According to a recent report by McKinsey & Co, publicly listed utility companies globally have experienced lower returns over the course of the last decade. According to the consultancy, cumulative shareholder returns of about 1% have been realised between 2007 and 2017, compared to 55% other global manufacturing and service companies.
The Financial Times reported that “Centrica of the UK has seen its share price fall 50% over the past four years. France’s EDF has lost 65% of its value since the 2005 initial public offering. Despite some recent recovery, the German utility RWE is worth little more than a fifth of its peak value 10 years ago.”
It is anticipated the electricity demand will grow faster than another other type of energy, driven by economic growth across the developing world, along with the increased electrification of the transport sector.
Yet, with an anticipated $7.2 trillion that needs to be invested between 2016 and 2025, utilities will need to improve performance and create value in order to remain financially viable. In the face of increasing competition from non-traditional market entrants, changes need to be undertaken faster and with more skill than has been previously shown. Utilities will need to focus on improving efficiency to drive prices down yet provide better reliability and safety.
How will this scenario be impacted by the increased impact of distributed generation and the need to investment in sophisticated systems to manage the flow of electricity in a bi-directional manner in a decentralised way?
McKinsey recommends the following actions:
Get scale:With increasing competition in the market, scale will become an important differentiator.
“Renewables and retail, with their fixed cost structure, are two areas where scale and competitiveness go hand in hand.”
Scale may require a review of capital investments, and even the need to divest assets or consider consolidation.
Embrace new technologies: Applying analytics to the network can lead to significant cost effectiveness improvements. According to the report, up to 25% maintenance and replacement cost savings for transformers and circuit breakers and up to 20% for maintenance and replacement of overhead and underground cables have been realised.
Regulatory management: With a potential increase in ‘top-down regulation’ utilities will be well served by anticipating regulation or helping define and shape it. Effectively managing regulation relationships will be a priority, along with “active institutional advocacy.”
Explore adjacencies: With so many changes already on the cards, it may be an opportunity to embrace the change and consider launching a new business model according to the analysts at McKinsey. This may then see T&D operators expanding into telecom infrastructure or expanding into completely new fields such as insurance or consumer credit.
The reality is that the utility industry is on the cusp of an enormous change – those that embrace the change stand a chance of prospering; the others may well be putting their futures at risk.