Utility firms in developed markets will increasingly align corporate strategies with the trend of decarbonisation. The “utility of the future” will invest substantially in boosting renewable power generation, pursuing demand “behind the grid” and offering electric vehicle (EV) services. This strategy will bring them into greater competition with major oil and gas and tech firms.
Ongoing decarbonisation of the power sector will continue to change the way that electricity is generated and consumed. It is already having a profound impact on utility companies operating in the global power market, particularly those in developed markets, where the process of decarbonisation is typically more advanced, and the traditional structure of the electricity market is more entrenched. Pressure to pursue corporate strategy that aligns with decarbonisation will stem from customers, shareholders and regulators.
Market disruption underway
Rapid growth in renewable energy has seen the share of small-scale and distributed power sources in the global electricity system increase significantly. As part of this, there has been major growth in rooftop solar photovoltaic systems among residential and commercial and industrial consumers.
Key drivers have been both environmental concerns and consumers looking to reduce electricity bills via self-consumption (consuming the electricity generated themselves) and/or selling power back to the grid. A two-way flow of electricity between so-called “prosumers” (those who both consume and produce electricity) and utilities is thus beginning to emerge. The rising penetration of renewable energy and growth in distributed electricity generation has led to an increasingly decentralised and fragmented power system.
Traditional business model under threat
This decentralised power system contrasts with the traditional utility business model of one-way delivery of electricity from centralised power plants. In order to respond to this shifting operating environment, utilities will adapt their corporate strategies in three main ways:
- Shaking up the capacity portfolio
- Pursuing demand behind the grid
- Offering EV services
Elements of the strategy are already being implemented, as outlined in the tables below.
Shaking up the capacity portfolio: utilities will continue to prioritise investment in renewable energy, with the aim of capitalising on growth opportunities in this fast-growth market and lessening their exposure to thermal power assets. Government policy will be supportive of this strategy due to increasingly stringent international emissions reduction targets and falling renewable energy technology costs. Government support for renewable projects tends to include financial incentives, power purchase agreements and priority access to the grid.
Conversely, the thermal power sector is looking notably less attractive in a number of developed markets due to tightening environmental regulation. As a result, governments in an increasing number of countries are establishing phase-out programmes for coal capacity; thermal power facilities are facing the installation of costly emission abatement technology; and the availability of finance for new coal facilities is drying up. Furthermore, the influx of renewable energy onto grids has depressed wholesale prices, squeezing the profitability of thermal power projects.
Pursuing demand behind the grid: the deployment of distributed energy and the rising trend of self-consumption is eroding demand for electricity from the centralised grid. This presents a significant risk to utility revenues going forwards.
To combat this, utilities can become more active behind the grid by offering a package of energy services to households and businesses, as opposed to just supplying electricity. This will involve utilities establishing themselves as providers of rooftop solar, battery storage and energy management technology, including smart meters and demand-side response. Offering household energy management services will also become an increasingly important revenue stream.
Offering EV services: the EV market has a lot of potential for utilities to tap into. Firstly, the electrification of transport provides a new avenue of electricity demand for utilities to capitalise on. Secondly, the growing penetration of EVs enables the facilitation of vehicle-to-grid services (V2G). V2G technology allows for electricity to be stored in an EV and then fed back into the grid network. It can play an important role in balancing the electricity system and also allow consumers to sell electricity back to the grid at times of peak demand or use it for self-consumption. This could be facilitated by the partnering of utilities with automobile companies. Finally, growth in EV market penetration will necessitate the roll-out of nationwide charging infrastructure.
Utility firms moving into increasingly crowded market, oil and gas giants set to compete for core operations
A range of new players will complicate implementation of the above strategy for utility firms. In particular, oil and gas majors will encroach on utility firms’ core business of power generation, as well as move into EV services, while a plethora of tech firms will vie for share in the energy services market.
The evolution of corporate strategy at oil and gas majors to adapt to decarbonisation will bring them into competition with utility firms. In recent years increasingly vocal shareholder demands for change at major firms, including ExxonMobil, Royal Dutch Shell and BP, appears to be catalysing a strategic shift. For instance, at BP’s annual shareholder’s meeting in May, 99% of shareholders voted in favour of a resolution committing BP to keeping the company’s carbon emissions in line with the 2015 Paris Agreement.
Although the hydrocarbons industry has been slow to adapt to decarbonisation so far, the vast investment capital available to these companies dwarfs that available to utility firms, making a rapid catch up possible. European oil and gas majors such as BP, Royal Dutch Shell, Total and Equinor (formerly Statoil) are most advanced down the path of investing in decarbonisation.
The key areas of competition between oil and gas firms and utility companies will be renewable power generation and EV services. Diversifying into renewable energy generation may be the path of least resistance for some hydrocarbons companies, where synergies with their existing operations can be found. For instance, there are similarities between funding and implementing the construction of large, capital-intensive extractive and renewable energy infrastructure. Meanwhile, existing retail fuel distribution station infrastructure could be leveraged to offer EV charging facilities.
Tech firms eyeing energy services
Turning to energy services, a variety of technology firms will intensify competition in providing energy services to households and businesses behind the grid. At the household level, the rapidly growing penetration of “smart” household management software from firms, including Amazon, Apple and Google, will provide these companies with a platform from which to expand into household energy management. At a corporate level, firms with existing expertise in energy management, including Honeywell, Schneider Electric and Siemens, are all well placed to expand in this sector.
Georgina Hayden and John Davies are the founders of research and analysis firm, North Shore Analysis. Georgina is an energy consultant and has a special interest in the low carbon economy. John is an economist and has a special interest in emerging markets, global trade and heavy industry.
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