The Future of the Utility Business Model According to Current Utility CEOs
Given the dramatic changes taking place in the energy industry, the incumbents are reacting in different ways. Centrica is trying to remake itself as an energy services provider, powered by big data and smart boilers. Eon and RWE have both split themselves up, hiving off their legacy generation arms to focus on the new world of scattered, cheap renewables. SSE last year started offering broadband services alongside gas and power. Scottish Power is betting big on renewables while it dabbles in batteries. And EDF? It is clinging on for dear life to Hinkley, a project that, whether it happens or not, is likely to serve as a reference point for a time of immense change in which the industry desperately sought the right answer. Many will have got it wrong.
Obviously the changes have not been lost on the leading utility executives and this post captures some of the most relevant comments from the leading CEO's and energy experts across the world.
Iain Conn – Centrica CEO
The chief executive of British Gas owner, Centrica, Iain Conn, recently said that the era of domination by the big six energy companies in the UK has come to an end. Iain Conn called time on the era, saying that a new wave of energy technology was already making the notion of Big Six past tense. "We are on the edge of a revolution," he said. "The Big Six nomenclature will become passe." The development of in-home batteries, cheap solar power and big data all feed into the energy revolution the Big Six are battling, according to Conn. More than 600,000 UK homes are now fitted with solar panels. He added: "We face new challengers in terms of technology, energy supply and generation, energy management and, of course, access to customers. We are going head-to-head with like of Google, Amazon and Samsung." "There will, inevitably, be winners and losers," said Conn.
Johannes Teyssen – E.On CEO
"The integrated model is dead," says Mr Teyssen. Following this comment, the E.On CEO decided to ditch the traditional "plant-to-plug" model of a utility, in which one supplier generates electricity, distributes it across its own network and sells it directly to households and businesses. That model was broken down into parts, with power generation and energy trading residing with Uniper — short for "unique performance" — while renewables, networks and customer services remained with Eon.
Isabelle Kocher – Engie CEO
The world of energy is going through a "structural shift", she says, with demand for big, traditional hydrocarbon power plants falling sharply . At the same time, demand for more decentralised renewable energy is soaring. This is a significant challenge for Engie because most of its power is produced from natural gas and, to a lesser extent, coal. The long-term shift towards renewables is being driven by growing awareness of climate change, she says. "People have woken up to the fact that we need to completely reassess our economy to avoid climate disaster," she says, adding that a turning point was the Paris Climate Accord struck in November 2015 to agree to limit emissions. "People today understand that we need more wind, solar and hydro. We need to replace coal with gas. We need to leave oil in the ground. This is fundamentally challenging the model of all the energy companies." Engie, says Ms Kocher, "simply has to adapt to the new world order". That is why her first announcement as head of Engie was that the group would over the next three years sell €15bn worth of assets, mostly in exploration and production, coal-fired power plants and US gas plants. It will then invest €22bn in renewable energy, energy services such as heating and cooling networks, and decentralised energy technology. She says "there is a massive revolution in the world of energy."
Paul Massara – Former Chief Executive of Npower – "The energy supply business is facing a life-or-death moment." The former boss of Npower, said the combination of rooftop panels, a lithium battery and energy-efficient LED light bulbs would immediately cut power bills by 20%.
Simon Virley, UK Chairman of KPMG's Energy Advisory Practice
He said: "Contracts where homes are fitted with solar panels and batteries raise the prospect of homes becoming largely self-sufficient. This presents a significant challenge for the conventional power generators. They have to find a way to make money by selling a lot less of the product they produce."
Denis Garman, Leader of Duke Energy's Energy Management and Information Solutions Group
Like any other investor-owned utility facing disruption, Duke Energy has come to an existential fork in the road: New business models or no? For Duke, the US's largest electric utility, the answer seems to be a resounding yes. Duke is exploring "new business areas to get in," according to Denis Garman. "We're really trying to rethink our value proposition." "There are lots of new players coming into the marketplace. The rules are being rewritten as we speak," Garman said. "It is incumbent upon us to be purposeful about how we move, and how quickly we move. Because the world is moving fast." Duke Energy is trying to create "enormous" value by being its customers’ "trusted energy advisor". "If you think about the utility model for the last 100 to 130 years, it's probably moved faster in the last three," Garman said. New opportunities, such as the "broader ecosystem around the connected home," are emerging — but they won't last forever, Garman said, and "we've got to be very sensitive to that."
Peter Terium, CEO of RWE
RWE is a traditional centralised distribution electricity utility in Germany and the parent company of npower, one of the "Big Six" energy providers in the UK. The CEO recently acknowledged the inevitability of this shift: "We have to adjust to the fact that, in the longer term, earning capacity in conventional electricity generation will be markedly below what we've seen in recent years," adding that this put strains on RWE's business model. With the rise of the prosumer, houses are gradually turning into small power plants that produce and store electricity. Mr Terium says the utility of the future will form partnerships with prosumers, helping them sell excess energy to the grid when their batteries are full and buy it in if grey or windless days leave them short of power. They will also advise them on reducing their consumption, which is one reason why so many are involved in smart meters that show customers how much energy they use and how much they pay for it. "We want to offer bundled products, where all those functions can be combined under one contract," Mr Terium says. "This industry is leaving a world where customers were just meter numbers," says Terium. Companies such as RWE can no longer just "sell kilowatt hours", he says. They have to present a much broader offer, reflecting the rapidly changing world of energy.
Gérard Mestrallet, chief executive of GDF Suez
"What renewables have been able to bring is the miniaturisation of the equipment needed to produce electricity," Gérard Mestrallet, chief executive of GDF Suez, said in a recent interview. "A wind turbine is a thousand times smaller than a power plant." This allows for distributed generation – production in small quantities near the point of use, rather than in vast amounts in a few locations."