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The shape of power to come 12th PwC Annual Global Power & Utilities Survey www.pwc.com/utilities Investment, affordability and security in an energy-hungry world

Transcript of The shape of power to come - PwC · PwC thanks all the participants who took time to participate in...

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The shape ofpower to come

12th PwC Annual GlobalPower & Utilities Survey

www.pwc.com/utilities

Investment, affordability and securityin an energy-hungry world

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About the survey

The 12th PwC Annual Global Power & Utilities Survey is based on research conductedbetween October 2011 and April 2012 with senior executives from 72 power andutility companies in 43 countries across Europe, the Americas, Asia Pacific, MiddleEast and Africa. The majority of participants were senior vice-presidents, seniorgeneral managers, directors or other department heads from power and gas utilities,with interests covering supply, transmission, generation and trading.

AcknowledgementsPwC thanks all the participants who took time to participate in the survey. This is the12th power and utilities sector survey. We take this opportunity to thank everyonewho has participated over this 12 year period, both within PwC and in the power andutilities sector.

Published April 2012

ArgentinaAustraliaAustriaBelgiumBotswanaBrazilCanadaChileColombiaCzech RepublicDenmarkFinlandGermanyGreeceHungaryIndiaIndonesiaIrelandIsraelItalyJordanKenyaKoreaMalaysiaMexicoNamibiaNetherlandsNew ZealandNorwayPeruPhilippinesQatarRussiaSouth AfricaSpainSri LankaSwedenSwitzerlandThailandUAEUKUSAVenezuela

worldwide industry viewpoints

72 power and utilities companies

43 countries

Introduction 3Executive summary 4The big issues 8

Huge demand growth 9 Investment and affordability 13Cleaner energy 16Smarter energy 21Company strategies 25

2030 scenariosEnergy efficiency 12Electricity transformation 20Electric vehicles 24

CEO perspectives 27Eletrobras 28 Eskom 29 Exelon Corporation 30 RusHydro 31

Around the world 32Regional survey highlights 33

Contact us 37

Contents

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IntroductionThe PwC Annual Global Power & UtilitiesSurvey goes to the heart of boardroom thinkingin utility companies across the globe. In this,our 12th edition, we look ahead to how theworld of electricity will look in 2030 and assessindustry thinking on the changes that will needto take place along the way.

The changes that lie ahead are of great potential significance. New technologies,unforeseen possibilities, different ways of generating, distributing, storing andusing electricity will all play their part. The challenges are equally great. Thedevelopment of effective policy frameworks and the attraction of adequateinvestment continue to be big uncertainties facing the sector. Until they areresolved, power systems will be on a knife edge in terms of whether they willcope with the huge scale of demand growth ahead.

Cleaner energy and the decarbonisation of electricity generation will be centralto efforts to reduce global warming. Issues such as energy affordability, securityof supply and energy efficiency could have major positive or negative impacts onthe sector itself and the wider economic landscape in the coming decades. Oursurvey highlights a considerable degree of concern about whether there will begood outcomes on these fronts in the next 20 years.

We look at these big issues through the viewpoint of a survey that is extensive inscope as well as intensive in its depth. We have talked to 72 senior power andutility company executives in 43 different countries around the world. Thesurvey is supplemented by the ‘on the record’ perspectives of a number of CEOsthat are also included in the report. We report their findings on a range ofquestions and also, in a series of 2030 scenarios, their assessment of what keyaspects of the world of electricity will look like in 2030.

12th PwC Annual Global Power & Utilities Survey 3

Manfred Wiegand Global Power & Utilities Leader

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Executive summary

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The world faces a huge electricity demandchallenge in the coming decades. A range ofbottlenecks and investment barriers will need to beovercome if power systems are to keep up withdemand. Our report examines industry opinion onthese issues as well as a range of other importantchallenges facing the sector in the period to 2030.

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Investment outlook

The capital funding requirement in allmarkets, both mature and growthterritories is considerable. 68% of surveyparticipants are making major or verymajor investment in upgrades andreplacement generation. New gasgeneration heads the generation prioritylist. 55% are making major or very majorgas generation investments versus only21% for new coal and nuclear generation,24% for offshore wind and 37% foronshore wind generation.

But investment has become more difficult.78% report that the financial crisis andeconomic downturn has had a medium tovery high impact on shortage of capital forinfrastructure projects. Overall, more thantwice as many survey participants sayobtaining finance for generation andtransmission is tough compared to thosewho are finding it relatively easy.

Policy priorities

The policy message from the industry togovernments is a clear one – if the demandchallenge is to be met, put potentiallydisruptive market reform on the backburner and focus on the removal ofplanning bottlenecks and the promotion ofan investment-friendly regulatoryenvironment.

Three issues are rated of priorityimportance:• a regulatory environment that

encourages network investment – highlighted by 80% of the survey participants

• removal of strategic infrastructure planning bottlenecks (76%)

• increased interconnection between different electricity systems (76%).

In contrast, far fewer attach priority tomoves such as further liberalisation (38%)or unbundling of distribution networks(31%).

12th PwC Annual Global Power & Utilities Survey 5

Cleaner energy

Many in the industry can see a time whenrenewable energy will compete withoutthe need for subsidy – 80% plus thinkonshore wind, biomass and all forms ofsolar will not need subsidies to compete by2030. There is less confidence in offshorewind but, even so, 69% say it will becompetitive by 2030. 66% also thinkmarine energy will be competitive by2030.

The fossil versus non-fossil fuel generationmix of our survey participants is highlyrepresentative of world electricitygeneration fuel mix. This provides a goodbase for views on the future fuel mix.Looking ahead to 2030, they expect amajor ramping-up of non-hydrorenewables. In overall terms, they expecttheir fuel mix to change from 66% fossilfuels versus 34% non-fossil fuels today to57% versus 43% in 2030.

These projections suggest that the world’spower utility companies are alreadylooking beyond current policies. Theyanticipate fossil versus non-fossil fuel mixadjustments that are closer to the ‘newpolicies scenario’ of the InternationalEnergy Agency1. But they fall significantlyshort of the 42% versus 58% split neededby 2035 if the world is to limit globalwarming to an average 2OC increase, whichremains the current climate change globalpolicy goal.

Energy affordability andsecurity of supply

Energy affordability is becoming aconcern. Two thirds (66%) see the abilityto recover costs fully from customers as abarrier to meeting demand growth.Worries about the outlook for fuel povertypersist. Half see a medium to highprobability that the number of customersin fuel poverty will increase significantlyover the next 20 years and this isparticularly a concern in Europe and SouthAmerica.

Worries about affordability and the pace ofinfrastructure investment in western powermarkets are translating into concernsabout security of supply. In Europe, 53% ofour survey respondents predict anincreased risk of blackouts in the period to2030 compared with only 16% expecting adecreased risk. In North America, 40%anticipate increased risk versus 20% sayingblackout risk will reduce. In developingmarkets, where power cuts are a currentfact of life in many countries, industrysentiment is moving in the oppositedirection. Modernisation of power systemsis expected to reduce the incidence offailures in these regions.

think onshore wind, biomass and all forms of solar will not need subsidiesto compete by 2030.

over 80%

1 International Energy Agency, World Energy Outlook 2011, page 178, table 5.2.

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A new gas era

Gas heads the list of investment prioritiesfor new generation. Our survey highlightsthe growth in new gas generation, theemergence of shale gas and demand fromChina and other fast-growth countries asmajor developments affecting the gasmarket in the next ten years. More gasgeneration will certainly play a big role butthe industry does not yet see it as a game-changer. Overall, survey participantsexpect gas’s share of their companies’ fuelmix to rise from 29% now to 33% in 2030.Despite all the shale gas hype, manyquestions still remain about its accessibilityin some locations and its environmentalsafety.

In Europe, where gas prices remainindexed against the oil price, gas remainsrelatively expensive and the market hasattracted liquefied natural gas (LNG)cargoes that would previously have servedNorth America. A majority in our survey(54%) believe that a move away from oilindexation to more liquid, traded marketswill be an important major developmentaffecting the gas market in the next tenyears. In turn, this could reducedifferentials in global gas pricing.

Energy efficiency

Can we expect energy efficiency to helpthe supply and demand outlook in thedecades ahead? Industry opinion isdivided on this issue. Just over half (55%)of the survey participants are optimisticbut the remainder assign a medium to highprobability that energy efficiencyprogrammes will have largely failed tofulfil their promise by 2030. An importantfactor in promoting energy efficiency is thephasing-out of fossil fuel subsidies in manyparts of the world. But less than a fifth(18%) expect such a move to have takenplace by 2020. Instead, the overwhelmingindustry sentiment in our survey is that afossil fuel subsidy phase-out is improbableand that such subsidies will persist into thenext decade.

43%is the forecast share of non-fossilfuel in generation by 2030 butit won’t be enough to limit globalwarming to an average 2OC increase.

Industry sentiment is sceptical aboutfossil fuel subsidies being phased out inthe next ten years.

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2030 scenarios

We also include a series of glimpses intothe future with our industry survey’sviewpoint on three important issues thatcould shape the 2030 electricity world –energy efficiency, transformation of energysystems and electric transportation. On thelast of these, three fifths of our surveyrespondents think there is a medium tohigh probability that electric cars will forma significant proportion of the worldvehicle fleet by 2030.

They anticipate a marketplace wherecompetition for the customer will beintense. Such a marketplace will posesignificant challenges for power and utilitycompanies, particularly those used to morecaptive customer bases. It will demandagility, customer management systemsable to cope with a more mobile customerand the ability to forge effectivepartnerships with a range of other retailersand brands.

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Company strategies in a changing world

We conclude with a look at some aspects ofcurrent company strategies as they preparefor the decades ahead. We see a world ofmuch greater internationalisation ofoperational footprints and investmentpartnerships with companies and investorsalike stepping up their ‘go abroad’strategies in pursuit of growth and value.We are likely to see more strategicpartnerships between power and utilitycompanies and organisations that have gotlarge pools of capital, such as sovereignwealth funds. We also anticipate morejoint venture project and investmentrelationships across the energy chain, suchas between upstream gas and downstreamutilities.

The changing geographic focus of powerand utility industry strategies is reflectedin the expansion priorities of our surveyparticipants. Only 12% ranked westernEurope and 13% ranked North America asa number one or number two priority forexpansion despite the fact that 24% and28% of the survey sample were fromcompanies based in these regions. Instead,China (getting 40% of number one andnumber two mentions as a priority targetfor expansion) and other growth marketsaround the world rated higher as prioritytargets for expansion.

Smarter energy

The industry is confident that smart gridtechnologies will be in place by 2030,giving the technological backbone neededto efficiently balance different generationsources, flexible generation andinterconnections between grids or energystorage technologies, such as pumpedhydro, compressed-air and large-scalebatteries. Some see a potential ‘power togas’ breakthrough in electricity storage.Nearly one in five in our survey even go sofar as to say it will be the most commonform of electric storage by 2030.

The smart grid revolution with thedomestic customer, though, may be moreof a challenge for utility companies. Oursurvey participants express concern thatcustomer engagement may be a barrier tothe kind of behaviour change needed tofully realise the system efficiency potentialof smart energy grids. Interestingly, as theyembark on a smart energy world, morethan one in four (27%) say the biggestcompetitive threat to their companiescould come from companies with powerfulcustomer brands from outside the sector.

say the biggest competitive threat to theircompanies could come from companies withpowerful customer brands from outside thesector.

More than one in four

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The big issues

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12th PwC Annual Global Power & Utilities Survey 9

What policies are needed?

The role of government is pivotal. Powermarkets continue to walk a sometimesambiguous line between market operationand government direction. Governmentshave long moved away from directingdemand but remain the key influence onsupply through a variety of policies. Whatdoes the power and utilities industry say arethe most important policy priorities?

World electricity demand is projected to increase from 17,200 TWh in2009 to over 31,700 TWh in 20352. Economic and populationgrowth, as well as technological change and urbanisation, are drivingthis demand. The result is an increasing electrification of the world.More people will gain access to electricity and more activities andapplications will be powered by electricity.

Huge demand growth

Meeting this huge demand growth is goingto need more investment, effectiveregulatory policies, better and smarterinfrastructure and good energymanagement. The total investment neededby 2035 in the power sector is estimated atUS$16.9 trillion, an average of US$675bneach year3.

Figure 1: What policies are needed to help meet world power demand growth in the period to 2030?

80%

76%

76%

Most important A regulatory environment that encourages network investment

Increased interconnection between different electricity systems

Fast-track planning and permitting procedures for strategic infrastructure

69%

66%

68%

M

Medium important

Demand-side management schemes

A liquid wholesale electricity market

Renewable generation subsidies

52%Subsidies and grants for new technology (e.g. CCS, tidal power, etc.)

52%Energy efficiency subsidy schemes

43%

31%

38%

Least important The unbundling of transmission from other utility market activities

Further market liberalisation

The unbundling of distribution networks

27%A minimum carbon price to help support nuclear new build

Source: 12th PwC Annual Global Power & Utilities Survey

80%emphasise the importance of aregulatory environment thatencourages network investment.

2 Ibid, page 176, table 5.1.3 Ibid, page 98, table 2.4.

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Their focus is clear – they believe greateremphasis needs to be on the promotion ofa more certain and investment-friendlyregulatory environment rather thanpotentially disruptive market reform. Theimportance of ‘a regulatory environmentthat encourages network investment’ ishighlighted by 80% of survey participantsand heads the ‘most important list’. Incontrast, policies such as unbundling andfurther market liberalisation are seen as‘least important’. Also, perhaps reflectingthe changed outlook towards nuclearpower post-Fukushima, carbon prices tosupport nuclear build are also seen as leastimportant.

The focus on regulatory policy reflects thefact that the stance of governments can bean investment dealmaker or breaker.Changes, delays and uncertainty inregulatory frameworks can inhibitinvestment and increase the cost of capital.Stable regulation is essential for successfulproject financing. Factors such as long-term tariff certainty and power purchasearrangements are important for investors.Regulatory changes need to be well-planned and signalled. Retrospectiveregulation, such as has occurred in someEuropean countries in respect ofrenewable subsidies, can underminemarket confidence.

Removing bottlenecks

Governments also have a big role to play inthe second and third issues that theindustry sees as essential in meeting thegrowth in future power demand – greaterinterconnectedness between differentelectricity systems and the need tostreamline planning processes (76% ofrespondents rate each of these as‘important’ or ‘very important’). Planningobstacles are proving a major barrier to thedevelopment of new generation sourcesand transmission networks. They arepushing renewable generation offshoreand are a cause of significant large projectdelay.

Interconnections across state or nationalboundaries will be important to enable abetter balancing of supply and demandand prevent power shortages but they willneed a high degree of intergovernmentalcooperation. The incorporation of moreelectricity from renewable sources,sometimes in remote locations, will requireadditional grid connectivity andinvestment in transmission networks.

Figure 2: Security of supply – will the risk of blackouts increase or decrease in the period to 2030?

In mature markets... In developing markets...

46% Increase

18% 53% Decrease

North America and Europe Asia, South America, Middle East and Africa

13%

Source: 12th PwC Annual Global Power & Utilities Survey

Other issues, such as demand-sidemanagement schemes, liquidity inwholesale markets and subsidies forrenewable generation, are also viewed asimportant in helping meet demand in theperiod to 2030. But they are seen asunderpinning factors of mediumimportance compared to the major issuesof investment-friendly regulation, powersystem interconnectivity and fasterplanning processes.

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12th PwC Annual Global Power & Utilities Survey 11

Are we heading for a supplycrunch?

The scale of the demand growth challengebetween now and 2030 begs the obviousquestion – are we heading for a supplycrunch with blackouts becoming morecommonplace? Governments and powercompanies face a tricky balance – reducingdependency on high carbon fossil fuelgeneration while expanding supply andrenewing or replacing ageing generationand transmission assets.

The risk to security of supply is real.European and North American power andutility companies are putting themselveson blackout watch for the period ahead. InEurope, 53% of our survey respondentspredict an increased risk of blackouts inthe period to 2030 compared with only16% expecting a decreased risk. In NorthAmerica, 40% anticipate increased riskversus 20% saying blackout risk willreduce. In developing markets, wherepower cuts are a current fact of life inmany countries, industry sentiment ismoving in the opposite direction.Modernisation of power systems isexpected to reduce the incidence offailures in these regions (see figure 2).

Medium to high probability* (percentage of responses)

Figure 3: Probability scenario“By 2030, energy efficiency programmes will have largely failed to fulfil their promise andwill have had limited impact on dampening demand growth”

55%

46%

*

Low probability

Medium to high probability* (percentage of responses)

Figure 4: Probability scenario“Fossil fuel subsidies, which support oil- and coal-fired generation in places such as the Middle East, Russia and parts of Asia, will be phased out across the world by 2020”

*Probability in the range of 40% - 100%Source: 12th PwC Annual Global Power & Utilities Survey

Low probability

41%

59%

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2030 scenarioWill energy efficiency remain in the land of promise?

4 Ibid, page 2625 The Political Economy of Renewable Energy in Europe, IHS Global Insight, Dec 2011.

Energy efficiency undoubtedly has an important role to play in easing thedemand growth challenge. Back in 2007 the Intergovernmental Panel onClimate Change observed: “It is often more cost-effective to invest in end-use energy efficiency improvement than in increasing energy supply tosatisfy demand for energy services.” But since that time, despite the prioritygiven to energy efficiency in many policy initiatives, global energy intensityhas begun to increase for the first time in more than 20 years.

Can we expect energy efficiency to help the supply and demand outlook inthe decades ahead? Industry opinion is divided on this issue. Just over half(55%) are optimistic but the remainder assign a medium to high probabilitythat energy efficiency programmes will have largely failed to fulfil theirpromise by 2030.

Much will depend on the phasing-out of fossil fuel subsidies. These are amajor barrier to energy efficiency as the artificial reduction in energy costsleads to higher than optimal demand for energy. In countries like Iran asmuch as one third of government spending is used to subsidise fossil fuelprices. Countries such as China, Russia and India are making efforts toreform their subsidies but overall world progress remains slow.

The energy efficiency prize is immense in countries where such subsidiesexist. Russia, for example, could save almost one third of its annual primaryenergy use if it increased its energy efficiency in each sector to the levels ofcomparable OECD countries4. If a phasing-out of fossil fuels is to have animpact on energy efficiency in the period to 2030, it needs to be wellunderway by 2020. Our survey asked about the probability of fossil fuelsubsidies being largely phased-out by 2020? Less than a fifth (18%) see thisas highly probable. The overwhelming industry sentiment in our survey isthat this is improbable and that such subsidies will persist. If this is the case,it will be a major factor undermining energy efficiency.

Even in territories without such significant fossil fuel subsidies, the prize ofenergy efficiency is a difficult one. The EU, for example, has set a goal of a20% efficiency savings target as part of its 20-20-20 objectives. On currenttrends EU states are set to achieve less than 9% savings on 1990 levels by20205.

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Overall, more than twice as many surveyparticipants say obtaining finance forgeneration and transmission is toughcompared to those who are finding itrelatively easy (figure 5). But despite thepressures on companies in Europe, oursurvey shows that concerns about shortageof capital for infrastructure projects are felteven more acutely among companies inAsia and the Middle East and Africa.Survey participants in both these regionswere more likely to report shortage ofcapital as a result of the recent worldeconomic and financial uncertainty thantheir counterparts in Europe and NorthAmerica (figure 6).

Attracting investment will be central to meeting the future electricitydemand challenge. But many power and utility companies are facinga reduction in capital raising options. Investment has become moredifficult. 78% of our survey participants report that the financialcrisis and economic downturn has had a medium to very high impacton shortage of capital for infrastructure projects, with 63% saying ithas had a high or very high impact.

Investment and affordability

Tough funding environment

The large European utility companies havefaced particular constraints. Between 2010and 2011 many European companies haveseen larger share price falls than themarket average. On the debt side,issuances have declined from 75.6bn eurosin 2009 to 14.6bn euros in 2011 as debtmarkets contracted. In addition, across thewhole European utilities sector, 15 groupssuffered downgrades in 2011 and 30% areon negative watch or facing downgradereviews6.

Figure 5: Extent of the financing challenge

44% 17%Tough Easy

Tough Easy44% 21%

Obtaining finance for generation

Obtaining finance for transmission and distribution

% scoring 1 (very small challenge) to 5 (very large challenge)Source: 12th PwC Annual Global Power & Utilities Survey

78%report that the financial crisis andeconomic downturn has had amedium to very high impact onshortage of capital for infrastructureprojects.

6 PwC, Power Deals: 2012 outlook and 2011 review.

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Finance is identified as the biggest risk inthe capital project value chain – 85% see itas a medium to very high risk versus only15% rating it low risk. It outweighsconstruction risk, which was rated asmedium to high risk by 76% of surveyparticipants. Construction risk will reducein the next five years as companies gainmore project experience but the industry isnot as optimistic about finance risk. Nearlyas many expect finance risk to be as greatin five years’ time.

Energy prices and affordability

But tough as it is in the capital projectcontext, financing is actually not thebiggest challenge for power and utilitiesbusinesses as a whole. Investment isrunning up against regulatory risk, priceand affordability worries. The level ofregulatory returns and a reasonable degreeof forward certainty are critical for long-term capital investment. Regulatory risk,cost recovery from customer tariffs, priceuncertainty and workforce skills shortagesall outweigh the difficulty of obtainingfinance in the minds of survey participants(see figure 7).

Figure 6: Impact of the global financial crisis and economicdownturn on shortage of capital for infrastructure projects

4.6

3.3

3.1

1* 5

3.6

Middle East and Africa

South America

Asia

Europe

North America

Global

4.0

3.9

u

*1 = very unimportant, 5 = very importantSource: 12th PwC Annual Global Power & Utilities Survey

vFigure 7: Finance versus other challenges

3.4

Regulatory risk

Wholesale price uncertainty

Ability to recover costs fully from customers

Finding and retaining a skilled workforce

Obtaining finance

1* 5

3.6

*1 = very small challenge, 5 = very large challengeSource: 12th PwC Annual Global Power & Utilities Survey

4.1

3.8

3.9

Investment is running up againstregulatory risk, price andaffordability worries.

14 12th PwC Annual Global Power & Utilities Survey

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Companies find themselves having tobalance government directives with marketdynamics. ‘Command and control’approaches continue to be blended withmarket mechanisms and they cansometimes be uneasy bedfellows. Energyprices are a hot issue in many countries asthe cost of investment and decarbonisationputs pressure on customer budgets.Concerns about energy prices are creatinga ‘trilemma’ in the triangle that has to bebalanced between affordability,sustainability and security of supply andadding to the social pressures ongovernments.

These concerns are echoed by surveyparticipants. Two thirds (66%) see theability to recover costs fully fromcustomers as a barrier to meeting demandgrowth. Worries about the outlook for fuelpoverty persist. Half see a medium to highprobability that the number of customersin fuel poverty will increase significantlyover the next 20 years. Set against this,many more see a very low probability ofthis scenario (23%) than see it as a highprobability (3%). Concern about futurefuel poverty was greatest among SouthAmerican and European surveyparticipants (figure 8).

Figure 8: Probability scenario“The number of consumers in fuel poverty will increase significantly over the next 20 years”

Europe

South America

Asia

North America

Global 51%

Middle East and Africa

63%

58%

50%

45%

44%

*Probability in the range of 40% - 100%Source: 12th PwC Annual Global Power & Utilities Survey

Medium to high probability* (percentage of responses)

Worries about the outlookfor fuel poverty persist.

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The move to low or no carbon fuels hasbeen given extra uncertainty by the impactof the Japanese tsunami on the outlook fornuclear power. Our survey participantsexpect nuclear’s share of their owncompanies’ generation to remain much thesame in 2030 as it is today, implying anexpansion of nuclear capacity to matchtotal supply expansion. Differentgovernments have reacted in differentways but a recent World Energy Councilreport makes the point that the Fukushimaaccident has not so far led to a significantretraction in nuclear power programmes incountries outside Europe, except Japanitself 7. In Europe, changes in nuclearpolicies have taken place in Germany,Switzerland and Italy. Among our surveyparticipants, around half of them (48%)think only a small number of countries willturn their back on this source of energy,25% expect the impact to be greater andanother 27% expect a large number ofcountries to pull the plug on nuclearpower.

All around the world, companies and governments are committed to amove to cleaner low or no carbon power generation. The UnitedNations Climate Change Conference meeting in Cancun made a 2°Caverage warming goal explicit and acknowledged that greaterambition is necessary if it is to be reached. But time is running outand the recent economic downturn and austerity policies in somecountries are testing governments’ resolve. Also, the Arab Spring andthe impact of the Fukushima emergency in Japan have focusedattention on security of supply with possible impacts on the pace oftravel towards cleaner energy.

Cleaner energy

Moving away from fossil fuels

The fossil versus non-fossil fuel generationmix of our survey participants closelymirrors that of the overall world electricitygeneration mix. They report a higher thanworld share of hydro and non-hydrorenewable generation and a lower thanworld share of nuclear generation. Interms of the overall fossil versus non-fossilfuel mix, they are highly representative.This degree of representativeness providesa good base for views on the future fuelmix anticipated as our survey participantslook ahead to 2030. They say non-hydrorenewables, which account for an 8%share now, will double to a 16% share in2030. Windpower’s share is also forecast todouble and solar power will more thanquadruple its current share.

66%fossil versus 34% non-fossil fuelcurrent generation mix of our surveyparticipants closely mirrors thatof the overall world electricitygeneration mix.

Will the move to cleaner fuelshappen fast enough?

The following table shows our surveyparticipants’ 2030 fuel mix projections andcompares them with the 2035 assumptionsin three of the IEA’s World Energy Outlookprojections – the ‘current policies scenario(CPS)’, the ‘new policies scenario (NPS)’and the 450 scenario.

The industry survey projections suggestthat the world’s power utility companiesare already looking beyond currentpolicies. They anticipate fossil versus non-fossil fuel mix adjustments that areconsistent with the IEA’s World EnergyOutlook 2011 ‘new policies scenario’ and,indeed, anticipate moving ahead of these.But we would emphasise that suchestimates need to be viewed cautiously.They are based on interview forecastsrather than detailed projections andcannot be weighted to take account ofdifferent survey company generationcapacities. Indeed, if we restrictpredictions to the main regions of Europe,North America and Asia, the path chartedby survey participants is markedly lessoptimistic and indicates that they will fallshort of the ‘new policies scenario’.

Figure 9: Future fuel mix scenarios versus industry expectations8

Fossil fuel

Non-fossil fuel

41% 58% 66% 57%

59% 42% 34% 43%

Industry expectations

IEA 2035 450scenario

IEA 2035 ‘new policiesscenario’

IEA 2035 ‘current policiesscenario’

PwC survey participants’ 2030 projection

8 World Energy Outlook 2011, ps 546 (NPS) and 547 (CPS and 450 scenarios - generation).Source: 12th PwC Annual Global Power & Utilities Survey

7 World Energy Council, Nuclear Energy One Year After Fukushima, March 2012.8 World Energy Outlook 2011, ps 546 (NPS) and 547 (CPS and 450 scenarios – generation).

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Impact on global warming

These projections certainly fallsignificantly short of the adjustmentsrequired to achieve the 450ppm CO2reduction needed to limit global warmingto an average 2OC increase, which remainsthe current climate change global policygoal. The 450ppm CO2 reduction scenariois the trajectory needed to achieve the stillstated world goal of limiting globalwarming to an average 2OC increase.

Instead the survey forecasts a fuel mixcloser to the ‘new policies scenario’. Such ascenario would result in a level ofemissions consistent with a long-termaverage temperature increase of more than3.5°C. The IEA points out a rise in excess of3.5°C “would have severe consequences: asea level rise of up to two metres, causingdislocation of human settlements andchanges to rainfall patterns, drought, floodand heat-wave incidence that wouldseverely affect food production, humandisease and mortality.9” Current policieswould leave global warning on an evenmore dangerous path – with temperatureincreases of 6°C or more.

Can CCS help make thedifference?

The commercial development of carboncapture and sequestration (CCS)technology has got off to a slow start.Governments have sought to give a spur tosuch technology but, in the UK forexample, agreement on demonstrationprojects has been deferred followingdifficulties on technology definitions andfunding terms. Nonetheless, our surveyrespondents still see CCS making asignificant future contribution in thegeneration mix. They expect over a third(35%) of their coal-fired generation andaround a fifth (21%) of gas-firedgeneration to be equipped with CCS by2030. It puts the industry part-waytowards but still significantly short of the60% and 27% 2035 targets that form partof the IEA’s 450 scenario.

Figure 10: Industry CCS expectations

Proportion of coal-fired generation with CCS

Proportion of gas-fired generation with CCS

60% 35%

27% 21%

Industry expectations

IEA 2035450scenario10

PwC survey participants’ 2030 forecast

10 International Energy Agency, share of total electricity generation fitted with CCS, data supplied to PwC.Source: 12th PwC Annual Global Power & Utilities Survey

9 International Energy Agency, World Energy Outlook 2011, p207.10 International Energy Agency, share of total electricity generation fitted with CCS, data supplied to PwC.

CCS could make allthe difference butthe pace ofdevelopment needsto accelerate.

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Figure 11: Ranking of major barriers to development of utility-scale renewables

High capital costs compared to other generation technologies

The willingness of consumers to pay

Cost and difficulty of connections to the transmission grid

Unstable subsidy regimes

Intermittent output

Impact on grid stability

Lack of suitable control systems to manage them

75%

66%

62%

58%

55%

49%

28%

S

Figure 12: Do you think renewable generation technologies will be able to compete without subsidy by 2030?

Onshore wind

Biomass

Residential scale solar PV

Commercial and industrial scale solar PV

Utility scale solar PV

Concentrating solar power

Offshore wind

Marine

85%

85%

82%

82%

80%

80%

69%

66%

Source: 12th PwC Annual Global Power & Utilities Survey

Removing barriers torenewables

Major barriers remain in the way ofrenewables in the next decade. Threequarters (75%) of our survey participantspoint to the high cost compared with othergeneration as an important or veryimportant barrier. Two thirds (66%)highlight the unwillingness of consumersto pay and 62% stress the cost anddifficulty of grid connections (figure 11). Cost competitiveness and pricingconstraints vary from region to region,affected by a complex interplay of localfossil fuel prices, carbon policies, othersubsidy frameworks and capital costs. InNorth America, for example, low gas priceswould, on the face of it, disadvantagerenewables but one of their main effectshas actually been to disincentivise theconstruction of new gas generation.

Only 20% of our survey participants thinkthe issue of renewable energy affordabilitywill have fully resolved as a constraint by2030. Renewable energy subsidies willremain key – two thirds say they will be ofhigh or very high importance in meetingfuture energy demand. Another 18% ratethem of medium importance. But many inthe industry can see a time whenrenewable energy will compete withoutthe need for subsidy – 80% plus thinkonshore wind, biomass and all forms ofsolar will not need subsidies to compete by2030. There is less confidence in offshorewind but, even so, 69% say it will becompetitive by 2030. 66% also thinkmarine energy will be competitive by 2030(figure 12).

75%point to the high cost ofrenewables compared with othergeneration technologies.

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The new gas era

With gas heading the list of generationinvestment priorities (see page 25) andnew sources of gas coming onstream orbeing exploited in different parts of theworld, we are entering a new era of gas.Chinese demand will be an importantfactor shaping the market with thecountry’s compound average annualgrowth in primary natural gas demandexpected to increase at a rate of 6.7% perannum in the period to 203511. Among oursurvey participants, 70% attach high orvery high importance to gas demand fromChina and other fast-growth economies(figure 13).

The economics of the new gas era arebeing played out in different ways indifferent parts of the world. In NorthAmerica, the shale gas boom has led to theso-called gas glut and low gas prices whichare at a level that is inhibiting new gasgeneration build. In Europe, where gasprices remain indexed against the oil price,gas remains relatively expensive and themarket has attracted LNG cargoes thatwould previously have served NorthAmerica.

A majority in our survey (54%) believethat a move away from oil indexation tomore liquid, traded markets will be animportant major development affecting thegas market in the next ten years which, inturn, could reduce differentials in globalgas pricing.

Much of Chinese gas demand will need tobe met by LNG imports but China has alsoreleased an ambitious five year plan for thedevelopment of its own shale gas. It isaiming for 6.5bn cubic meters of shale gasproduction by 2015, around 2-3% ofprojected 2015 Chinese gas production,and more than 60bn cubic meters of shalegas production by 202012. In total, Chinahas an estimated 1,275 trillion cubic feet oftechnically recoverable shale gas reserves,making it the largest repository of shalegas in the world13.

Figure 13: Major developments affecting the gas market in the next ten years

The development of shale gas resources

The move from oil-indexed long-term contracts to traded gas markets

Demand from China and other emerging economies

Growth in gas-fired generation

Major new gas pipeline projects

70%

61%

58%

54%

51%

Source: 12th PwC Annual Global Power & Utilities Survey

11 World Energy Outlook 2011, table 4.2, ‘new policies scenario’. 12 China sets target for shale gas development, Financial Times, 16 March 2012.13 World Shale Gas Resources: an initial assessment of 14 regions outside the United States,

US Energy Information Administration, April 2011.

The economics ofthe new gas era arebeing played out indifferent ways indifferent parts ofthe world.

12th PwC Annual Global Power & Utilities Survey 19

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2030 scenarioElectricity transformation

Will new sources and supplies of gas transform the generation mix? Willbreakthroughs in electricity storage, such as ‘power to gas’ technology,dramatically alter the utility of intermittent renewable power and the wideroperation of electricity systems? Will smarter grids deliver on their potentialand even lead to some convergence of the sector with telecoms, IT and othertechnology areas?

Our survey respondents are cautious. More gas generation certainly has arole to play but it’s not a game-changer. Overall, they see gas’s share of theircompanies’ fuel mix rising from 29% now to 33% in 2030. Despite all theshale gas hype, many questions still remain about its accessibility in somelocations and its environmental safety. But the survey does lend strongsupport to a 2030 outlook where onshore wind and a range of solargeneration facilities, including utility-scale concentrating solar power,compete and play a major role in the energy mix without the need forsubsidy.

There is the potential for a ‘power to gas’ breakthrough in electricity storage.One in five in our survey even goes so far as to say it will be the mostcommon form of electric storage by 2030. But they are outnumbered threeto one by those saying that current pumped storage technologies will be themain answer to storing electricity.

What is certain is that the industry is confident that smart grid technologieswill be in place. This will give the sector the technological backbone neededto efficiently balance different generation sources, flexible generation andinterconnections between grids or energy storage technologies, such aspumped hydro, compressed-air and large-scale batteries.

The smart grid revolution with the domestic customer, though, may be moreof a challenge for utility companies. They express concern that customerengagement may be a barrier to the kind of behaviour change needed tofully realise the system efficiency potential of smart grids (see next section).Interestingly, as they embark on a smart energy world, more than one infour (27%) say the biggest competitive threat to their companies could comefrom companies with powerful customer brands from outside the sector (seefigure 19).

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But companies would be wise to becautious about the customer opportunity,particularly among residential customers.The nature of the customer-utilityrelationship varies widely across differentregulatory regimes and marketframeworks. The experience of smart gridand smart metering deployment so farsuggests that gains such as an increasedlevel of ‘smart’ end-user energymanagement and peak load shifting aredifficult to achieve. Customer inertia is apotential barrier to realising the fullpotential of smart energy systems.

The future of electricity is set to move a long way from the centralisedgrids that have dominated modern power systems to date. We are fastmoving towards a new energy eco-system with a blurring ofdistinctions between distribution, transmission and generation. Arange of technological innovations are expected to make possible astep change in grid efficiency. They will facilitate automation toreduce cost and improve quality and enable the optimal use ofdistributed generation. Crucially, they will promote interactionbetween supply and demand technologies and between the consumerand the utility that will provide benefits for both.

Smarter energy

Smart energy motivations

Smart grids and smart metering are highon the list of investment priorities – secondonly to the need to upgrade or replacegeneration capacity in the view of oursurvey respondents and on a par withinvestment in transmission anddistribution networks. Interestingly, oursurvey participants rate the customerrelationship potential of smart grids andmetering as the most important factor insmart grid investment (figure 14). Twothirds (66%) see it as an important or veryimportant opportunity to get close to theircustomers with the management of peakdemand (62%), which involves changes incustomer behaviour, also at the top of thelist. These ‘customer interaction’ goalsedge out pure operational gains, such asimproved grid reliability (59%) andreduced operational costs (55%).

66%of survey participants see smart gridsand smart metering as an importantor very important opportunity toget close to their customers.

Figure 14: Smart metering and smart grid rationale

Improve grid reliability

Manage a more complex grid

Get closer to our customers

Manage peak demand

Reduce operational costs

66%

62%

59%

55%

55%

48%

45%

42%

38%

35%

30%

14%

Enable distributed generation

Regulatory requirement

Enable renewable generation

Develop new products and services

Enable electric vehicles

Limit consumer debt

Enter the telecom or internet sector

Source: 12th PwC Annual Global Power & Utilities Survey

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Customer engagement

There is increased recognition of thechallenge of customer engagement by theindustry. Two thirds of survey participantssay there is a medium to high probabilitythat the technology will be in place butshortcomings in customer engagement willlimit the potential of smart technology,even as far ahead as 2030 (figure 15). Thisview is particularly strong in the maturemarkets of North America and Europe (seeregional chapter).

In contrast, in Asia and South Americarespondents were more positive about theprospects for customer engagement andbehaviour change with fewer than halfanticipating a medium to high prospectthat customer engagement would limit thepotential of smart grid and smart meteringtechnology. Industry survey participants indeveloping markets see more positivepotential for customer smart gridinteraction than their counterparts inmature markets where a greaterproportion of smart metering and gridsystems have to be ‘retrofitted’.

Distributed generation

Nearly half (48%) of the survey populationstress the importance of smart grids as anenabler of distributed generation. But theyalso point to barriers in the way ofdistributed generation, the biggest ofwhich is cost-effectiveness. Nearly threequarters (73%) say the long return oninvestment time for customers remains amajor barrier and 69% point to the lack ofpolicy support. Fewer than one in sixexpect distributed generation to supplymore than a 10% share of electricitydemand by 2025. The consensus estimateis that distributed generation willcontribute a 2-5% share by that time.Within this share, solar PV is expected toaccount for 42% of distributed generation(49% in Europe), compared with a 22%share for fuel cell technology and 22% forgeothermal.

Medium to high probability* (percentage of responses)

Figure 15: Probability scenario“Smart metering and smart grid technology will be successfully in place by 2030 but its impactwill be limited by shortcomings in customer engagement”

*Probability in the range of 40% - 100%Source: 12th PwC Annual Global Power & Utilities Survey

Low probability

66%

34%

Two thirds say there is a medium tohigh probability that shortcomingsin customer engagement will limitthe potential of smart technology.

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Electricity storagebreakthroughs

The intermittency and, in some cases, thelocation of renewable and distributedgeneration sources will makebreakthroughs in electricity storageimportant for the future energy eco-system(figure 16). Pumped-storage powerstations are a good solution for short-termload balancing, but there is only limitedcapacity available and it is only suitable incertain locations. Long-term storage istherefore a major challenge when it comesto transforming the energy supply systemand for power utilities.

Electric cars could play a significant rolewith smart grids and metering enabling acountry’s stock of electric cars and theirbatteries to provide an outlet forintermittent renewable energy that issurplus to other grid requirements. Butbattery technology, both for vehicles andwider applications, needs to improve interms of capacity and cost if it is to greatlytransform transportation and renewableenergy storage. Research continues inimproving battery performance andlongevity, and breakthroughs are expectedwith new technology, such as the lithium-air battery. If successful, new batteries willreplace gasoline-fuelled engines, improveelectricity transmission and impact a hostof other potential uses.

Superconducting Magnetic Energy Storage(SMES) systems store energy in themagnetic field created by the flow of directcurrent in a superconducting coil whichhas been cryogenically cooled to atemperature below its superconductingcritical temperature. SMES systems arehighly efficient, power is available almostinstantaneously and very high poweroutput can be provided for a brief periodof time. They are currently used for somegrid stability applications but major costand scale barriers need to be overcomebefore they could be used for large-scalestorage.

Researchers in Europe are testing ‘gasified’or ‘power-to-gas’ technology that involvesthe use of excess power to producehydrogen by electrolysing water and, ifrequired, in a second step convertinghydrogen into synthetic methane byreaction with carbon dioxide (CO2). Theexisting natural gas infrastructure, namelythe gas grid and its associatedunderground storage facilities, could beused to store this methane and also, up toa certain volume, the elemental hydrogen.The idea is not new, but it has becomemore important in the light of growingshare of renewable generation in theenergy mix.

Figure 16: Top five forms of large scale electricity storage expected to be most in use by 2030

Electric vehicles

Superconducting magnetic energy storage

Pumped storage

Batteries

Gasified power storage

54%

38%

27%

21%

18%

Source: 12th PwC Annual Global Power & Utilities Survey

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Three fifths of our global power survey respondents think there is a mediumto high probability that electric cars will form a significant proportion of theworld vehicle fleet by 2030. But two thirds (67%) express frustration thatregulatory agreement on standards for electric vehicle infrastructure isevolving too slowly.

What will an electric car world look like in 2030? Most of our surveyparticipants expect competition for the customer will be intense. Only 7%think this is unlikely. But who will own the customer relationship? Amajority think car retailers will sell up-front energy deals with the car.Others see the potential for relationships between power utility companiesand other retailers or petrol retailers. Some see the electric car marketbecoming like the mobile phone market with the car and the electricitywrapped together in contract deals.

Such a marketplace will pose significant challenges for power and utilitycompanies, particularly those used to more captive customer bases. It willdemand agility, customer management systems able to cope with a moremobile customer and the ability to forge effective partnerships with a rangeof other retailers and brands.

Of course, there are many technological barriers to be overcome beforeelectric-powered transport can become more commonplace, principally theevolution of batteries and engine technology. If these can be overcome, thereis then the development of electric vehicle charging infrastructure. Nearlythree fifths (58%) of our survey participants believe such infrastructure willbe a major challenge for power utility companies.

Figure 17: What are the most likely electric car customer strategies?

Utility companies will create partnerships with petrol retailers

The market will become like the mobile telecoms market with the car and the energy tariff wrapped up together

Car companies will seek to sell up-front energy deals (1 year of energy, etc.) with the car

Utility companies will create partnerships with retailers and supermarkets

54%

44%

35%

35%

Source: 12th PwC Annual Global Power & Utilities Survey

2030 scenarioElectric-powered personal transport

A future electric car marketplace willpose significant challenges for powerand utility companies.

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Utility companies have a relativeadvantage over companies in some othersectors when it comes to bank financingand the debt markets. But given the scaleof capital required and market constraints,some are exploring alternative options,such as the investment in Iberdrola byQatar Holding, a subsidiary of the Qatarsovereign wealth fund, and GDF Suez’spartnership with Chinese sovereign wealthfund China Investment Corporation.

Continuing growth in regions such as Asia Pacific and South Americais contrasting with more limited growth prospects in North Americaand in Europe. Power and utility companies in these mature marketsare turning their sights to growth opportunities elsewhere but arehaving to balance their acquisitive growth appetite with theirconsiderable renewable energy and infrastructure commitments inhome markets.

Company strategies

Investment priorities

The capital funding requirement in allmarkets, both mature and growthterritories, is considerable. 68% of surveyrespondents are making major or verymajor investment in upgrades andreplacement generation (figure 18). Newgas generation heads the priority list forgeneration. 55% of the survey participantsare making major or very major gasgeneration investments versus only 21%for new coal and nuclear generation, 24%for offshore wind and 37% for onshorewind generation. Away from generation,major or very major investments in smartgrids (56%) and transmission anddistribution infrastructure (52%) alsofeature strongly.

68%of survey respondents are makingmajor or very major investmentin upgrades and replacementgeneration.

Figure 18: Where are you making major new generation and related investments?

Onshore wind generation capacity

LNG infrastructure

Replacing/upgrading existing generation capacity

New gas generation capacity

Offshore wind generation capacity

New nuclear generation capacity

New coal generation capacity

Solar PV generation capacity

68%

55%

37%

27%

24%

21%

21%

18%

17%Carbon capture and storage

Source: 12th PwC Annual Global Power & Utilities Survey

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New partnerships and jointventures

We are likely to see more strategicpartnerships with organisations that havegot large pools of capital, such as sovereignwealth funds. Another is joint ventureproject and investment relationships acrossthe energy chain, such as betweenupstream gas and downstream utilities.Joint venture project and investmentrelationships are well established in theindependent power generation marketinvolving companies in different parts ofthe energy chain – for example, betweenInternational Power and Mitsui.

These could spread to more parts of thepower sector. During 2011, RWE held talkswith Gazprom about the possibility of ajoint venture covering gas and coal-firedgeneration plant in Germany, the UK andthe Netherlands. They failed to reach aconclusion. Such a move would have givenGazprom access to downstream generationand eased balance sheet risk for RWE. Theprospect of such moves across differentparts of the energy chain remains apossibility.

‘Go abroad’ strategies

We are seeing active east-west investmentmomentum and ‘go abroad’ strategies frommany companies and investors. CheungKong Infrastructure (CKI), the investmentvehicle of Hong Kong billionaire Li Ka-shing, has been an active bidder for UKnetwork assets. China Three GorgesCorporation won the auction for a stake inEnergias de Portugal, giving it access tothe growth market of Brazil. E.ON andIberdrola have also made significant movesinto the Brazilian market with purchases inMPX Energia and Elektro respectively.

The changing geographic focus of powerand utility industry strategies is reflectedin the expansion priorities of our surveyparticipants. Only 12% ranked westernEurope and 13% ranked North America asa number one or number two priority forexpansion despite the fact that 24% and28% of the survey sample were fromcompanies based in these regions. Instead,China (getting 40% of number one andnumber two mentions as a priority targetfor expansion), central and eastern Europe(29%), the Indian subcontinent (21%),other Asian countries (19%), the MiddleEast (17%), Africa and Latin America (14%each) all rated higher as priority targets forexpansion.

Figure 19: Who poses the largest competitive threat?

Companies with powerful customer brands from outside utilities sector

Companies with a power engineering/technology focus

Utility companies from outside your home territory

Utility companies based in your home territory

Companies from the oil and petroleum sector

48%

39%

27%

21%

15%

Source: 12th PwC Annual Global Power & Utilities Survey

The ‘go abroad’ nature of power andutilities markets is reflected in the surveyparticipants’ view that the biggestcompetitive threat to their companiescomes from utility companies from outsidetheir home market (figure 19). Alsostriking, in a world where smart energytechnologies permit greater interactionwith the customer, more than one in four(27%) say that companies with powerfulbrands from outside the sector also pose amajor competitive threat.

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12th PwC Annual Global Power & Utilities Survey 27

CEO perspectives

An energy efficient future, companies’ answers toglobal and regional challenges, electricity evolutionand global energy transformation – these are thetopics shared with PwC during in-depth interviewswith CEOs of major industry players. We bringtogether different geographical perspectives fromBrazil, South Africa, the United States and Russia –a unique view on the power and utilities sector now and into the future.

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“It is reasonable to expect a continued M&A trend between the market players, with theconsolidation of big transnational groups, to provide the scale of business platforms neededfor the global energy power sector.” José da Costa Carvalho Neto, chief executive officer, Eletrobras

Perspective: industry answers to global and regional challenges

Global answers and an increasinglyglobal-scale industry will characterisethe future power utilities sector ascompanies and policy-makers seekanswers to the big questions ofaffordability, security of supply and sustainability.

According to José da Costa Carvalho Neto,the questions facing the world’s energysector will need: “An intensification of thedialogue between the industry’s companiesand national governments, internationalagencies and multilateral agencies, in theadjustment of trade-offs between globalenergy power policies and business plans.”

On the question of the search for a balancebetween affordability, security andsustainability, José da Costa Carvalho Netobelieves that they can be complementaryand that diversification will be important:“I do not think there is just one source thatwill change the game. A more diversifiedmix is likely to be the way. I believe thatgas and nuclear will have a wider role toplay in this future energy mix.”

Scale and cost

Alongside the development of globalanswers, companies will need greaterglobal scale to compete in a sector wherethe challenges of cleaner and smarterenergy will be dominant considerations:“Companies that cannot face these newchallenges will inevitably lose marketshare or even disappear from the market.”

Part of the requirement for scale comesfrom the need to control costs. CarvalhoNeto sees definite dangers of rising energycosts, in part arising from the challenge ofcleaner generation sources: “We emphasisethe risk of exacerbated elevation ofgeneration costs due to social andenvironmental requirements, mainly in thedeveloped and emerging countries.”

In a world where fossil-fuels will stilldominate, Carvalho Neto also highlightsthe challenge of “geopolitical matterstogether with the imbalance in thegeographic distribution of fossil fuelsacross power markets and the location ofthe reserves to be explored.”

Regional context

Scale and answers at a regional levelreflect the global challenges. Brazil alreadyhas a strong focus on renewable energy. It is the largest hydropower producer inthe word after China and policies topromote renewable energy have alsospurred significant windpower capability.Carvalho Neto points out: “Eletrobras isthe largest generator of electric power inLatin America and there is still greatremaining hydroelectric potential to beused in the region, as well as theresumption of the expansion of nucleargeneration, expanded investment in windand biomass energy.”

In December 2008, the country launchedits National Climate Change Plan, focusinglargely on reducing deforestation but alsocontaining provisions on energy efficiencyand renewable energy. The energyefficiency provisions are significant saysCarvalho Neto: “The action plan has thegoal of a 10% reduction in electricityconsumption by 2030 compared with areference scenario.” Carvalho Neto alsoemphasizes “the electro-energy integrationof South America and universal access toelectricity” as very important.

Smarter and cleaner energy

Carvalho Neto foresees significant changein the decades ahead: “In the period to2030, a lot of changes will occur in theglobal electric power industry due toglobal warming, the difficulties of andbarriers to nuclear energy and of fossil-fuelsources and, in countries like Brazil, theconstruction of big reservoirs forhydroelectric plants.” He highlights“increasing use of renewable sources, suchas the wind, solar, biomass andhydropower, including the development ofrun-of-river plants that do not need bigreservoirs.”

Smart grids will be important. CarvalhoNeto envisages: “A more informed,demanding consumer that has moreoptions and choices, including thepossibility of ‘auto generation’, with so-called intelligent energy supplies broughtabout by smart grids, smart buildings andsmart homes acting together.” He alsomentions visionary projects such asDesertec to bring solar and wind powerfrom north Africa to Europe, as examplesof the greater international collaborationthat will be part of the future power world.

“Companies that cannot face the new challenges will inevitablylose market share or evendisappear from the market.”

Eletrobras is the largest electric power company in Latin America. It is responsiblefor 36% of Brazil’s total generation capacity, with 37 hydroelectric plants, twowind farms and two thermonuclear plants.

Eletrobras

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12th PwC Annual Global Power & Utilities Survey 29

“Energy efficiency is probably one of the foundation stones upon which future energy strategieswill be based. The world cannot afford the per capita energy densities that are prevalent inindustrialised societies and major strides have to be taken to reduce them.” Brian A. Dames, chief executive, Eskom

Perspective: an energy efficient future

World demographic trends mean thatenergy efficiency will be an importantpart of future energy policies in the viewof Brian A. Dames: “Energy efficiency canmake a significant contribution but inorder to be effective it requires supportivepolicy frameworks that enable large scaledeployment of technologies.”

He points out that developing countrieshave an opportunity to build efficiencyinto their growth and developmentmodels: “Developing nations are not likelyto grow their demand along the sametrajectories as taken by the developedworld. Energy efficiency will probably bebuilt into the roll out plans right from thebeginning.”

Incentivising efficiency

But this won’t happen without design anddirection: “In order to be effective theyneed to either be legislated and enforcedor incentivised through demand responsetariffs. Subsidies for energy efficientappliances could also to be funded fromcarbon tax funds. A cost-reflective pricingenvironment also will incentiviseinvestment in energy efficient technologiesas well as in R&D in alternative and moreefficient technologies.”

Automation will play an important role inmaking energy efficiency more certain:“Technologies that can be hardwired intothe system and do not rely on humanbehaviour will be required for high levelsof sustainability.” Ultimately, Damesexpects that: “Price parity will be a keyfactor that makes energy efficiencyprogrammes sustainable. Also, with theincrease in the cost of energy it can beexpected that energy efficiency initiativeswill become self-funded and, as such,sustainable.”

Game changers

Dames sees nuclear power as a potential‘make or break’ issue: “The world couldmake an about turn on nucleartechnologies when their carbon footprintand inherent risk are better understood bythe public.” He also points to a number ofenergy ‘game changers’ including smartdemand management systems, new fuelsources such as shale gas and energystorage: “Energy storage has a highpotential to become cheaper as storagedensity increases and this will enable theuse of small amounts of power by loads asand when required, especially in responseto pricing signals.”

He highlights the potential of highefficiency solar: “As the cost of PV comesdown and the efficiencies climb, it isconceivable that almost every residentialand small commercial dwelling will havesome form of solar augmentation. Solarmight impact wind’s dominance as thepreferred renewable energy source,especially in regions such as SouthernAfrica.”

The transition to such a future couldpresent some intriguing developments:“The wealthy sector of the market may bethe first to adopt clean or ‘off grid’solutions which will put a financial burdenon the utility to pick up those customersthat cannot afford to go for self-generation.”

Dames says that this could lead to “thepossibility that the utility is seen as a back-up to the alternate renewable systemand this will raise interesting funding andsustainability issues for the utility. Moneyfrom revenues may fall and cost to servethe remaining customer base could rise. Inaddition to this, distributed generation andhigher overall efficiencies could result indiffering power flow with the resultingchanges in transmission grid investment.”

Electric cars

When it comes to electric cars andassociated recharging infrastructure,Dames points out that: “The natural link tofill-up is probably more related to theproviders of parking space than petrolretailers.” He is sceptical that pricingmodels might mimic those in the mobiletelecoms sector: “Wrapping of services likecell-phones make sense if the variable costof supply like ‘air-time’ is virtually free, butif the supply is ‘electricity’ that has a highvariable cost, then the wrapping model’seconomics change significantly.”

But, despite the potential for aconsiderable number of technologicaladvances, Dames concludes by stressingthe need to be realistic about the nature oftimescales in the power sector: “2030 isonly 18 years away which is less than thehalf-life of most of the assets that make upthe electricity grid. As such many of theassets we are commissioning today willstill be around and thus changes will tendto be evolutionary rather thanrevolutionary.”

“Every home could probablyconsume 20% less energy andstill achieve the same quality of life.”

Eskom generates approximately 95% of the electricity used in South Africa andapproximately 45% of the electricity used in Africa. It is one of the top 20 utilities inthe world by generation capacity with a net maximum self-generated capacity of41,194MW.

Eskom

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30 12th PwC Annual Global Power & Utilities Survey

“Unforeseen developments can always disrupt an industry – cell phones altered the telecomlandscape, digital music drove major change in the music industry – but attempts to force adirection or commit too many resources to an expected outcome tend to lead to results that fall short of what can be achieved.” Christopher M. Crane, president and chief executive officer, Exelon Corporation

Perspective: electricity evolution

Christopher M. Crane says the pathahead for the power utilities industryneeds to be a flexible one: “We need toplan for a natural evolution whileallowing for revolution: embracing whatwe know we can do cheaply whilecreating an environment where futuresolutions that best provide clean,affordable, and reliable power can easilyaccess the market when they are ready.”

Crane expects such evolution will see “theoldest, dirtiest plants retiring to make wayfor low-cost energy efficiency, operationalenhancements and expansions at existingplants, new assets that leverage newly-cheap natural gas and, finally, some moreexpensive solutions supported bylegislative efforts. While there is somechance that our world will be defined bydisruptive paradigm shift, there is also avery real possibility that the world willfollow a natural progression from wherewe are today, particularly in the UnitedStates.”

The 2030 electricity world

Crane points to “a number of importantdevelopments under way that couldmaterially change the dynamic of theelectricity world.” Among the manychanges taking place, he says:“technological developments haveunlocked major shale gas resources fordevelopment at very low costs andglobalisation continues to de-regionalisecommodity prices, making competition forresources more global. In certain parts ofthe world, a fairly depreciated asset basewill begin to require retirements, while inother parts of the world, distributedgeneration may allow emerging markets toskip much of the centralised build-outaltogether.”

There are “any one of a number oftechnological developments” that couldhave “the possibility to upend the demandand/or supply sides of the power sector,”according to Crane. Technology is alsochanging the way consumers interact withthe industry: “Younger generations arebecoming increasingly technologicallysavvy, networked and interested in thebroader impacts of energy consumption –an important combination that could drivereal change in how customers interact withthe power sector or how policy makersshape the industry.”

Balancing affordability, security and sustainability

Crane stresses that “clean, affordable andreliable electricity is essential formaintaining a developed standard of livingand a robust economy.” He points tonatural gas as a central element indelivering this balance: “We believe that inthe near-term, with sustainedeconomically priced natural gas, thatcombined cycle generation will be thepreferred choice for base and intermediateload supplies of affordable electricity atleast for the next decade.”

“New nuclear is attractive as an efficient,clean, and low-carbon option, but incompetitive markets where we operate, thegeneration produced would not becompetitive with projected market pricesfor some time,” observes Crane. “As analternative to building new nuclear plant,we are increasing the output of ourexisting fleet through modifications thatwill enable us to significantly increase thecapacity of our fleet.”

Energy efficiency

Government-mandated energy efficiencyprograms, such as those found at Exelon’sthree regulated delivery companies,ComEd, PECO, and BGE have an importantrole to play according to Crane. “Theseprogrammes at our utilities have beenquite successful in achieving their goals,and reasonable energy efficiency programscan be part of a broader approach tocleaning the generation supply stack in acost-effective and reliable manner.”

But he also points out that “energyefficiency is a tough nut to crack. In manyareas, it represents a largely untappedresource in the stack to free up additionalcapacity and generation. One of thebiggest obstacles is the difficulty of findinga way to monetize its benefits. Commercialproperty owners have no incentive toinvest in energy efficiency because theirtenants pay the energy bill. Homeownersmay struggle to finance the upfront cost ofefficiency investments, or they may simplybe uncomfortable taking the risk that theywill not fully recoup the investment, evenwhen payback periods can oftenreasonably be measured in months.”

“Distributed generation mayallow emerging markets to skipmuch of the centralised build-outaltogether.”

Exelon Corporation is one of the US’s largest competitive energy products and servicessuppliers by load (about 164 terawatt-hours per year) and customers (approximately100,000 business and public sector and approximately 1 million residential), servingmore than two-thirds of America’s Fortune 100 companies. It has one of the largestand cleanest power generation fleets in the US, with approximately 35,000 megawattsof owned power generation, including more than 19,000 megawatts of nuclear power.

Exelon Corporation

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12th PwC Annual Global Power & Utilities Survey 31

“Electricity storage is the most promising current trend in the energy sector. More so thantransmission, nuclear fission or alternative sources like the sun, wind or anything like that. It is power storage technology that will change the future of the industry.” Evgeny Dod, the chairman of the management board of RusHydro Group

Perspective: transforming electricity

Evgeny Dod is looking ahead to a worldwhere technological breakthroughs couldhave a profound effect on the operationof electricity systems. “The powerindustry is a very conservative sector butI do think we seem to be on the brink ofreal system-wide changes in many areasof electricity and in the energy industryas a whole,” he says.

He believes that the changes on the wayare “multifaceted” but he singles outelectricity storage technology as having thegreatest potential significance. “We are onthe verge of creating large and relativelycheap, efficient rechargeable batteries,”observes Dod. “It will cause a fundamentalconceptual shift, changing the way largegrid construction is conceived.”

Rethinking our approach to power

“I believe, in the next ten years, we will seelarge scale, industrial production ofrechargeable units that will allow us toreconfigure our approach to issues ofbaseload and peakload power and theconstruction of additional grids. I thinkthat the whole concept of electricitystorage will change our view on how basicfuels such as gas, oil, coal, etc. are used.”

He stresses that electricity storage won’t bethe only big improvement. “Clearly, thereare significant and promising projectsrelating to transmission technologies. Theyare sure to yield a concrete breakthrough,”he says. “But this process is complicated bythe fact that huge resources andproduction capacities are needed to movefrom scientific research results to actualproduction. For instance, just replacing allthe cables and power lines is, in itself, ahuge process. On the other hand, buildingthousands of storage blocks of 1,000 MWeach is a relatively quick and efficientprocess.”

A new power model

The potential of large-scale storage needs tobe viewed together with renewable energyand more efficient transmission. “If youtake the three together – then that’s afundamentally different setup. This modelremoves the need to lay expensivetransmission lines to remote, isolated areas.In the far east of Russia, for example, youcould have communities linked to differentstandalone systems – with different costs.”

Other trends will also be important. “Theoil price situation will promote new trendssuch as shale gas, new sources of energyand coal,” says Dod. “These will remain atthe fundamental core of the whole energysector. But, in my view, it is energy storagetechnologies that will be the transformativebreakthrough. It has the potential to be thekey issue that will change the world.”

Energy efficiency

The survey uncovered considerable doubtsabout programmes to boost energyefficiency but Dod disagrees. “I think thatenergy efficiency is a very promising areaand I don’t share this scepticism. There arevery effective and interesting programmesworking to cut energy use in productionand in the household.”

However, he stresses that clear incentivesare important if consumers are to adoptenergy efficiency technology and habits.“Everything depends on them havingserious incentives. From an economicperspective, these should be materialincentives, so that they can be measured.All too often, organisations and individualsare not very interested. It won’t happenuntil people are able to really see howmuch they have saved and be able to usewhat they save for themselves moredirectly. This is particularly the case inareas such as the public sector where,typically, the person using the electricity isnot the person paying for it.”

Electric personal mobility

Finally, Dod also anticipates big potentialfor electric cars. “I believe that by 2030 theshare of electric vehicles, at least in bigcities, will be no less than 30%. The keyissue is battery life and charging time. Incities, compact ordinary electricity-powered vehicles are our future. I’ve evenordered a car like that for myself – a Tesla,I think. 95% of all our transport within theFirst Concrete Ring (Moscow region ringroad) that has a mileage of up to 100kmper day should be electric-powered. It’senvironmentally good and clearlyprofitable for electricity companies.”

“The whole concept of electricitystorage will change our view onhow basic fuels are used.”

RusHydro is one of Russia’s largest power generating companies in terms of installedcapacity. It is also a leader in power production using renewable energy sources,developing power generation using water flows, tidal, wind and geo-thermal energy.

RusHydro

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32 12th PwC Annual Global Power & Utilities Survey

Around the world

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Figure 20: Will the risk of blackouts change in the period to 2030?

decrease/increase

6%44%

Asia

53%16%

Europe

75%

Middle East & Africa

40%20%

North America

38%50%

South America

Source: 12th PwC Annual Global Power & Utilities Survey

Security of supply

Companies in mature markets are morepessimistic about the trend for blackoutsthan those in developing countries (figure 2). Looking in more detail at howthis breaks down between differentregions, we see that survey participants inEurope are the most pessimistic,envisaging a trend from a period whenpower interruptions are relatively rare toone where they are possibly more frequent(figure 20). In contrast, of course,blackouts are a more common currentoccurrence in developing markets and hereindustry opinion expects the situation toimprove, with the outlook most optimisticin the Middle East and Africa.

Power markets around the world differ in many ways, not least theirdesign, regulatory frameworks and natural resource context. Carbonis priced in some and not in others. Competition for the end customeris present in some and not others. And the infrastructure developmentand renewal challenge varies according to maturity of the existingpower systems and the scale of new demand. Despite these differences,industry sentiment on many aspects of the big issues is fairlyconsistent around the world. But there are some notable points ofdifference. In this chapter, we review the other main regionalcontrasts in the survey findings.

Regional survey highlights

Energy policy

We asked what energy policy levers will beimportant in helping the utility sector meetdemand by 2030. Globally, the emphasiswas on a regulatory environment thatencourages network investment, theremoval of strategic infrastructureplanning bottlenecks and increasedinterconnection between differentelectricity systems. The regional responsesstressed the same things, except:• survey participants in Asia were less

concerned about interconnection between electricity systems, instead emphasising the importance of demand-side management schemes

• responses from the Middle East and Africa also placed a particular emphasis on the importance of renewable energy subsidies.

12th PwC Annual Global Power & Utilities Survey 33

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34%

*Probability in the range of 40% - 100%Source: 12th PwC Annual Global Power & Utilities Survey

Figure 21: Probability scenario“By 2030, energy efficiency programmes will have largely failed to fulfil their promise and will have had limited impact on dampening demand growth”

Asia

North America

Middle East & Africa

South America

Global

Europe

Medium to high probability* (percentage of responses)

13%

50%

47%

55%

38%

Energy efficiency

Globally, a third of our survey see amedium to high probability that energyefficiency programmes will fail to achievetheir potential by 2030. Industry opinionin North America, Asia and Europe is mostsceptical about the potential of energyefficiency programmes. In contrast, inother parts of the world where the scopefor improvements is greater, surveyparticipants are more optimistic, includingthose regions such as the Middle East andAfrica where fossil fuel subsidies are apotential barrier to energy efficiency.

34 12th PwC Annual Global Power & Utilities Survey

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Smart grid customerengagement

Worries about customer engagement being abarrier to realising the full potential of smartgrid and smart metering technology aregreatest in North America and Europe wherecustomer relations and, indeed, physicalmeters are more firmly entrenched. In NorthAmerica, 80% are of this view and in Europe74%. In Asia and South America respondentsare more positive about the prospects forcustomer engagement and behaviour changewith fewer than half anticipating a medium tohigh prospect that customer engagementwould limit the potential of smart grid andsmart metering technology.

66%

*Probability in the range of 40% - 100%Source: 12th PwC Annual Global Power & Utilities Survey

Figure 22: Probability scenario“By 2030, smart metering and smart grid technology will be successfully in place but its impact will be limited by shortcomings in customer engagement”

Europe

North America

South America

Asia

Global

Middle East & Africa

Medium to high probability* (percentage of responses)

80%

63%

56%

38%

74%

Worries about customer engagementlimiting the potential of smarttechnology are less evident in marketsoutside North America and Europe.

12th PwC Annual Global Power & Utilities Survey 35

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59%

*Probability in the range of 40% - 100%Source: 12th PwC Annual Global Power & Utilities Survey

Figure 23: Probability scenario“By 2030, electric vehicles will be a significant proportion of the global vehicle fleet”

Europe

Middle East & Africa

South America

North America

Global

Asia

Medium to high probability* (percentage of responses)

45%

38%

88%

63%

68%

Electric cars

Expectations of the development of electric vehiclesare weakest in North and South America. Europeand Asia are in line with the global results but,perhaps surprisingly, optimism about the potentialof electric-powered personal transport is greatest inthe Middle East and Africa.

Fuel poverty

Finally, when it comes to fuel poverty, surveyparticipants in Asia and North America are moreoptimistic than their counterparts in other parts ofthe world on the outlook for fuel poverty. Those inthe Middle East and Africa are in line with theglobal results but European and South Americanresponses are more pessimistic.

51%

*Probability in the range of 40% - 100%Source: 12th PwC Annual Global Power & Utilities Survey

Figure 24: Probability scenario“The number of consumers in fuel poverty will increase significantly over the next 20 years”

Europe

South America

Asia

North America

Global

Middle East & Africa

Medium to high probability* (percentage of responses)

44%

58%

50%

45%

63%

36 12th PwC Annual Global Power & Utilities Survey

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Manfred WiegandGlobal Power & Utilities Leader Telephone: +49 201 438 1517Email: [email protected]

Norbert SchwietersGlobal Consumer and Industrial Products & Services LeaderEnergy, Utilities & Mining Leader Germany Telephone: +49 211 981 2153 Email: [email protected]

Jeroen van HoofGlobal Power & Utilities Assurance LeaderTelephone: +31 88 792 1328Email: [email protected]

David EtheridgeGlobal Power & Utilities Advisory LeaderTelephone: +1 415 498 7168 Email: [email protected]

James KochGlobal Energy Utilities & Mining Tax LeaderTelephone: +1 713 356 4626Email: [email protected]

For further information

Olesya HatopGlobal Energy, Utilities & Mining Marketing Telephone: +49 201 438 1431 Email: [email protected]

Global contacts Territory contacts

AustraliaJock O’CallaghanTelephone: +61 3 8603 6137Email: [email protected]

Michael Shewan Telephone: +61 3 8603 6446 Email: [email protected]

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

BelgiumKoen Hens Telephone: +32 2 710 72 28 Email: [email protected]

Brazil Guilherme Valle Telephone: +55 21 3232 6011 Email: [email protected]

CanadaAlistair BrydenTelephone: +1 403 509 7354Email: [email protected]

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

DenmarkPer Timmermann Telephone: +45 3945 3945Email: [email protected]

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

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

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

GreeceSocrates Leptos-BourgiTelephone: +30 210 687 4693Email: [email protected]

Contacts

12th PwC Annual Global Power & Utilities Survey 37

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IndiaKameswara RaoTelephone: +9140 6624 6688Email: [email protected]

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

IsraelEitan GlazerTelephone: +972 3 795 4 664Email: [email protected]

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

JapanKoji Hara Telephone: +81 90 1618 5601 Email: [email protected]

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

Middle EastPaul NavratilTelephone: +973 1754 0554Email: [email protected]

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

New ZealandCraig RiceTelephone: +64 9 355 8641Email: [email protected]

NorwayStåle Johansen Telephone: +47 9526 0476Email: [email protected]

PolandPiotr Luba Telephone: +48 22 523 4679 Email: [email protected]

Russia & Central and Eastern EuropeMichael O’Riordan Telephone: +7 495 232 5774 Email: [email protected]

SingaporePaul CorneliusTelephone: +65 6236 3718Email: [email protected]

South AfricaStanley SubramoneyTelephone: +27 11 797 4380Email: [email protected]

Angeli Hoekstra Telephone: +27 1 1797 4162 Email: [email protected]

SpainInaki Goiriena Telephone: +34 915 684 469 Email: [email protected]

SwedenMartin GaveliusTelephone: +46 8 5553 3529Email: [email protected]

SwitzerlandMarc Schmidli Telephone: +41 58 792 1564 Email: [email protected]

TurkeyFaruk Sabuncu Telephone: +90 212 326 6082 Email: [email protected]

United KingdomSteve JenningsTelephone: +44 20 7802 1449Email: [email protected]

United StatesDavid Etheridge Telephone: +1 415 498 7168 Email: [email protected]

UruguayPatricia MarquesTelephone: +598 2916 0463Email: [email protected]

38 12th PwC Annual Global Power & Utilities Survey

Contacts

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12th PwC Annual Global Power & Utilities Survey 39

All the power and utilities expertise of PwC is broughttogether with one focus – you the client. Our Power & UtilitiesGlobal Centre of Excellence isn’t a physical centre. It’s muchmore powerful than that. It’s a way of accessing andchanneling the knowledge of all our subject experts aroundthe globe that are relevant to your needs.

With networks linked into the most important issues that theindustry is facing, our Global Centre of Excellence is a place toget information and professional advice on our industrytailored services. It delivers points of view and thoughtleadership on the future of the sector and provides a platformfor debate between industry stakeholders.

It gives you maximum value from our strong team of 4,000power and utilities specialists around the world working inthe following areas:

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Global Power & Utilities Centre of Excellence

www.pwc.com/utilities

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