Energy Radar. The future of Germany's energy sector. Düsseldorf, March Roland_Berger_Energy_Radar_ pptx

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1 Energy Radar The future of Germany's energy sector Düsseldorf, March

2 ENERGY RADAR Summary Study findings > The skills required in the future are very different from those required today Implications > Employee training and cooperative partnerships are essential > The industry is devoting its attention to two aspects for its future positioning Customers, innovation and employee training Efficiency and further development of the asset-driven business > Solutions need to be found to balance innovation and efficiency Creativity and customer orientation on the one hand Further developing the traditional business areas in a strictly efficiencyoriented way on the other > There is a high level of uncertainty in the industry regarding future development > Cultural change is inevitable, involving: Readiness to try out new topics and discard them if necessary Shorter half-lives of business models and organizational structures 2

3 ENERGY RADAR Background and starting point of the study Background Questions Increasingly DYNAMIC More REGULATORY/ POLITICAL actions A B What TRENDS determine today's and tomorrow's competition in the energy sector? What SKILLS are critical for success, now and in the future? DISAPPEARING traditional value creation roles and declining importance What positioning options are there and C what action is needed? 3

4 ENERGY RADAR We talked to experts in the energy sector We investigated trends, skills and the need for action with a structured questionnaire A. Trends 1. Fundamental developments 2. Development of environment overall 3. Development of industry environment B. Company-specific skills 1. At each step of the value chain 2. Along the entire value chain C. Need for action Respondents > Managers/employees from Germany's "Big 4" energy companies, and regional and municipal suppliers > Directors/members of relevant academic chairs/institutions > New energy players > Country focus: Germany 4

5 ENERGY RADAR Basis for our analysis We received 126 responses to our questionnaire Respondents 28% 33% 21% 18% "Big 4" Regional suppliers Municipal suppliers Other 5

6 A. What TRENDS determine today's and tomorrow's competition in the energy sector?

7 TRENDS Importance of industry trends for companies' development TODAY TOMORROW GAIN IN IMPORTANCE 1) Political, legal and regulatory topics dominate Political, legal and regulatory topics continue to be decisive Topics that make it clear power companies will have to change Partnerships, innovation, employees Technologies that support the energy transition Storage, virtual power plants, etc. LOSS OF IMPORTANCE 2) Commodity prices (except gas) Conventional generation technology Network regulation 1) Trends with the greatest increase in importance over the next 10 years 2) Trends with the greatest decrease in importance over the next 10 years 7

8 TRENDS today TODAY: The current market environment is dominated by political, legal and regulatory developments Current top 10 industry trends for company development Politically initiated upheaval Grid fees system Gas prices Incentive regulation EU standards/targets Effectiveness/efficiency (conventional) Industrial customers willingness to switch LOW HIGH > Five of the ten current top trends are political, legal or regulatory > Technological development plays a downstream role aside from the efficiency of conventional generation and CHP Combined heat & power Security of supply Price competition Politics and regulation currently dominate Political, legal and regulatory environment Procurement markets Technological environment Customer behavior Competition 8

9 TRENDS today Political, legal and regulatory issues dominate across the entire industry "BIG 4" REGIONAL SUPPLIERS MUNICIPAL SUPPLIERS Politically initiated upheaval Politically initiated upheaval Politically initiated upheaval Move away from nuclear power Grid fees system Grid fees system Effectiveness/efficiency (conventional) Grid fees system Combined heat & power Effectiveness/efficiency (conventional) Industrial customers' readiness to switch Incentive regulation Gas prices Incentive regulation Gas prices EU standards/targets Citizen protests against infrastructure plans Support of renewable energies Coal prices Approval process for infrastructure projects Industrial customers' readiness to switch Security of supply Gas prices Competition/price oversight by antitrust authorities Price competition Price competition Security of supply Combined heat & power EU standards/targets Economic growth > Politically initiated upheaval takes the top spot for all types of energy providers > Technology and procurement prices follow, but at a distance > Price competition is of relatively major importance for municipal suppliers Politics and regulation currently dominate Political, legal and regulatory environment Procurement markets Technological environment Customer behavior Competition Business environment Social environment 9

10 TRENDS tomorrow TOMORROW: Political upheaval will continue to dominate in the future Innovation, employees and cooperation gain importance Future (in ten years) top 10 industry trends for company development Politically initiated upheaval Security of supply Shortage of experts Effectiveness/efficiency (conventional) Networks/cooperation EU standards/targets LOW HIGH > Political upheaval will continue to dominate in the future > The importance of security of supply will rise considerably > Three new factors cracked the top 10: "Networks/cooperation", "Innovation competition" and "Shortage of experts" CHP Innovation competition Gas prices Grid fees system Political change continues Innovation, cooperative arrangements and employees take center stage Political, legal and regulatory environment Social environment Technological environment Competition Procurement markets 10

11 TRENDS Gaining importance Technological development in the context of the energy transition will see the greatest increase in importance Top 10 industry trends with the greatest rise in importance Battery storage Smart grids/meters LOW HIGH > Eight of the ten industry trends expected to see the greatest gain in importance involve technological developments Power to gas Other storage technologies > Storage technologies especially will increase in importance Virtual power plants Capacity mechanisms Self-supply by private/corporate customers > Besides technology, only "Capacity mechanisms" and the trend toward "Self-supply" will see a major increase E-mobility Wind energy (offshore) Energy efficiency products Technology topics related to the energy transition will gain the most in importance Technological environment Political, legal and regulatory environment Customer behavior 11

12 TRENDS Gaining importance Municipal suppliers believe the importance of technology topics in the context of the energy transition will rise the most Top 10 industry trends with the greatest rise in importance Battery storage Smart grids/meters Power to gas Other storage technologies Virtual power plants Capacity mechanisms Self-supply by private/corporate customers LOW HIGH > Municipal suppliers believe the importance of all technology topics (except for offshore wind energy and energy efficiency) will grow the most > Increase of "Power to gas" is rated much lower by the Big 4 E-mobility Wind energy (offshore) Energy efficiency products Technology topics will see the biggest jump in importance Technological environment Political, legal and regulatory environment Customer behavior "Big 4" Regional suppliers Municipal suppliers 12

13 B. What SKILLS are critical for success, now and in the future?

14 SKILLS Importance of skills for company success TODAY TOMORROW GAIN IN IMPORTANCE 1) Key skills today are Cost reduction/ optimization Strategy/ management Customer orientation Customer orientation Optimization But focus switches to continuous process improvement Innovation/corporate development Innovation/new business models LOSS OF IMPORTANCE 2) One-time, fundamental cost reduction/optimization Employee training 1) Skills with the greatest increase in importance over the next 10 years 2) Skills with the greatest decrease in importance over the next 10 years 14

15 SKILLS today TODAY: Cost reduction/optimization and gaining customer loyalty are important skills Today's top 10 skills that are crucial for a company's success Customer loyalty Regulation management Plant optimization (conventional generation) Controlling/risk management Strategic company development Cost-efficient operation and maintenance (network) Cost-efficient operation and maintenance (conventional generation) LOW HIGH > Optimization and cost efficiency are represented 4 times in the top 10 > Company management topics form a secondary focus > Customer loyalty plays a significant role Cost efficiency (sales) Knowledge of customer needs Electricity trade Cost efficiency and customer focus currently dominate Customer orientation Company management Cost reduction/optimization Trade 15

16 SKILLS tomorrow TOMORROW: ability to adapt/flexibility, corporate strategy and knowledge of customer needs are in a three-way tie at the top Tomorrow's (in ten years) top 10 skills that are crucial for a company's success Ability to adapt/flexibility Strategic company development Knowledge of cust. needs LOW HIGH > Adjusting to the new environment of the increasingly decentralized energy sector and focus on the customer were rated the highest Customer loyalty Continuous process optimization Employee development > Continuous optimization is becoming more important than one-off cost reduction Employer attractiveness Cost efficiency (sales) Cost-efficient operation & maintenance (network) Flexibility of the roadmap Flexibility and sales competence will be important in the future Innovation Company management Customer orientation Cost reduction/optimization Employee training 16

17 SKILLS tomorrow Customer orientation and strategic company development are main topics for all power company categories 1 2 "BIG 4" Strategic company development Cost-efficient operation & maintenance (conv'l generation) 3 Flexibility of the roadmap REGIONAL SUPPLIERS Ability to adapt/ flexibility Knowledge of customer needs Strategic company development 4 Regulation management Customer loyalty 5 Knowledge of customer needs Continuous process optimization 6 Customer loyalty Employee development 7 Cost efficiency (sales) Entrepreneurship Ability to adapt/ flexibility Cost efficiency overhead (conventional generation) Continuous process optimization Controlling/ risk management Cost efficiency (sales) Project management (incl. approval processes) MUNICIPAL SUPPLIERS Customer loyalty Knowledge of customer needs Strategic company development Cost-efficient operation & maintenance (network) Ability to adapt/ flexibility Cost efficiency (sales) Continuous process optimization Cost efficiency overhead (network) Targeted customer approach Employee development > For municipal suppliers, customer orientation has the greatest importance > For regional providers, flexibility is of crucial importance > The "Big 4" view strategic company development as the decisive factor Customer orientation and strategic company development were ranked at the top in all categories Innovation Company management Customer orientation Cost reduction/optimization Employee training 17

18 SKILLS Gaining importance The importance of developing new business models is rising dramatically Top 10 skills with the greatest increase in importance Employees at all levels of the value chain New business models outside commodities area (sales) Ability to adapt/flexibility Managing cooperative arrangements Flexibility of the roadmap Product dvlpmt./new business models (convent. generation)) Product dvlpmt./new business models (renewable generation Product dvlpmt./new business models (e.g. local balancingg) (network) Process innovation Entrepreneurship LOW HIGH > The importance of innovation topics will increase the most > New business models in sales are becoming more important than those in conventional or renewable generation or those for the network > The importance of product developments on different levels of the value chain will see strong growth In the future, the ability to change will be critical Company management Innovation 18

19 C. What positioning options are there and what action is needed?

20 WHERE ACTION IS NEEDED There are two focuses for future positioning 1 Customers, innovations 2 Efficiency and further develand employee training opment in asset-driven business > Customer takes center stage > Innovations and employees will ensure the company's future success > Focus on optimization > The characteristics of a company's management are relevant for further development Analysis basis: factor analysis identified two statistically significant elements 20

21 WHERE ACTION IS NEEDED 1. Customers, innovations and employee training LOW HIGH Customers Innovation Knowledge of customer needs Customer acquisition Customer loyalty New business models in commodities Process innovation New business models outside of commodities > Customer needs will be the most important aspect of this element in the future > "Innovation" here refers especially to new business models Employee training Employee incentive systems Employees at every stage in the value chain Employee development Current importance Future importance 21

22 WHERE ACTION IS NEEDED Action needed regarding customers, innovation and employees "Setting up new business models in connection with decentralized power supply" "BIG 4" "Develop from an energy seller into an energy service provider" REGIONAL SUPPLIERS "Process stability in sales" MUNICIPAL UTILITY "Expand new and more locally oriented business areas, e.g. consulting, energy efficiency, contractor services" MUNICIPAL UTILITY "Internal training to quickly develop employees into 'entrepreneurs' " REGIONAL SUPPLIER "Share know-how and handle succession without losing specialist skills" MUNICIPAL UTILITY "Product innovations derived from customer needs" REGIONAL SUPPLIERS 22

23 WHERE ACTION IS NEEDED 2. Efficiency and further development in asset-driven business LOW HIGH Cost efficiency Plant optimization Cost-efficient operation & maintenance (conventional generation) Cost efficiency overhead (conventional generation) Cost-efficient operation & maintenance (network) Flexibility of the roadmap Lifecycle management Plant optimization > Both optimizing and managing existing plants are key > Cost efficiency is relevant for all plantintensive areas > Company management is the medium for optimization Company management Asset management Concession management Regulation management Current importance Future importance 23

24 WHERE ACTION IS NEEDED Need for action in efficiency and further development in asset-driven business "Linking regulation and asset management more closely" "BIG 4" "Optimizing structures and processes in the technical network areas" MUNICIPAL UTILITY "Continuous efficiency improvement in the organization" REGIONAL SUPPLIERS "Cost optimization, horizontal cooperative arrangements, more flexible energy procurement, risk management" MUNICIPAL UTILITY "Ensuring the profitability of conventional generation" REGIONAL SUPPLIERS "Make power plant usage flexible in a cost-efficient way" "BIG 4" 24

25 WHERE ACTION IS NEEDED Summary: We can define two skills clusters But trends still have a high degree of uncertainty Two (statistically significant) factors were derived for future positioning Skills cluster I Customer, innovation, employee training Skills cluster II Efficiency and further development in asset-driven business Gas prices Networks/cooperation Security of supply Combined heat & power Innovation competition Effectiveness/efficiency (conventional) Shortage of experts Politically initiated upheaval EU standards/targets Grid fees system Trends are diverse, but don't form any clear groups Companies have to cope with high uncertainty 25

26 WHERE ACTION IS NEEDED Use innovation, cooperation and efficiency to support the cultural change and prepare employees for the transformation Employee training focuses especially on INNOVATION Cultural change creates the basis for coping with shorter "half-lives" of e.g. products, structures supports COOPERATION EFFICIENCY/ CONTINUOUS IMPROVEMENT 26

27 Backup

28 BACKUP Consistent assessments Political, legal and regulatory developments dominate Current top 10 industry trends for company development Politically initiated upheaval Network tariff structure Gas prices Incentive regulation EU standards/targets Effectiveness/efficiency (conventional) Industrial customers willingness to switch LOW HIGH > Five of the current top 10 trends have political, legal or regulatory aspects > Politically initiated upheaval still important for the "Big 4" "CHP" and "Security of supply", by contrast, rated as less so Combined heat & power Security of supply Price competition Politics and regulation currently dominate Political, legal and regulatory environment Procurement markets Technological environment Customer behavior Competition "Big 4" Regional suppliers Municipal suppliers 28

29 BACKUP The picture is different depending on the type of company But technological industry drivers are important across the board "BIG 4" REGIONAL SUPPLIERS 1 Politically initiated upheaval Effectiveness/efficiency (conventional) MUNICIPAL SUPPLIERS Combined heat & power Effectiveness/efficiency (conventional) Shortage of experts Politically initiated upheaval 3 EU standards/targets Security of supply Shortage of experts 4 Citizen protests against infrastructure plans Innovation competition Security of supply 5 Grid fees system Energy-efficient products Networks/cooperation 6 Gas prices Politically initiated upheaval Price competition Capacity mechanisms Networks/cooperation EU standards/targets Wind energy (offshore) 9 Networks/cooperation 10 Industrial customers' trend toward self-supply Combined heat & power System services (e.g. elec. balancing markets) Demand decrease Industrial customers' readiness to switch Gas prices Effectiveness/efficiency (conventional) > "Shortage of experts" is a major concern for regional and municipal suppliers > "Security of supply" not a top factor for the "Big 4" > Combined heat & power is of key importance for municipal suppliers in particular > Efficiency plays a big role for "Big 4" and regional suppliers Technologies/innovation become more important Political, legal and regulatory environment Technological environment Social environment Procurement markets Competition Customer behavior 29

30 TRENDS Losing importance All of the declining trends are related to the political environment or conventional power generation Top industry trends with the greatest decrease in importance Black coal Brown coal Exit from nuclear power LOW HIGH > The importance of fossil fuels in power generation will decrease most dramatically > 5 factors have political, legal or regulatory aspects Oil prices Coal prices Politically initiated upheavals Incentive regulation > Political decisions continue to be important to power companies, but their impact is tapering off Competition/price oversight by anti-trust authorities Grid fees system Conventional fuels will see the greatest loss of importance Technological environment Political, legal and regulatory environment Procurement markets 30

31 BACKUP Background information on conducting the factor analysis Scree plot Eigenvalue No. of factors > Using the scree plot for extraction identified two factors > Extraction method: Principal component analysis > Rotation process: Varimax rotation > Overall, 40.5% of the variance can be explained by the extracted factors > KMO criterion: > Eigenvalue Factor 1: Factor 2:

32 BACKUP Definitions of terms SCREE PLOT PRINCIPAL COMPONENT METHOD VARIMAX ROTATION EXPLAINED VARIANCE KMO CRITERION EIGEN- VALUES Eigenvalues are plotted on a coordinate system in descending order. The line makes an "elbow" at the point where the difference in the eigenvalues between the two factors is greatest. The point value of the elbow determines the number of factors to be extracted Assumes that the variance of an output variable can be completely explained by extracting the factors An orthogonal rotation that assumes the factors are uncorrelated with one another Describes the proportion of variation accounted for by the factors of the considered variables. When all possible factors are extracted, the variance is 100% explained A test value calculated based on the anti-image correlation matrix. Shows to what extent the output variables should be grouped together and therefore serves as an indicator of whether or not factor analysis is worthwhile. The KMO value permits an assessment of the correlation matrix as a whole as well as of individual variables. It should be between 0.5 and is deemed to be "mediocre" Indicate what weight both factors should carry when describing the observed correlation(s). The Kaiser rule is to drop all components with eigenvalues under 1.0 Source: Backhaus, K; Erichson, B; Plinke, R: Multivariate Analysemethoden. 12th ed., Springer, Berlin

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