UTILITY BUSINESS MODELS Future of Utilities discussion 6 October Andy Kelly

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1 UTILITY BUSINESS MODELS Future of Utilities discussion 6 October 2015 Andy Kelly

2 PÖYRY MANAGEMENT CONSULTING A division of Pöyry a global consulting and engineering company Over 250 energy market experts in 15 offices across Europe Independent advice on commercial and strategic decisions Informed and high quality regulatory and policy advice Underpinned by a pan-european market modelling capability Pöyry offices Pöyry Management Consulting offices (c) grafikdienst.com Experts in market design with references from across Europe and beyond COPYRIGHT PÖYRY FUTURE OF UTILITIES 2

3 ENERGY POLICY AND MARKET DESIGN MUST EVOLVE TO DELIVER DECARBONISATION Europe faces a policy dilemma between re-regulation and liberalisation; whether to rely on European markets and a strong CO 2 regime, or to build national solutions with government-channelled investment What are the consequences for future electricity market design? Will the future energy sector be based on market principles or are we returning to regulated investments? How will EU and national policy objectives be balanced in the future framework? How will emissions targets and renewables targets be balanced? How will we ensure that investment is made in a timely and efficient manner? COPYRIGHT PÖYRY FUTURE OF UTILITIES 3

4 WHILE EUROPEAN UTILITIES ARE UNDER SEVERE PRESSURE TO IMPROVE FINANCIAL PERFORMANCE Selected stock indices Source: Thomson Reuters COPYRIGHT PÖYRY FUTURE OF UTILITIES 4

5 Generation (GW) Electricity price ( /MWh) Generation (GW) INTERMITTENCY WILL BE A MAJOR CHALLENGE IN THE FUTURE 8 Intermittent generation ElectricityPrice In 2030, with much more wind generation, the entire system has to flex in response to wind generation Nuclear CCGT Biomass Other renewables CCSCoal Demand Coal Peaking plants CHP Imports Jan 04-Jan 07-Jan 10-Jan 13-Jan 16-Jan 19-Jan 22-Jan 25-Jan 28-Jan 31-Jan Chart shows January 2030 with 2000 wind patterns COPYRIGHT PÖYRY FUTURE OF UTILITIES 5

6 GIVING RISE TO SIGNIFICANT VARIABILITY AND UNPREDICTABILITY ON THE SYSTEM At the day ahead and at the within day stage Hourly dispatch change, 2020 (GW) /DSR More flexibility needed to manage the system COPYRIGHT PÖYRY FUTURE OF UTILITIES 6

7 DRIVERS OF CHANGE EU energy markets are being challenged by transformational change through policy-induced technological revolution Can we achieve decarbonisation with security and affordability? Policy targets Will Internet of Everything connect demand, decentralised generation and storage technologies? Can energy markets adapt to the new mix of generation under support regimes? Markets Market Players Technology Regulation Will integrated EU-level competitive market based designs survive national politics? COPYRIGHT PÖYRY FUTURE OF UTILITIES 7

8 THE SMART ENERGY FUTURE Generation, demand and storage interact dynamically Source: Eurelectric Consumers are at the heart of the transformation lots of opportunities for the industry in getting from today s system to the future vision COPYRIGHT PÖYRY FUTURE OF UTILITIES 8

9 THE CONSUMER WILL NO LONGER BE SIMPLY A SERVICE TAKER BUT WILL INCREASINGLY BECOME A SERVICE PROVIDER Frequencyresponsive devices Home automation Provision of price information to consumers Residential Devices Aggregation of DG and controllable demand Utility Operation Smart Grid Devices Consumers Appliance monitoring and control Management of storage and EV charging cycles Commercial & Industrial Devices Monitoring and control of microgeneration The consumer will be increasingly interacting at both a local and national level with a variety of actors in the energy value chain as part of the new smart energy paradigm COPYRIGHT PÖYRY FUTURE OF UTILITIES 9

10 WHAT WOULD AN INTEGRATED ENERGY COMPANY LOOK LIKE IN THE FUTURE? Access to a portfolio of generation and demand Hedging, optimisation, risk management, trading skills and collateral Control of big data Customers good engagement, good understanding of their needs Ability to deploy user-friendly applications and automation tools COPYRIGHT PÖYRY FUTURE OF UTILITIES 10

11 HOW DO TRADITIONAL UTILITIES SCORE AGAINST THE FUTURE CAPABILITIES REQUIREMENTS? Currently they only (and partly) fulfil the first two roles Access to a portfolio of generation and demand Hedging, optimisation, risk management, trading skills and collateral Big data User friendly Applications and automation tools Customers relationship Traditional utilities Yes, BUT often an inflexible, heavily thermal portfolio with little demand contribution? Who does it now? Energy companies, with emphasis on ownership Energy companies and (decreasingly) financial players Aggregators: Existing energy companies may need to extend their capabilities to provide the full scope. Most utilities do not cover the third or fourth item, and doubtful on the fifth. What could be contracted out? Acquired? Lots of potential competitors/partners in the marketplace which need to be analysed COPYRIGHT PÖYRY FUTURE OF UTILITIES 11

12 SMART TECHNOLOGIES ARE ALREADY APPEARING TODAY Smart energy package Demand-side management Smart heating app Electric vehicles Fortum developed a smart energy package containing in-home displays, PV, on-line reporting and smart heating solutions as well as home security Swisscom Energy Solutions has developed an innovative model to combine Smart Home with demand side management. (BeSmart) British Gas offers a smart heating system for their gas customers that includes a kit of hardware as well as an online account and a mobile app. BMW has invested 2 bn in the development of a breakthrough electric vehicle - the BMW i3. COPYRIGHT PÖYRY FUTURE OF UTILITIES 12

13 CONCLUDING THOUGHTS There are many drivers of change, both at an EU level and within individual countries Intermittency represents a significant challenge for the European energy markets; and predictability and flexibility will be increasingly important: Market designs and trading should value flexibility Customers can offer a physical hedge against volatility A smarter energy business model is needed, with the consumer at the heart of this transformation There is potentially significant value for both conventional and new players, if they allow their business models to evolve COPYRIGHT PÖYRY FUTURE OF UTILITIES 13

14 Contact: Andy Kelly, Phone: COPYRIGHT PÖYRY