VPRI AlLeon-P0. Enrico Lanzavecchia Alessandro Leona Value Partners. Milan Energy Forum, 24 October 2007

Transcription

1 VPRI071024AlLeonP0 Enrico Lanzavecchia Alessandro Leona Value Partners Milan Energy Forum, 24 October 2007

2 VPRI071024AlLeonP1 UK experience The liberalization in Italy 1

3 VPRI071024AlLeonP2 The gas and electricity domestic market liberalization in UK has started in 1998 From 2002 the UK Authority has removed retail market prices controls, having considered the market sufficiently competitive Today, half of the customer base (26 Mio. EE; 22 Mio Gas) has been reallocated, with an average switching monthly rate of 1,4% 70% of the consumer base who are still with the incumbent are satisfied for prices and services; 15% do not see any reason for change and only 3% consider the switch difficult or ignore the possibility Competition, initially focused on price, is now moving to service level Payment method (prepay, standard credit, direct debit) has effects on price Thanks to the competition, customers can save, yearly, up to 18% on bill amount More and more customers sign fixed price contracts (6Mio customers), green energy or online offers (2,5Mio/year); moreover, 40% of the potential customer base have a dual fuel offer 2

4 VPRI071024AlLeonP3 Progressive market concentration Vertical integration with generation process Players combined presence in electricity and gas Electricity players market share (on # clients) Generation capacity 2006 Electricity and gas market share in mar %= * * Other Scottish power (Iberdrola) Seeboard EDF Energy 14% 10% 5% 10% 11% 14% EDF Energy* 15% 14% 13% 15% Scottish power EDF Energy Npower 5 GW 6,2 GW 2 GW Scottish power EDF Energy Npower 12% 14% 16% 9% 7% 12% 13% Npower (RWE) 17% 14% 16% SSE 10 GW SSE 18% 13% SSE(Scottish hydrosouthern Elec.) Powergen (eon) British Gas (Centrica) 14% 8% 21% 21% 24% 20% 22% Powergen British Gas 11 GW (E.on UK) 4,3 GW (of which 0,9 tolling) Powergen British Gas 19% 21% 46% Dic 01 Dic 03 Mar 06 Electricity Gas * EDF acquires Seeboard Source: Ofgem, corporate web site, Value Partners analysis 3

5 VPRI071024AlLeonP4 Offer development criteria Segmentation essentially centered on purchasing behaviors, for example:. Consumption profiles (independent house vs. apartment house). Payment method (Direct debit, Standard credit, Prepayment) Predominant offer pricedriven, with extension to additional services, for example:. Home Care services (i.e. assistance and fittings maintenance). Other services (i.e. insurances, property mgmt) Growing emphasis on environmentally compatible offers Strong appeal of traditional channels (i.e. franchising), online channel still limited (5% of switching in 2006) growing (i.e. ad hoc offers development), but the use of comparison sites is growing (i.e. Tesco Energy, Energylinx, Energywatch) Benchmark UK: example of electricity and gas offers in London Standard customer s profile Domestic Gas consumptions: ~910 m³/year with British Gas at a standard rate Electricity consumptions:. ~3.200 kwh/year with London Energy at a standard rate Payment through direct bank credit Annual expenditure in energy: 650 Dual fuel offers. 32 of which 7 green. Savings up to 18%. 7 players Only electricity offers. 33 of which 5 green. Savings up to 21%. 7 players Only gas offers. 15. Savings up to 17%. 6 players Source: Ofgem, corporate web sites, Energywatch, Value Partners analysis 4

6 VPRI071024AlLeonP5 Clients changing supplier Steady increase in clients changing supplier Cumulated rate of switch Half of the customer base has been reallocated Apr07 Source: Ofgem 5

7 VPRI071024AlLeonP6! Price differential trend between Prepay and Standard credit and between Prepay and Direct debit Annual savings ( ) calculated on the Best Offer available PPMSC PPMDD 26 Mio Prepay (PPM) 14% Standard credit (SC) 41% Direct debit (DD) 45% Source: OFGEM 6

8 VPRI071024AlLeonP7 " #$% Annual energy bill ( ) London area depending on payment conditions Best offer Prepaid Electric energy Standard credit dual fuel npower 435 Scottish Power 961 Powergen 384 Powergen 913 British Gas Scottish Power British Gas % 9% npower 909 EDF 357 EDF 907 SSE 356 SSE 875 Prepaid gas Direct debit dual fuel npower 617 EDF Energy 865 Powergen 615 Powergen 857 British Gas Scottish Power British Gas 837 9% 5% Scottish Power 836 EDF 579 SSE 828 SSE 560 npower 825 Source: OFGEM, Energywatch on consumer profile 3300kWh EE, kwh gas 7

9 VPRI071024AlLeonP8 UK experience The liberalization in Italy 8

10 VPRI071024AlLeonP9 & Market liberalized from July 1 st 2007 The previous tariff regime was based on two main tariffs with crossed subsidy but not necessarily linked to social aims The temporary tariff regime implies a liberalized energy price component which impacts for 63% of an average D2 customer and for 36% of an average D3 customer The main players (Enel, Eni, Asmea, Aem, ) have already launched several offers (green energy, fixed tariff, fixed discount, fidelity card) and relative promotional campaign, but there isn t a direct comparison mechanism yet; the compulsary summary sheet is only available upon offer request There are still no regulatory indications on the timeframe for complete transition to the free liberalized market nor on the future of the Acquirente Unico The current fixed tariff offers, considering the recent energy cost trends, seem to offer advantages in the medium term, paying an extra initial cost 9

11 VPRI071024AlLeonP10 ' Standard tariffs previously in place D1 Theoretical tariff not applied in practice D2 Domestic clients, residence house and installed power <=3 kw Protection indistinctly offered to all the customers Not differentiated by time slot Yearly expense (Euro) Subsidy from D3s and high consuming D2 customers to low consuming D2s D3 D2 D1 D3 Domestic clients, residence house and installed power > 3kW Non residential houses (eg. 2nd house) Subsidy to D2 customers with low consumption levels Not differentiated by time slot D2 Special term Yearly consumption (kwh) Source: AEEG reference document 10

12 VPRI071024AlLeonP11 ( # )*++, & Domestic electric market Customers consumption profile 10,5 Mio 5 Mio Additional tariffs 62 5% 28 47% 5,5 Mio 62,5% 53% D3 79% 1 st House (> 3kW) ~ High cons. 2 nd House ~ Low cons. 17,5Mio 6,7Mio 37,5% 38% 8,3Mio D2 16% Consumption (TWh) Clients (Mio) 47% 2,6Mio 15% Low consumer < 1,8 MWh/year Medium cons. 1,8 < x < 3,54 MWh/year High cons. >3,54 MWh/year Source: Value Partners analysis on AEEG data and public sources 11

13 VPRI071024AlLeonP12 '. * /0% 12 Euro/year, percent Costs subject to liberalization 360 (100%) 37 (9%) 14 (4%) 223 (62%) PE 53% PD 7% PPE 2% Most players offer discounts on the PE factor only Includes system costs such as:. Nuclear charges. Subsidies for renewable power sources. Special tariff regimes subsidies. R&D expenses. Stranded costs*. 67 (18%) 21 (6%) 2 (1%) Yearly bill VAT (10%) Taxes Energy purchase and Dispatch Other variable costs Fixed amount Fixed amount for sale Variable costs Fixed costs VP analysis on the residential domestic customer, 3kW installed power, consumption 2400 kwh 12

14 VPRI071024AlLeonP13 2 0% 0 Euro/year, percent Costs subject to liberalization 615 (100%) 56 (9%) 60 (10%) The D3t customer pays extra charges to subsidize the D2t customer segment 223 (36%) PE 30% PD 4% PPE 2% 166 (27%) 107 (18%) 2 (0%) Yearly bill VAT (10%) Taxes Energy purchase and Dispatch Other variable costs Fixed amount Fixed amount for sale Variable costs Fixed costs VP analysis on the residential domestic customer, 4,5kW used power, consumption 2400 kwh 13

15 VPRI071024AlLeonP14 Mercato a maggior tutela (controlled market) Offers Monoraria (all day):. D2t (residence <=3kW). D3t (residence >3kW no residence) Two electrical offers:. green only. 1h x 365days Two electrical offers :. Bioraria. EnergiaPuraCasa (certified renewable) Bioraria offer Tariffs (energy component) Monoraria :. 7,94 c/kwh Bioraria * (depending on peak/ off peak):. 6,11 c/kwh off peak. 11,57 c/kwh peak 4,17% saving on the energy factor (1h per day) for the offer 1h x 365days Fixed tariffs for 2 years Bioraria:. 6,97 c/kwh off peak (+14%). 11,17 c/kwh peak (3,4%) Energia pura casa (certified renewable). 8,3 c/kwh(+4,5%) Bioraria tariff:. 5,95 c/kwh off peak (25%). 10,88 c/kwh peak (6%) Bioraria tariff fixed 1 year:. 6,86 c/kwh off peak (+12%). 11,08 c/kwh peak (4,2%) Other plus points You&Agip points Enelpremia (15 equivalent of fuel) additional points Solar power recharger set for internet subscribers for internet subscribers Installment payment possible * Peak is from 8.00 to from Mon to Fri (except holidays) Source: Official web sites, request for quotation, Value Partners Analysis 14

16 VPRI071024AlLeonP Offers Monoraria ècasa attiva: dual fuel ècasa rinnova: renewable sources ècasa sostiene: support to the Red Cross* EnergiaVerde 2 years (EV) PrezzoFisso 1 year (PF1) PrezzoFisso 2 years (PF2) Saving formula Tariffs 3,3% saving (12days in a year) on the energy component ècasa attiva: 8,0015 c/kwh (+0,7%) ècasa rinnova: 8,002 c/kwh (+0,78%) ècasa sostiene: 8,003 c/kwh (+0,8%) EVmono: 8,3 c/kwh EVbio: 11,89 / 5,79 c/kwh <65%> PF1 mono: 8,23 c/kwh PF2 mono: 8,35 c/kwh PF1 bio: 11,64 / 5,64 c/kwh PF2 bio: 11,69 / 5,69 c/kwh <57%> 4% saving on the energy component Other plus 25 coupons to be used in supermarkets Fixed tariff (for 12 months) Fixed tariff for 12 or 24 mths AEM payes unbalance costs (0,54 /kwh discount, equal to 6,8%) Tariff blocked for 12 months * Match charity: 1 MWh from clients + the same amount from Ena Source: Official web sites, request for quotation, Value Partners Analysis 15

17 VPRI071024AlLeonP16 ( 1 Brent and net average domestic tariff trends Brent price and net tariff, index numbers, 1 twomonth period 2000=100 6 Brent price (in Euro) Net average domestic tariff Source: AEEG analysis on Platt s data 16

18 VPRI071024AlLeonP17 & The domestic electricity market is an interesting market especially for Groups with production capacity, with the purpose to balance the amount produced on a customer segment less volatile than industry (customers average lifetime in UK is 4 years) The price advantage for customers is still limited compared to the Acquirente Unico and there are no indications on the customers migration process from the regulated market to the liberalized market The offer transparency should be granted today by the offer comparison form for the different consumer ranges. However the saving reported in the promotions do not give an idea of the related savings, since they only refer to a 3066% part of the total yearly cost The renewable offers could have room for a further growth, considering the customers care on environmental themes (source IRES): 38% of the interviewed target are willing to pay a monthly extra rate (19% between 1 and 10, 17% between 11 and 50 and 2% more than 50 /month) The fixed tariff offers, considering the recent energy cost trends, could bring significant savings in the medium term (as happened in UK) 17

19 VPRI071024AlLeonP18 2 EXAMPLE: 4,5 kw available power 3,65 MWh yearly consumption 75% of which off peak Yearly bill ~800 Biorari tariff until 1 july, then the Authority abolished it Quarterly bill for an average high consumer ( ) Start of bioraria billing* It s only 20 Yes, but multiply it by 5 million users What is the overall effect? Total unit tariff ( c/kwh) lug06 ott06 gen07 apr07 lug07 ott07 24,2 22,9 21,9 22,2 24,5 22,2 * Discount for off peak consumption, extra price for peak (break even at 30% peak consumption) 18

20 CodeP19 Enrico Lanzavecchia, Director In twenty years of management consulting he conducted projects in Italy and abroad for corporations in the energy & utilities, telecom and consumer goods industries. He is leader of the Energy practice. Previous experience: Engagement Manager at McKinsey & Company, Management Accountant at Henkel Italy. Degree in Economics and Statistics from the Bocconi University, Milan, MBA at INSEAD, Fontainebleau. Alessandro Leona, Senior Engagement Manager He developed significant professional expertise in strategy, organisation and cost efficiency projects in different sectors, mainly energy & gas, industry, and services. Previous experience: McKinsey & Company, ST Microelectronics, National Institute for Nuclear Physics and Lawrence Berkeley Lab (CA) Degree in Electronics Engineering from the University of Pavia and PhD in Electronics and Information Systems at the University of Pavia in collaboration with Lawrence Berkeley Laboratory Berkeley (CA). MBA at MIP, Milan Polytechnic 19