16 Instead,energy transformation will gather paceand we expect that growth will becomemore innovation-dependent, with successcoming to those companies that useinnovative technologies, products,services, processes, and business models to gain competitive advantage, to stayahead of change and create new marketsfor their products and services. In Africainnovation will be driven in part by thefact that power utilities will not be able to support the increasing demand forelectricity supply and businesses willevaluate other solutions, such as looking at different means of co-generation.

Business model innovation is just oneelement of the innovation required but islikely to be a key part. The difficulty is that business history tells us that themajority of business model innovations areintroduced by newcomers and incumbentsoften find it hard to respond successfully.Incumbent companies sometimes try tohold on to the existing model for too longor fall between two stools as they try tomanage two competing business models at the same time – the original businessmodel and the new model.

One way to avoid this trap is to separateout responsibility for developing newbusiness models and value propositions.For example in banking, this is what HSBCdid in the UK when it developed its highlysuccessful First Direct telephone, and nowinternet, banking service in the 1990s. Not only was branding separate from itsthen ‘Midland/HSBC’ traditional branchbanking brand but the service operatedlargely independently of the parentcompany. Another route for separation isby outsourcing to a community of newentrants and smaller firms. The incumbentutility can then nurture these innovationsand help scale up the emerging dominantproducts or services.

Avoiding a capital crunch

As well as innovating, utilities need tomake sure that a weakened investmentcase doesn’t close off growth routes.Energy transformation is eroding thecapacity of utilities as investors. Some havesuffered rating downgrades. Others havehad to deleverage, reducing debt relativeto cashflow, to maintain credit ratings.These developments, primarily affectingcompanies in Europe and some in Africa,come at a time when they also face majorcapital investment challenges to replaceageing infrastructure as well as makeenergy transformation investments such as smart grids. In parallel, many suchutilities need to deploy capital to pursuediversification away from mature, low orflat-growth markets towards fast-growthregions.

Global competition for capital is intense,and all the more so because the capitalconstraints faced in some markets stand incontrast to other markets. In the US, thechallenge for power companies has been to convince investors that peak stockvaluations can be maintained, a key part of which will be to demonstrate that theycan negotiate the challenges of energytransformation without facing the kind of conditions that have engulfed theirEuropean peers. Innovative and alternative approaches to financing arebecoming more commonplace in thesector. Partnerships and strategic tie-upswith sovereign wealth funds, insuranceand pension funds, already becoming more numerous, are likely to increase in importance.

“We expect that growth will become more innovation-dependent, with success coming to those companies that use innovative technologies, products, services, processes, and business models to gain competitive advantage.”

“Sector transformation could shrink the role of some power utility companies to providers of back-up power.”


No-one can predict the future but it is important that companies take a clear viewon the ways in which their marketplace is likely to evolve and their company’splace in the various different possible scenarios.

Looking ahead: future marketand business models

At its heart, this means addressing keyquestions such as:

• What will future market design look like?

• What are the implications for my company’s purpose, role and positioning?

• What are the business models that I need to pursue?

PwC’s energy transformation programmeincludes joint activities with companies to support their future strategies and map out the risks and opportunitiesinvolved.

• What are the implications for people and operational change?

• What will existing and new competitors be doing?

• How best to continue to deliver shareholder value throughout the transformation process?

Figure 2: The power sector has reached an inflection point where its future direction is much less predictable

1970 1990 2010 2030

Broadindustrialisation

Arab oilembargo

Expansion ofnuclear and gasgeneration

Emergenceof newtechnologies

Demanddestruction

Marketreform andliberalisation

‘Golden age’ of utility reinvention?

Flat and declining grid value?

‘Death spiral’ from disintermediation, technology disruption and customerevolution?

Few disruptive elements Less predictable future

Fukushimanuclearemergency


Green command and control

The Green Command and Control marketscenario represents a market in whichgovernment owns and operates theenergy sector and mandates the adoptionof renewable generation and digitaltechnology.

In this scenario, we see vertical integrationas the norm (particularly betweengeneration and retail), and investmentdecisions made as a response to regulatorydirection. It is a market in whichrenewables may be cost-competitive orsupported under renewable policyinitiatives, whilst stranded thermal assetsmay remain operational even when privatesector owners would have taken closuredecisions. Ongoing capital investmentwould be subject to policy approval andwould feed into regulated tariffs.

The market may combine a central gridwith distributed networks where the lattersupport social policy initiatives such asrural electrification or reducing the level ofcapital investment in major transmissioninfrastructure. There is likely to be anincreased level of investment indistribution networks to support back-upcapacity in localised areas of the grid.Consumer tariffs will reflect policydecisions and recovery of stranded costs,and may be smeared across central anddistributed networks.

There may be some limited opportunitiesfor new market entrants – potentially asoutsource partners supporting state-ownedcompanies with operations of distributednetworks, or as compliance advisors to the regulator supporting tariffdeterminations and investment casebusiness approvals. Outsourcing supportopportunities might offer local small-scaleas well as large project opportunities. For example, in South Africa theDepartment of Energy has mandated theroll-out of a national solar water heaterprogramme with the goal of one millioninstallations on households andcommercial buildings over a period of five years, providing significant potentialfor local capacity-building.

‘Business as usual’ with the maintenance of a classic centralised ‘command andcontrol’ energy system may continue to be an option for some countries,although we expect to see an increasedfocus on technology and innovation asthis model develops. But already over thelast two decades or so, many countrieshave moved away from this ‘classicmodel’ and, through a combination ofregulator-led and market-led innovation,have created markets characterised bydifferent ownership structures withvarying degrees of market liberalisation,customer choice and technologyadoption.

Current change has so far, on the whole,been incremental and stopped short of‘transformative change’, although many would see aspects of currentdevelopments in Europe astransformative. But we believe that, if the pace of innovation leads towidespread adoption of renewable andsmart energy technologies, we are likelyto see the emergence of a number of newmarket models. Each market scenario can be described by a unique set ofcharacteristics and illustrates differentpoints along a series of transformationcurves. We have considered a wide range of characteristics in developing the scenarios, including ownershipstructures, the level of adoption ofrenewable technology, level ofderegulation, level of engagement in the wholesale market by customers,regulatory and policy involvement inmarket structure and operations, use ofdigital media and the mix of large-scaleand small-scale generation.

We outline below four new marketscenarios which represent transformativechange – a significant shift from wherewe are today. Power utility companies are unlikely to be in only one of thesescenarios but, instead, experience a blend of them with perhaps one beingdominant. The most appropriate path for any given company will depend onlocal, as well as global, factors.

Future marketdesignsWe foresee a number of market modelsemerging. Unlike markets for manyother products and services, the role of governments is significant given theimportance of power to everyday lifeand economic activity. So the exactmarket shape for individual countrieswill depend on policy direction as wellas on other local factors such as theextent of competition and customerchoice, access to fuel, the nature ofexisting infrastructure, the degree of electrification and degrees ofinterconnectedness or isolation fromneighbouring territories. And, ofcourse, a crucial factor will be the pace of global technological change.


How might this market arise? We see two routes. In the first, it mightdevelop directly from a traditional,centralised “classic model” where thegovernment takes policy decisions to investin renewable generation, smart technologyand local energy hubs. In the second, themarket may have undergone some degreeof liberalisation and/or new entrants ingeneration or retail, but policy decisionsresult in control reverting to the publicsector. This might be the case, for example,in the event of a political decision torenationalise or when a company fails andprivate sector entities are not prepared tostep in.

We would see private sector players exiting the market and may see mergers of generators and/or retailers to supportgovernment policy preferences (forexample, a state-owned generatoroperating stranded assets as back-up for renewable generation, another state-owned company operating small-scalerenewable generation and supplyingcustomers within distributed networks).

Which countries might adopt this market scenario? In our view, a green command and controlmarket scenario is most likely to evolve inmarkets where there remains significantpublic ownership, single-buyer models orlimited interest from the private sector ininvestment, e.g. in China, selected SouthAmerican, Middle Eastern and Africanmarkets. Further, in some countries,renewable energy dominates the energymix, such as hydropower in Bhutan orNorway. In such situations, it makes sensefor governments to encourage green powerfor own use, thereby reducing any importof fossil fuels, and for earning extrarevenue from export of green power.

Ultra distributed generation

The Ultra Distributed Generation (DG)market scenario represents a market inwhich generators have invested indistributed renewable generation, withinvestment decisions based on policyincentives and/or economic businesscases. It is a market with full unbundlingand strong customer engagement, both in retail and as micro-generators.

Market operation becomes more complexfor both transmission and distributionoperators, given the increased volume ofdistributed and renewable generation andthe continued operation of large-scalethermal generation, but remains centrallyoperated and does not fragment.Regulatory oversight and revenue pricecontrols are likely to address efficiency ofsystem operation and equitable treatmentof generation in dispatch and systemsupport. In particular, determining whichmarket participants pay for the centraltransmission grid becomes a criticalregulatory question.

We expect to see stranded thermal assetsas distributed resources become cost-competitive and, in part, due to the lowerflexibility of some distributed generationand the ensuing volatility of wholesaleprices. Risks to security of supply increaseand we are likely to see continued policyand regulatory intervention to maintain anappropriate level of thermal capacity onthe system. Generators with distributedcapacity will have increased volumes ofoperational data to manage as they matchtheir physical and trading positions.Retailers will need to continually reviewtheir trading and hedging strategies tomanage price volatility and to determinethe tariffs that can be offered to differentcategories of consumers – particularlyprosumers who offset their demandthrough micro-generation.

This scenario presents considerablechallenges for system operators withcomplexities such as reverse flows, voltagemanagement, fault maintenance etc.,placing even greater importance on datamanagement capabilities. Generators,transmission system operators (TSOs) anddistribution system operators (DSOs) willneed to revisit the capability and skillsrequired from their staff and we expect tosee an increased emphasis on technologyspecialists over time.

There are significant opportunities for new entrants in addition to investment inrenewable and distributed generation. We expect to see growth in participantsproviding aggregation services, both forsmall-scale distributed generation and forload management. Offshore TSOs orprivate sector, localised DSOs linked to aportfolio of distributed generation willbecome more prevalent. There may be newroles for managing the interconnectionbetween local networks or for managingand interpreting generation data.

How might this market arise?We see the main driver of this model being policy decisions which result in asignificant increase in small-scaledistributed capacity over a relatively shortperiod of time. This might be led byretailers encouraging their consumers toreduce demand through becoming aprosumer owning micro-generation, byproactive consumers or by generatorssizing investments to meet local communityneeds at a distribution grid level.

Integrated investments in newcommunities that include distributedgeneration and a back-up connection tothe grid also support an Ultra DG marketscenario. The Ultra DG model could alsoarise through an evolving spiral ofdevelopments, where there has been noconscious policy decision but investmentsover time have led to the closure ofuneconomic thermal plant, prosumersreducing local demand requirements andrebalancing the system operations roles of the TSO and DSOs.

Which countries might adoptthis market scenario? In our view, an Ultra DG model is mostlikely to arise in markets where there isalready significant investment in distributedgeneration but where there is a strongnational infrastructure supported by policyobjectives, e.g. Germany or California. It could also arise in markets where theopportunity for significant investment insmall-scale renewables or larger-scaledistributed generation could support localnetworks or isolated developments whichwould only require periodic back-upgeneration from the transmission grid, e.g. Middle Eastern markets or Australia.


Local energy systems

The Local Energy Systems marketscenario represents a market in which we see significant fragmentation of theexisting transmission and distributiongrids and local communities demandgreater control over their energy supply,or a market in which a local approach isadopted for serving remote communities.

The market is likely to have undergone full unbundling and experienced strongcustomer engagement, both as consumersand micro-generators, but recognises thebenefits of vertical integration for off-gridsolutions. Financial viability of distributedgeneration and distributed grids is a prerequisite. Strong policy support forfragmentation is required, either to allowlocal initiatives or to encourage andincentivise local communities andbusinesses to take control and build andoperate their own local energy systems.

In its purest form, there would be a limitedrole for large-scale generation connectedto a central transmission grid. It wouldcontinue to support industrial customerswith large, secure, long-term loads andwould be able to provide back-up forsecurity of supply reasons. We wouldexpect significant levels of strandedcapacity, which may close without policysupport.

We see generators focusing on developingand operating small, distributedgeneration assets, sized to supportdomestic communities or commercialcustomers and most likely connected todistribution networks. Tariffs may wellvary across the country as the costs ofsupply would be based on the localgeneration assets. Customers may be ableto invest in the generation assets so thatthey have an incentive to manage theirdemand at times when the local capacitymargin is tight.

We see a need for new approaches tosecurity of supply, which we would expectto be provided by DSOs in the main,providing interconnections betweenlocalised grids. The role for the TSO wouldbe greatly reduced and would result insignificant overcapacity in transmission.

The market provides a new set ofchallenges for the regulator, particularly in relation to a customer protectionobligation. Regulators will need to addressinterconnections between local energysystems, review the risk of disconnectionand put in place reporting oversightmechanisms to check that customers arenot being overcharged. Where a territoryhas existing transmission capacity, theregulator might also need to determineappropriate charging mechanisms for thetransmission grid, both in terms of whichcustomers should pay and what proportionof the stranded capacity should beincluded.

There are a number of new roles that could arise within a Local Energy Systemsmarket. Generators may wish to becomelocal energy operators providing a fullrange of generation, network and retailservices across a range of technologies.Technology companies are also likely tolook at the option of becoming localenergy system operators. Marketparticipants may look at the opportunitiesto link the power and gas markets. Grid companies may decide to provideO&M services to micro-grids to maintainthe capability and skill base required tosupport their stranded assets.

How might this market arise? We see the main driver for Local EnergySystems to be policy decisions, based on an objective to increase ruralelectrification, reduce the emissionscaused by using diesel generation inisolated communities or to deal withcurrently unreliable/intermittent supply.Coupled with technology improvements in electricity storage and reductions in the capital investment costs of solar andwind generation (for example), tariffsbecome affordable and Local EnergySystems become practical.

Which countries might adopt this market scenario? We see Local Energy Systems as havingmost relevance in developing countrieswithout a strong national transmissioninfrastructure. The fall in costs ofrenewable generation and the improvedtechnology to support distributed gridsmeans that isolated communities could beelectrified without the need for majorcapital investment in transmission or fuelinfrastructure. We would expect to seecombinations of solar, wind, biomass andstorage technologies used in thesemarkets, for example in Africa, where anumber of such systems have already beenput into place. But in a country like India,where almost all generation capacity isgrid-connected, local energy systems based on renewable energy are likely tobe limited to island systems such as in the Sundarbans or Lakshadweep.

We see Local Energy Systems as beingparticularly suitable for isolated islandsystems, such as are found in Indonesiaand the Philippines. The prerequisite islikely to be cost-competitive storagetechnology to support distributedrenewable technology, CHP generationand limited thermal generation. The benefits would be in replacing carbon-intensive diesel generation, forexample in Alaska or the Philippines. In India, a new local approach to energy is taking root in some states in the form of retail supply outsourcing, whereby theDSO contracts out part of its licence areato franchisees.


Regional supergrid

The Regional Supergrid market scenario represents a market which ispan-national and designed to transmitrenewable energy over long distances. It is likely to embrace some degree ofunbundling and customer choice. It requires large-scale renewablegeneration, interconnectors, large-scalestorage and significant levels oftransmission capacity.

The main challenge that will need to beovercome is regional regulation thatapplies across borders. National regulatorswill have limited responsibilities and willbe required to oversee national marketswithin the regional context. In somesituations, geopolitical risk will also be amajor factor, for example if supply relieson generation located in neighbouring butpolitically sensitive regions.

We will see a new approach to generationinvestment decisions, where generators orgovernments will consider a regional merit order and interconnector accessrequirements as part of their business caseassessment (for example, South Africa andthe Democratic Republic of the Congo inthe case of the Inga hydro dam project).The emphasis on large-scale renewablegeneration means that we are likely to seestranded thermal assets, which wouldrequire regulatory support to remainavailable for national or local grid supportfor security of supply reasons.

We will see a shift in approach fromretailers, who will either become regionalretailers or will enter into partnerships to access customers in other countries. Brand management and customersegmentation will become more complexas retailers embed their products andservices in multiple countries.

Both generators and retailers will place an increased emphasis on trading and risk management. The presence ofconstraints, for example through limitedinterconnector capacity, means thatlocational pricing is the most likelyoutcome, so market participants will needto manage both national market prices andmarket prices in neighbouring countries.

The intermittent nature of some renewablegeneration is likely to mean volatility inmarket prices, particularly with long-distance transmission, and managing thepricing differentials between differentcountries will be crucial. Skilled regionaltraders will be vital, particularly formerchant generators.

National TSOs will enter into agreementswith other TSOs in the region or, ifagreement can be reached betweencountries, a regional TSO will manage theoverall system. Decisions on where newtransmission capacity is required toimprove the efficiency of the system will be taken on a regional basis, and willrequire a new charter to be developed to lay out the objectives, rules andoperational processes of the regionalmarket. Distribution businesses willremain national or local but are likely torequire restructuring so that their focusshifts to management of small-scale localrenewables and of the interface with thetransmission grid.

How might this market arise?The main driver for a Regional Supergridis policy, jointly created and pursued byneighbouring governments who recognisethe benefits of harnessing renewablegeneration sources and linking them todistant demand centres. It could arise frommarket coupling initiatives, where thegovernments and regulators determinethat each market would become moreefficient and pricing signals would becomemore appropriate if the two marketsbecame one.

Which countries might adoptthis market scenario?We see forms of a Regional Supergrid, but without common regulation in theUSA, so there is the potential for furtheraggregation and adoption of commonapproaches. Looking at where a RegionalSupergrid could arise through investment,we think that the Middle East has thepotential to adopt this model. The EU has an objective of a single Europeanelectricity market which would effectivelybecome a Regional Supergrid, but thecomplexities of implementing commonregulation across multiple countries withdifferent legal structures makes the puremodel less likely to be achievable. A hybridmarket adopting certain aspects would bea more realistic option.

India has proposed the development of arenewable energy grid, the ‘Green EnergyCorridor’, with support from the Germangovernment. It aims to handle growth inrenewable energy from the current 30GWto 72GW by 2022. In southern Africa, withthe support of the Southern Africa PowerPool (SAPP) and the different utilities inthe region, a supergrid called Zizabona is being established between Zimbabwe,Zambia, Botswana and Namibia, providingfor the import/export of electricity viaeither PPAs or day-ahead trading throughthe SAPP.

Combined models

Each of the four potential market scenariosoutlined above represents a transformativemove away from current markets. Thereare common themes across the models and we can see how, in practice, countriesmight adopt certain components frommore than one model.

The seeds are in place for transformativechange but there is still a lot of inertia in the system. The pace of change will vary from territory to territory. Some will see a gradual evolution whileothers will see parts of the sectorundergoing faster transformative change.Such transformative change might bedefined by locality or by the part of thevalue chain.

We believe that these transformativeenergy market scenarios provide a futurein which market participants and newentrants can thrive and the role of policymakers and regulators is clear. The mostappropriate market scenario will come out of an assessment of the impact of themajor disruptors and the local factors thatapply in each individual situation.


Within the next decade we anticipate that step-change milestones will be reached in at least some of the key disruptivetechnologies – grid parity of solardistributed generation, lower cost andmass-scale storage solutions, vibrant and secure micro-grids, attractive electric vehicle options and ubiquitousbehind-the-meter devices. In this newtechnology-enabled, customer-engagedmarketplace, companies need to definetheir desired purpose (see figure 3). We foresee a distinction between energysuppliers, integrators, enablers andoptimisers with different points of focusalong the value chain.

Incumbents and new entrants need to ask themselves how they intend to position themselves as market participants, i.e. the ‘role’ they will play in market development, customerengagement and business execution.Companies have distinct options on thisspectrum ranging from ‘passive and market-following’ to ‘innovative andmarket-making’. Defining the future role of the entity is fundamental to shaping the business model to deliver onaspirations.

In defining future business models,companies need to first understand andchallenge their company purpose andpositioning in the markets of the future.We call this ‘blueprinting the future’ and it consists of several fundamental steps,starting with defining ‘where to play’ interms of business segments, markets,products and, services (see figure 4). Core, adjacent and growth marketparticipation areas are assessed based on attractiveness, capability to competeand potential for profitable success. Next comes assessing ‘how to play’ in these selected areas, which defines the go-to-market strategies to be adopted byparticipants in pursuing their marketaspirations, e.g. new products, innovativeunbundled pricing.

We then focus on the most importantdimension of the blueprint, ‘how to win’.This element defines the particulartailored approach that is most appropriatefor a company to achieve competitivemarket success, e.g. partnering or channelexpansion.

Future utilitybusiness modelsCompanies need to determine the future direction of their own markets, how these markets are affected bytechnological advancement and whatthis means for their business strategies.While the urgency of their responsesmay vary by location and value chainpresence, we believe companies can’tafford to wait as the next decade is crucial.

Figure 3: Future role evolution

EnablerIntegratorEnergy Supplier

Transmission/distribution

Distribution/customer

Customer

OptimiserEmergent roles

Primary segment focus

Key focus areas

‘System-focused’ ‘Value-focused’ ‘Insight-focused’

• ‘Will do’ regardless of new area participation

• ‘Should’ migrate into depending on role

• ‘Could’ evolve into as new business models mature

• Facilitating grid interconnection withother transmission developers

• Extending the deployment of technologies or equipment into the distribution network

Generation

‘Asset-focused’

• ‘Have to do’ if assetheavy or short in supply

• Ensuring assets are optimised in the market to match price signals

• Achieving the right balance of asset-based and notional transactions within risk parameters

• Enhancing the value of the grid to all stakeholders

• Addressing how to leverage technologyto enhance system performance and customer engagement

• Enabling customers to better leverage behind-the-metertechnology

• Broader engagementwith the customer by providing value through advanced data analytics


To fully evaluate the above choices,companies need to examine their currentcore capabilities against the type and level necessary to effectively compete andprosper in a more decentralised anddisaggregated marketplace. In particular,incumbents and new entrants need to takestock of which capabilities are distinctiveand differentiable, e.g. asset managementor regulatory prowess, and which may need to be developed or strengthened, e.g. innovation or commerciality.

The energy value chain of the future willbe more interconnected than ever before.This value chain forms an integratedecosystem of unique elements that arehighly interrelated, notwithstanding thespecific focus of these individual elements(see figure 5). Incumbents will need tofocus on extending beyond independentviews of each value chain element into a more integrated view of how theseelements can interact with each other in the future, e.g. how the benefits ofincreased knowledge about systemperformance can bridge the gap toenhance the customer experience. Non-traditional entrants will need todetermine how they interact betweenincumbents and customers in a mannerthat does not ‘island’ assets or ‘diminish’customer relationships. Just as we are now entering the era of the ‘connectedcustomer’, we are also seeing the broaderemergence of the integrated grid.

Figure 4: ‘Blueprinting the future’

Figure 5: A networked model

Engage with customers

Actively manage the grid

Newmarket

paradigm

Distribution

Storage

Storage used to manage grid

Retail

Determine our ‘purpose’ and desired outcomes, e.g. ‘end-to-end’ participationor selected areas

Micro-grids Customers gooff grid

Customer Become an activeparticipant

New entrants Offer new products and services

Demandresponse

Customers becomeactive consumers

Distributedgeneration

Customers becomeproducers

Bulkgeneration

Focus on baseload

TransmissionLink supply

to load

‘Where do we play’?

‘How do we play’?

‘How do we win’?

Establish the ‘positioning’ we wish to achieve, e.g. ‘full offering portfolio orhighest value product

Define the ‘role’ we would like to perform, e.g. sole player or ‘partner of partners’

Future strategy

How competitorschoose to

play impactsthese choices


Figure 6: Business model choices

The range of futurebusiness models

Much comment has been directed at thebusiness model of the future. We do notbelieve there will be a single winningbusiness model but rather that there willbe a range of business models that willdeliver success in the new marketenvironments. Just as we see a number of transformational market models, we see a range of business models that buildon existing models or fill new service orproduct needs. We outline eight businessmodels which we believe will emergeindividually or in combination (see figure6). These individual business models coverthe full power sector value chain; each hasindividual characteristics and several arebased on integration and/or collaborationwith non-traditional partners.

Some market participants – incumbents ornew entrants – may be prevented fromplaying in all segments, while others mayseek to specialise in selected segments orintegrate into broader market areas.Whatever the case, the adopted businessmodel(s) need(s) to be tailored to enablecompanies to succeed in three key ways –strategically, financially and competitively.

Traditional core model

Alternative business models of the futuremay be very different from the traditionalmodel that dominated power and gasdelivery for decades. In the past, operatingan integrated utility from generationthrough to customer supply was wellunderstood because the utility controlledthe entire value chain. However, thismodel has been supplanted in manycountries through market restructuringand may be rendered further obsoletethrough the convergence of distributedtechnology and customer engagement.

In this traditional model, both tangibleassets and franchise customers wereconsidered important to preserve thebenefits of physical integration, economiesof scale and access simplicity. As policiesencouraging competition emerge, to takeadvantage of market options or regulatorymandates, specific segments of the valuechain became available for specialisationand for new entry. Now, unbundlingopportunities are starting to extend deeperinto the value chain and enable morespecialist participation.

Value chain

More integrated Less integrated

Asset-based Service-based

Generation T&D Retail

Traditional core business

Pure playmerchant

Networkmanager

Productinnovator

Value-addedenabler

‘Virtual utility’

‘Partner ofpartners’Gentailer

Grid developer


In the traditional model, makingmoney was easy to understand – investand earn a return on invested capital.In emerging business models, althoughwe consider that this feature may stillapply in selected segments, we believe a greater emphasis will be placed onobtaining higher margin fromprices/revenues rather than cost reduction to get higher earnings and profit growth.

Depending on how a traditional utilitythinks the electricity industry may evolvein its country/region and what marketmodels may emerge, it needs to evaluatewhere to play across the value chain.Should a traditional utility leveragemultiple business models? And if so, which ones and how should theytransform their business to be successful?

We have identified eight alternativebusiness models, which we describe belowwith respect to their scope, rationale, basisfor competition, and source of earnings(see figure 7). This should help utilitiesthink through which business modeloptions might be right for them and thekey decisions required to enable them todevelop their new market position insufficient time.

Figure 7: Business model elements

“Beyond the traditional model, we foresee eight different future business models that could emerge either individually or in combination.”

Traditional core business

Gentailer

Pure play merchant

Grid developer

Network manager

Product innovator

‘Partner of partners’

Value-added enabler

‘Virtual’ utility

Assets – customers

Assets – customers

Assets

Assets

Assets

Customers

Customers

Customers

Customers

Generation – T&D – retail

Generation – retail

Generation

Transmission

Transmission – distribution

Retail

Retail

Retail

Distribution – retail

ROIC

Competitive margin

Competitive margin

Regulated ROIC

Regulated ROIC

Competitive margin

Competitive margin

Competitive margin

Competitive margin

Business models Business focus Business alignment Profitability basis


DescriptionA gentailer utility operates at both ends of the value chain by owning generationassets and selling retail energy tocustomers in a competitive market.Gentailers pay a charge to transmissionand distribution system operators todeliver this power and also buy and sellenergy on the futures and spot markets to manage any forecast or real-timedifferences between load and supply. This business model is a by-product of thedesign of the local market and not relevantto all markets. Advantages of the gentailermodel are that it provides a natural hedgefor the business, i.e. a ‘sink’ for capacitywhen the generator is ‘long’ and a ‘source’for the retail business when it is ‘short’. A key risk to the gentailer model is thatretail consumers may gradually switch tocompetitors or invest in behind-the-meterdistributed energy resources, which couldpotentially strand part of the gentailer’sgeneration assets over time.

Market/model examples The gentailer model is typically applicablein markets where the generation and retail portions of the value chain arecompetitive and the transmission anddistribution companies operate as aregulated monopoly. Australia, the UK and New Zealand are countries that havesuccessfully deployed this model. In NewZealand, the five major generators are also the top five retailers. This type ofmarket development often has regulatoryimplications which are likely to influencefuture development of this business model.

This model has also developed in areaswhere traditional IPPs have moved intoretail energy sales as energy markets havederegulated. NRG Energy and NextEraEnergy are two examples of utilitiesoperating in this model in the UnitedStates that developed or acquired retailcapabilities to complement theirgeneration positions.

CapabilitiesOn the generation side, a successfulgentailer has strong capabilities in demandand market insights, project development,project finance and asset management.When planning to add new capacity, agentailer applies its strong marketknowledge to determine cost-competitivegeneration technology choices based onfuel markets, operating constraints andconsumer preferences. On the retail side, a successful gentailer has strongcapabilities in energy trading and hedging,origination and product development,pricing, customer acquisition and customermanagement. Strengths in these areasenable a gentailer to cost-effectivelyacquire and maintain customers whiledelivering higher margin services.

What utilities should do nowMonitor and understand the way differentcustomer segments use smart technologyand assess how to harness thesepreferences into mobile and/or tariffsolutions. Identify potential partners tohelp develop behind-the-meter distributedenergy resource business plans. Reviewmake/buy decisions to support their assetposition and investment requirementsunder alternative market scenarios todetermine what generation products tooffer in the future. Invest in understandingcustomer segmentation and what thatmeans for switching rates and retainingthe most profitable customers.

• High penetration of customer or third-party owned behind-the-meter distributed energy resources

• Regulatory change enabling transmission and distribution operators to develop, own, and operate distributed energy resources

• New entrants offering products/services that increase customer engagement in managing their energy needs through mobile tools or social media

Maximising competitive position against potential competitive threats

• Develop a behind-the-meter distributed energy resource business, organically or through networks partnerships or acquisitions

• Increase customer engagement via new energy management solution offerings and intelligent tools

• Develop alternative pricing packages and approaches that provide greater optionality or risk/reward tariffs to customers

• Offer, bundle, price, and cost-effectively deliver a wide range of energy products (low cost, high renewables, local premise-based generation etc.) with selected value-enhancing partners

• Energy trading approaches to hedge business risk

• Cost-effectively plan, develop, finance, construct, and operate the right asset mix

Competitor threats addressedGentailer actions Future gentailer profitability drivers

1Gentailer model

Relevance for transformative market scenarios

Green command and control Low

Regional supergrid Medium

Ultra distributed generation High

Local energy systems Low


2Pure play merchant model


Green command and control Medium


Ultra distributed generation Medium


DescriptionA pure play merchant utility owns andoperates generation assets and sells powerinto competitive wholesale markets atmarket clearing prices, or throughnegotiated bilateral contracts with othergenerators or large industrial consumers.This entity occupies a very narrow portionof the value chain and competes within theriskiest part of the business when marketsare volatile and positions are uncovered.Assets are built and financed by investorson a speculative basis, pre-contracted inpart or in full or acquired from anothergenerator. Pure play merchants havetraditionally developed baseload orpeaking plants with mature generationtechnologies from gas, which also enablesparticipation in ancillary grid servicesmarkets. However, wind merchant plantshave increased in popularity over the lastdecade and solar merchant plants arestarting to emerge.

Market/model examples Merchant players prefer liquid marketswith rising and/or high peak wholesaleenergy prices and high price volatility.Examples include deregulated regions likeTexas, California and New England in theUS and countries in emerging markets likeChile. Areas with low natural gas and coalprices are typically not well suited formerchant players because these low-costinputs often depress wholesale energyprices and do not provide significant‘spread’ for merchants to leverage.

CapabilitiesSimilar to a gentailer, a successful pure play merchant utility has strongcapabilities in demand and marketinsights, project development, projectfinance and asset management.Additionally, a successful player has strong market origination, trading,hedging and risk management capabilities, including the ability toexecute a variety of complicated purchase and sales agreements (e.g. using derivatives) that effectively lock in the price of fuel and electricity to eliminate as much market risk aspossible. As more low-carbon energyenters a market, mitigating market riskbecomes more challenging because market prices become more volatile, so a merchant’s strategy needs to beflexible and adaptive.

What utilities should do nowImplement world-class operationalprocedures to minimise costs ofoperations, manage price and volume risk exposure. Develop robust investmentplans to create a balanced generationportfolio, either across technologies ormarkets. Investigate alternative products to offer from the generation portfolio tomitigate against market change or meritorder structure.

• High penetration of behind-the-meter distributed energy resources and solutions like demand response that reduce peak demand

• Development of disruptive grid-level solutions such as energy storage that compete with merchant generators

• Development of ultra-efficient generation and excellence in operations


• Assess feasibility of expanding capacity of traditional fossil fuel plants with solar or energy storage to expand ability to play using same grid interconnection

• Explore options for developing distribution level or behind-the-meter projects (e.g. solar, charging infrastructure).

• Evaluate investment to enhance plant operational capabilities to capture value of flexible thermal capacity

• Identification of profitable regions for future merchant potential and key early investments (e.g. land)

• Ability to cost-effectively plan, develop, finance, construct, and operate the right asset mix

• Strong analytics and energy trading capabilities to hedge business risk

Competitor threats addressedMerchant actions Future merchant profitability drivers


DescriptionThis utility acquires, develops/constructs,owns and maintains transmission assetsthat connect generators to distributionsystem operators. In most cases, it operatesas a natural monopoly, although there may be multiple grid developers within asingle market. Some grid developers seekto build new transmission lines to connectremote renewable generation to loadcentres, while others will also maintainlines and infrastructure that have been inoperation for years. If a grid developeroperates in a wholesale electricity market,it must manage the stability of the powersystem in real time and coordinateelectricity supply and demand to avoidimbalances and supply interruptions.

Grid developers must constantly assess the ability of their systems to adequatelymeet current and future needs and plancost-effective system upgrades to meetthose needs, usually governed byregulation which may incorporateincentive mechanisms. Where thesetransmission developers construct ormaintain assets with an organised regional transmission operator present,close coordination with that operator is necessary to achieve grid coordinationand support the regional market model.

Market/model examples Grid developers are typically establishedby regulation in areas with existinginfrastructure. Examples of this modelinclude transmission system operators(TSOs) in Europe and independent systemoperators (ISOs) in the US. Additionally,new grid developers may be formed inareas that lack sufficient transmissioninfrastructure between generation andload centres.

For example, a grid developer may becreated to build and operate transmissionlines between remote generation assets like a hydropower facility or wind farmand a distant urban area, or to providenew transmission infrastructure wherethere are transmission constraints.Examples of the newer grid developers inthe US include Electric Transmission Texas(ETT) and Clean Line Energy Partners.

CapabilitiesA successful grid developer has a verystrong operating track record and excellentcapabilities in designing, operating andmaintaining high-voltage transmissionlines and supporting infrastructure.

In wholesale markets, they have verystrong capabilities for managing electricitydemand and supply in real time and inensuring reliability standards are fulfilled.Grid developers are also very good atengaging with key stakeholders, includinglandowners, communities, local and stateofficials, customers and equipmentsuppliers to facilitate siting and permitting.Newer grid developers typically havestrong relationships with investors and joint venture partners to enable access tolow-cost capital and to leverage creativefinancing and ownership arrangements. As remote generation capacity increasesand a larger proportion of connections are made at distribution network levels,the number of interfaces a grid developerneeds to manage will increase and theobligations and responsibilities willbecome more complex to oversee.

What utilities should do nowIdentify new locations (within their ownmarket or in new markets) for large-scalerenewable generation, flexible thermalgeneration and associated transmissionbuild. Work with alternative owner classes,e.g. financial sponsors, to shape marketbidding processes where competitivetransmission protocols will exist in thefuture. Review existing contracting andprocurement procedures to assess whetherthey are maximising value for money, risk allocation and whether they reflectregulatory settlements. Streamline gridconnection processes to improve resourceproductivity and lower operating costs.Consider whether alliances with DSOs may provide economics of scale andincreased scope for new investment.

• High penetration of distributed energy resources in urban areas combined with strong distribution system operators and micro-grids, reducing the need for transmission support

• Other grid developers obtaining first-mover advantages in new markets

• Regulatory imposed incentives where risks cannot be managed by the grid developer alone


• Develop close relationships with distribution system operators and regulators to support large-scale generation growth plans

• Convince investment partners to invest in large scale, low-cost renewable project developments that require new transmission to urban areas

• Implement world-class operational procedures toimprove cost-effectiveness and develop new forms of contracts with generators, load managers and the supply chain that incentivise strong performance and cost management

• Access to low-cost capital

• Partnering with generation developers to expand project access

• Robust operations to cost effectively manage transmission and infrastructure upgrades

• Identification of profitable regions for future expansion

• Innovative contracting with the supply chain to manage risks

Competitor threats addressedGrid developer actions Future grid developer profitability drivers

3Grid developer model


Green command and control High

Regional supergrid High

Ultra distributed generation Low



DescriptionA network manager operates transmissionand distribution assets and provides accessto their networks to generators and retailservice providers. Similar to someincumbent grid developers, they typicallyoperate as natural monopolies. Networkmanagers also manage power stability inthe network in real time and coordinateelectricity supply and demand to avoidimbalances and supply interruptions. A new role for network managers isemerging in the area of an ISO-like entity that will assume responsibilities as a ‘distribution system operator’ andhave specific, expanded responsibilities for network integration of incumbentsystems and distributed energy resources.As distributed generation increases, theopportunity for an entity to manage allinterfaces between local energy systemsand traditional distribution gridsincreases.

Market/model examples The network manager models typicallyexist in regions where the generation andretail portions of the value chain arecompetitive and the transmission anddistribution companies operate as aregulated monopoly. Australia, the UK and New Zealand are countries that have successfully deployed this model,though with the expansion of distributedgeneration and micro-grids, we expectthis role to expand and become morerelevant in many global regions.

CapabilitiesSimilar to grid developers, networkmanagers have strong capabilities indesigning, constructing, operating andmaintaining transmission and distributionlines and supporting infrastructure. They also have strong capabilities formanaging electricity demand and supply in real time and integrating power fromdifferent central and distributedgeneration resources. These networkmanagers also have deep skills in systemoperations data analytics that can enable insight into asset and networkperformance and optimisation. Thesecapabilities are provided through thedeployment of ‘smart grid technologies’that utilise multiple sensors to monitor and collect system performance data toenable enhanced analysis of power flows, equipment failure risks and assetdeterioration.

What utilities should do nowInvest in the evolution of the network and the deployment of ‘smart gridtechnologies’ throughout the system. Move toward the next stage of ‘big data’management and the analytical evaluationof power quality, equipment failure, circuitrisks and investment priorities. Anticipatethe deployment of distributed energyresources, i.e. storage, micro-grids,distributed generation, electric vehicles,etc., and prepare for integration into thenetwork and management of all deployedresource impacts. In some markets,instigate discussions with the regulator to develop and implement appropriatemechanisms to facilitate the new services.Implement world-class operationalprocedures to manage costs.

• High penetration of behind-the -meter distributed energy resources and micro-grids, reducing the need for a network manager to deliver power

• Regulatory mandates that create an independent entity that assumes traditional DSO roles


• Work with regulators to approve investments focused on advancing system capabilities (smart grid)

• Harden the infrastructure through targeted investment

• Advance reliability standards and awareness

• Develop partnerships withdistributed generation developers to install, operate and manage network connections

• Access to low-cost capital

• Investment recovery mechanisms

• Data analytics systems

• Predictive failure software

• Distributed energy resource integration

Competitor threats addressedNetwork manager actions Future network manager profitability drivers

4Network manager model





Local energy systems Medium


DescriptionA product innovator is a company thatoffers electricity as well as behind-the-meter products to customers. This modelfocuses on expanding the role of theenergy retailer and changing the level ofcustomer expectations. We expect behind-the-meter products to evolve into a mix of retail supply packages, e.g. the provisionof ‘green energy’ options, the developmentof service and pricing ‘packages’ that offer more flexibility to customers and the provision of behind-the-meter smartdevices, e.g. power monitors, smartthermostats. The products offered will empower the connected customer tomanage its energy control and provide alink to the network to advance insights into consumption patterns and impacts onnetwork stability. We anticipate that manyproduct innovators will seek to be activeplayers in electric vehicle charging, theprovision of premises-based infrastructureand the management of roof-top solar and fuel cell markets.

Market/model examples The product innovator model will be mostrelevant in markets where the regulatoryframework allows choice and the level ofcustomer acceptance of new technologiesand products is high. A market with a high penetration of distributed energy willbe attractive for a product innovator whocan help provide products that enable orcomplement distributed energy. Examplesof product innovators that have movedbeyond pure energy supply include DirectEnergy and TXU Energy in the US andPowershop in New Zealand.

CapabilitiesA successful product innovator will behighly effective at customer acquisitionand retention as well as cross-sellingproducts. Keeping operating costscompetitive will be essential to preservingan acceptable margin. To this end, theproduct innovator needs competitivecontracts with energy suppliers and otheroperational efficiencies, and contracts with technical asset providers for customersupport and management of faults. A keyquestion is whether the product innovatorcan succeed in offering a compelling set of products at the right price. Companiesparticipating in this space will needexceptional skills in customer knowledge,product development, channelmanagement, pricing and productbundling. Product innovators will alsoneed robust customer data analytics andbuying propensity insights to shape theright offerings to the market.

What utilities should do nowFocus on knowing their customers’ needs,their customers’ willingness to pay forsolutions, and the value of their ownbrand. Assess whether a new brand wouldbe more successful, perhaps throughpartnering with a product provider orcreating a separate business unit (orcorporate structure). Market research will provide views of what productexpansions have been successful or failedin different markets in the past, and thepotential products that could be offered insmart homes or through mobile devices. We expect that companies will enter intodiscussions with providers from othermarkets, e.g. Google Nest, to discuss how to partner around customer productdevelopment and provisioning, rather than default to automatic competition.

• Multiple new entrants offering a range of new energy products to customers

• Incumbents and new entrants innovating on specific customer offers

• Regulatory change enabling retail energy sales

• Bundling of offerings to enhance product attractiveness

• New tariffs offering risk/reward opportunities for customers


• Develop a compelling product suite including everything from the commodity to the home device

• Develop opportunities for superior products that integrate with other needs, such as home or building security or automation

• Invest in data analytics tools to develop excellence in customer acquisition and retention

• Enhance brand reputation to support product expansion

• Keep customer acquisition costs low and operating costs overall low (e.g. attractive energy supply contracts or own energy supply)

• Diversify the product portfolio beyond commodity products to preserve margin

• Establish partnerships to enhance product range

• Focus on retention of profitable and high-volume customers and minimise switching

Competitor threats addressedProduct innovator actions Future product innovator profitability drivers

5Product innovator model



Regional supergrid Low


Local energy systems High


DescriptionIncumbent utilities will need to assesswhether they have the requisite experienceand portfolio breadth to address futurecustomer needs for products and services.A ‘partner of partners’ utility is a companythat offers not only standard power andgas products and associated services, butalso a range of other energy-relatedservices, from life-cycle EV battery change-out, to home-related convenience serviceslike new service set-up coordination, tomanagement of net metering-driven gridsell-back. These services can be providedsolely by the utility but are more likely togain customer acceptance when they can be bundled through an expandedrelationship with high quality brandedproviders, like Vivint, OPower, Honeywell,GE, Tesla or Solar City.

Market/model examples The ‘partner of partners’ model is mostrelevant in markets where there is a highproliferation of energy technology andchoice and customers are seeking ways tosimplify their lifestyle while loweringupfront costs. A market with a highpenetration of distributed energy isattractive for a ‘partner of partners’ whocan help provide simple and innovativeservice-based solutions. One example of a‘partner of partners’ model is NRG Energyin the US, with its eVgo and Sunoraofferings. Few utilities have embraced this model as it involves non-traditionalpartnership arrangements.

CapabilitiesA successful ‘partner of partners’ will behighly effective not only at customeracquisition, but also provide superb servicedelivery. A distinguishing characteristic ofthese companies will be their ability toinnovate in a manner that customerswould not expect from their traditionalpower retailer. These companies will alsopossess deep customer insights and acommitment to satisfy customers across all touchpoints. A ‘partner of partners’ may find that many customers want asimple, low upfront cost approach,enabling these utilities to not only installbut also continue to own certain assets, for example installing and then servicing a solar system, or installing and continuing to manage energy management equipment. One challengewill be for companies to determine themost appropriate brand with which to go to market, overcoming customers’perceptions of the constraints on servicesthat can be successfully offered by a utility company.

What utilities should do nowEvaluate brand strength to understandconstraints and the need for innovativepartnerships. Invest in data analyticsproducts to understand customer needsand demand elasticities. Identify potentialpartners with complementary technologyor customer management products andservices and engage in introductoryconversations. Understand the impact ofnew products and services on customerswitching, margins and long-term growth objectives.

• Increasing choice and complexity in the market in terms of technologies and providers

• Multiple new entrants offering range of new energy and associated services to customers

• Incumbents and new entrants innovating on service delivery models



• Develop a compelling suite of services and identify the right solution provider partners

• Create a range of relationships with solution partners

• Expand the range of channels to market that can be leveraged

• Develop bundles of offerings targeted at the connected customer

• Enhance brand value

• Keep cost of service low,e.g. cross-selling multiple products to a single customer

• Keep customer satisfaction high by establishing clear customer service standards, pinpointing and quickly addressing customer pain points, and offering a wide range of innovative yet convenient services

Competitor threats addressed‘Partner of partners’ actions Future ‘partner of partners’profitability drivers

6‘Partner of partners’ model







DescriptionA value-added enabler leverages itsfundamental capacities for informationmanagement to expand the role that autility can provide on behalf of itscustomers. While many customers seek togain more control over energy consumptionor more choice with respect to energysupply, these customers do not share auniform desire to always be ‘hands-on’ inmaking decisions regarding their energyuse patterns. Many customers are ‘inert’, i.e. they do not easily adapt to theexistence of choice or accept the role of‘high touch’ in energy management. This iswhere an incumbent can play a new andvaluable role that is difficult for otherproviders to fulfil. Utilities collect andmanage massive amounts of data from two primary sources – system operationsand customer load. These data provideinsights into energy usage patterns that are valuable to the customer and fromsources that a customer cannot access.Thus, the utility has the ability to become a value-added energy manager forcustomers given the ‘customer knowledge’it possesses and the customers’ lack ofdesire to perform these same activitiesthemselves.

Market/model examples Most utilities have performed value-addedroles that are knowledge-based in the past,specifically around energy efficiencyprogrammes or energy management inindustrial processes. The level ofknowledge-based energy managementanticipated in this model, however,dramatically extends the scope and scale of these activities into the mass market to a much deeper level.

Manufacturers such as Honeywell andMitsubishi are focused on addressingcertain control elements, like powermonitors and smart thermostats.

Others, such as Google Nest, are playing in a similar vein with the objective ofproviding customers a ‘set and forget’experience, leveraging their massive datacentres to provide real-time and predictiveenergy consumption data. This space isrelatively wide open to utilities,particularly if they understand how toleverage system and customer data toprovide premise and action-based insightsand solutions. Utilities may also benefitfrom constraints on third party data usageunder data privacy laws, enabling them tooffer solutions or to become a partner ofchoice for solution providers.

CapabilitiesManaging large amounts of data in amanner where insights can be rapidlygleaned to guide customer energydecisions and behaviours will befundamental to success in this businessmodel. In addition, skills in customereducation and decision guidance will bekey to delivery of value to the customer.Beyond these analytical and interfacecapabilities, utilities will need to provide a customer experience where value isreadily demonstrated so that customersfeel comfortable sourcing their energydecision-making to a utility rather than a non-traditional entrant. Utilities willneed to demonstrate to customers thatthey can keep personal data secure andrisks of data leakage are remote.

What utilities should do nowUtilities looking to become a value-addedenabler need to harness the data that they already possess and determine how to extract value from this information. These companies will need to invest inadditional information technology capacityto support, leverage and protect this data.Customer acceptance of the utility in anon-traditional role will require both acampaign to expand customer awarenessand appropriate dialogue with regulatorsto establish the parameters of the value-added services to be provided.

• Low-priced/free behind-the-meter devices

• Regulatory change preventing utilisation of customer data

• Leverage of third-party brandfor market entry


• Build-out ‘big data’ platforms

• Educate customers on energy management options

• Design innovative methods for sharing customer benefit

• Deploy data synthesis methods and tools

• Develop data security protocols

• Enter into partnerships with data managers to improve competitive position

• Robust data analytics systems

• Pricing mechanisms for performance

• Decision tools for customer adoption

• High quality data security management systems and protocols

Competitor threats addressedValue-added enabler actions Future value-added enablerprofitability drivers

7Value-added enabler model







DescriptionA virtual utility can aggregate thegeneration from various distributedsystems and act as the intermediarybetween and with energy markets. A virtual utility can also act as anintegrator of non-traditional servicesprovided to customers by third parties, e.g. distributed energy resources outside its traditional service territory. In thismodel, the utility does not own assets but merely provides integration services on behalf of the supplier, provider orperformer. A primary focus of companiesin this space is to optimise the sourcing ofenergy, with respect to costs, sustainabilityand customer needs, and to manage thedistribution system. The virtual utility canalso undertake demand-side managementfunctions for commercial and industrialloads and smart residential appliances, to help balance demand and supply, eitherin the wholesale market or contractingwith the TSO or DSOs.

Market/model examples Markets with high penetration ofgeneration connected at distribution level(Germany, US states of Hawaii andCalifornia) or a regulatory setting thatoffers a high degree of freedom forcustomer choice (US states of New York orTexas, the UK and Australia) are ideal forthe virtual utility model. Island systemsand remote systems are also ideal marketsfor this business model. Utilities maycombine distributed generation with theirown generation, providing a route tomarket for independent generators andexpanding their own asset portfolios.

CapabilitiesA successful virtual utility will be highlyefficient at energy sourcing, managing or interfacing with local distributionnetworks, real-time balancing of demandand supply, and providing intelligent tools for managing customer engagement.Sustainability and increased reliability(back-up power) may be offered asadditional products, beyond the traditionalreliable and affordable grid power. To develop the additional capabilities, the virtual utility will need to buildpartnerships with developers, systemintegrators, energy service/energy savingscompanies (ESCOs), software/technologyvendors and online energy marketplaces.

What utilities should do nowCompanies wishing to become virtualutilities should develop an aggregationservice offering to small, distributedgenerators, merchant generators and loadreducers. Build capabilities to monitordevelopment of innovative technologiesand potential partners to leverage toexpand solution offerings for thewholesale market and for balancingservices. Additionally, they shoulddetermine pricing structures that provideappropriate incentives for the energyproviders and a sufficient margin for theirown operations. In some markets, utilitiesshould instigate discussions with theregulator to develop and implementappropriate mechanisms to facilitate thenew services.

• High penetration of non-utility- owned distributed generation and storage systems


• New entrants offering products/services that increase customer engagement in managing their energy needs


• Participate in distributed generation and storage projects

• Develop partnerships with technology-based providers

• Increase customer engagement via intelligent tools

• Define future roles for incumbents in concert with regulators

• Offer structure and pricing of a wide range of energy products (low cost, high renewables, local generation etc.)

• Ability to trade energy (sourcing and consumption)

• Partnering with key players across the energy value chain

Competitor threats addressedVirtual utility actions Future virtual utility profitabilitydrivers

8Virtual utility model






Where do we go from here?

Utilities may choose from a range of pathsto move forward from where they aretoday. But frankly, business model claritymay be difficult to achieve as a lot ofuncertainty exists on how future marketsmay develop and mature. And multiplemodels may need to be deployed to meetdiverse market needs or specific regulatorystructures in various countries, or evenjurisdictions. Companies will need to beagile in designing their future businessmodel and recognise that an imperfectview of the future will likely lead to anunfinished product that evolves throughtime.

Regardless of the business model chosen,utilities need to understand how they canleverage their current business positionand the external market to enhance theirfuture competitive positioning. While notalways obvious, companies have severallevers that can be used to advance theirreadiness for the future and positionthemselves for success (see figure 8).

Incumbent companies may not be asnimble or focused as some new entrants.But they have a number of potentialadvantages with regard to data, policy,relationships, pricing, partnering andregulatory decisions. These can helpleverage the successful development oftheir future business models. At the sametime, it’s important for companies torecognise that future markets are likely to create networks of participants in new partnerships and collaborations that become a norm of the go-to-marketmodels.

Companies can take advantage of theselevers to strengthen their starting point for defining their future roles and forsubsequent market participation. For example, utilities already hold largequantities of data that have not beeneffectively utilised, giving them theopportunity to add value through betterutilisation and communication of this data.

Similarly, utilities are a naturalcollaborator with regulators in the shaping of responsive policies toaccomplish public interest objectives,including how to enable customers toachieve greater control and choice.Utilities are also attractive partners tonew entrants that wish to offer high-valueproducts but do not wish to support themin the manner customers are used to from their utility.

Utilities will need to determine ‘where’ itmakes sense for them to participate in the future energy market and ‘how’ theycan best position themselves for success. No single business model will be thepanacea for utilities. Rather, they will have to be adaptive to the development of the marketplace and the evolution of the connected customer. Just as utilitiesare unsure of market direction, customersare equally uncertain of what reallymatters to them in energy decision-making. These gaps between foresight and expectations provide the ‘open seas’where utilities can forge new businessmodels that fundamentally reshape thehistorical relationship with customers andposition incumbents for a broader andmore value-creating future.

DataOwnership of grid and customerinformation can provide aknowledge platform thatenhances the value proposition.

PolicyMandates and legislation canshape the playing field andenhance the incumbent’s abilityto compete.

RelationshipsThe natural interfaces of theincumbent with customers,suppliers, stakeholders and other providers create a natural platform.

PricingShifts in traditional cost-recognition models can providegreater certainty to cost recoveryand additional flexibility to ratedesign.

PartneringEnhanced creative and deliverycapabilities can extend theincumbent’s existing platformsand market reach.

RegulatoryDecisions can provide bothoffensive (exploit) and defensive(preserve) mechanisms toenhance market competitiveness.

Figure 8: Future business model levers


Data

Pricing

Partnering Relationships

PolicyRegulatory

Key levers


Discover more

Global contacts

Norbert SchwietersGlobal Power & Utilities LeaderTelephone: +49 211 981 2153 Email: [email protected]

Jeroen van HoofGlobal Power & Utilities Assurance LeaderTelephone: +31 88 792 14 07Email: [email protected]

David EtheridgeGlobal Power & Utilities Advisory LeaderTelephone: +1 925 519 2605Email: [email protected]

Olesya HatopGlobal Power & Utilities MarketingTelephone: +49 211 981 4602Email: [email protected]

Contact us to learn more about PwC’s energy transformation programme and giveyour viewpoint on the themes and scenarios discussed in this report.

Global subject matter experts

Market design

Karen DawsonTelephone: +44 20 7804 4591Email: [email protected]

Paul NillesenTelephone: +31 88 792 72 37Email: [email protected]

Companies’ business models

Brian CareyTelephone: +1 650 248 8469Email: [email protected]

Tom FlahertyTelephone: +1 214 746 6553Email: [email protected]

Territory contacts

Asia-Pacific

Australia & East ClusterMark CoughlinTelephone: +61 3 8603 0009Email: [email protected]

ChinaGavin ChuiTelephone: +86 10 6533 2188Email: [email protected]

IndiaKameswara RaoTelephone: +91 40 6624 6688Email: [email protected]

IndonesiaSacha WinzenriedTelephone: +62 21 52890968Email: [email protected]

JapanYoichi Y HazamaTelephone : +81 90 5428 7743Email: [email protected]

KoreaMichael KimTelephone : + 82 2 709 0707Email: [email protected]

Europe

AustriaMichael SponringTelephone: +43 1 501 88 2935Email: [email protected]

BelgiumKoen HensTelephone: +32 2 710 7228Email: [email protected]

Central and eastern EuropeAdam OsztovitsTelephone: +36 14619585Email: [email protected]

DenmarkPer TimmermannTelephone: + 45 39 45 91 45Email: [email protected]

FinlandMauri HätönenTelephone: + 358 9 2280 1946Email: [email protected]

France Philippe GiraultTelephone: +33 1 5657 8897Email: [email protected]

Jean-Christophe Bertrand Telephone: +33 1 5657 6171 Email: [email protected]

GermanyNorbert SchwietersTelephone: +49 211 981 2153Email: [email protected]

GreeceVangellis MarkopoulosTelephone: +30 210 6874035Email: [email protected]

IrelandAnn O’ConnellTelephone: +353 1 792 8512Email: [email protected]

IsraelEitan GlazerTelephone: +972 3 7954 830Email: [email protected]

ItalyGiovanni PoggioTelephone: +39 06 570252588Email: [email protected]

NetherlandsJeroen van HoofTelephone: +31 88 792 1328Email: [email protected]

NorwayStåle JohansenTelephone: +47 9526 0476Email: [email protected]

PolandPiotr LubaTelephone: +48227464679Email: [email protected]

PortugalJoao RamosTelephone: +351 213 599 296Email: [email protected]

RussiaTatiana SirotinskayaTelephone: +7 495 967 6318Email: [email protected]

SpainManuel Martin EspadaTelephone: +34 686 491 120Email: [email protected]

SwedenAnna ElmfeldtTelephone: +46 10 2124136Email: [email protected]

SwitzerlandMarc SchmidliTelephone: +41 58 792 15 64Email: [email protected]

TurkeyMurat ColakogluTelephone: +90 212 326 64 34Email: [email protected]

United KingdomSteven JenningsTelephone: +44 20 7212 1449Email: [email protected]

Steve MullinsTelephone: +44 753 205 8626Email: [email protected]

Middle East and Africa

Middle EastJonty PalmerTelephone: +971 269 46 800Email: [email protected]

Anglophone & Lusophone Africa Angeli HoekstraTelephone: +27 11 797 4162Email: [email protected]

Francophone AfricaPhilippe GiraultTelephone: +33 1 5657 8897Email: [email protected]

The Americas

Argentina/Latin AmericaJorge BacherTelephone: +54 11 5811 6952Email: [email protected]

BrazilRoberto CorreaTelephone: +55 31 3269 1525Email: [email protected]

CanadaBrian R. PothTelephone: +1 416 687 8522Email: [email protected]

United StatesMichael A. HermanTelephone: +1 312.298.4462Email: [email protected]



1Redrawing the Energy-Climate Map: World Energy Outlook special report, 2013,OECD/IEA, Paris.

2The Global Commission on the Economy andClimate, The New Climate Economy Report,2014, p. 46, from US Energy InformationAdministration, 2014. EIA projects modest needs for new electric generation capacity.Today in Energy, 16 July 2014.

3PwC, Utility of the Future: a customer-led shiftin the electricity sector, an Australianperspective, April 2014.

4AGEE-Stat and AGEB, Federal Statistical Office(Destatis Statistisches Bundesamt), 2014.

5Seto and Dhakal, 2014. Chapter 12: Human Settlements, Infrastructure,and Spatial Planning. In Climate Change 2014:mitigation of climate change. Contribution ofWorking Group III to the Fifth AssessmentReport of the Intergovernmental Panel on Climate Change.

6United Nations (UN), 2014. World Urbanization Prospects, the 2014revision. UN Department of Economic andSocial Affairs, Population Division.

7UBS Q Series®, Global Utilities, Autos &Chemicals: Will solar, batteries and electric carsre-shape the electricity system? 20 August 2014.

8PwC, Staying ahead in an era of game-changingcustomer transformation, 2014.

9Grapy E. and Kihm S., Does disruptivecompetition mean a death spiral for electricutilities? Energy Law Journal, vol. 31, no. 1,2014.

10www.kiwipowered.com

11Bloomberg Businessweek, Why Google,Comcast, and AT&T are making power utilitiesnervous. May 29 2014.

12Caldecott B. and McDaniels J. StrandedGeneration Assets: implications for Europeancapacity mechanisms, energy markets andclimate policy. Working Paper, January 2014.Smith School of Enterprise and theEnvironment, University of Oxford.

13US Energy Information Administration, Annual Energy Outlook 2014 (AEO2014)reference case.

14The Economist, European Utilities: how to losehalf a trillion euros, 12 Oct 2013.

15Edison Electric Institute, Disruptive Challenges:financial implications and strategic responses to a changing retail electric business, January 2013.

16PwC, Energy Transformation: the impact on the power sector business model, 2013.

References

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