Heather Johnstone, Senior Editor
PricewaterhouseCoopers’ (PwC) 2007 volume of its global utilities survey shows a sea change in the attitude of the world’s utility industry. Last year’s survey examined the ‘big leap forward’ that would be required to address the challenges posed by security of supply and climate change. The overall finding was of a sector that recognized the need for change, but was unsure of when and how this change could be achieved against a background of continuing regulatory uncertainty.
In the 2007 survey, Energy and Efficiency: The Changing Power Climate, we find a power utilities sector transformed. Not only are renewables and nuclear power now found at the top of the most companies’ agendas, the industry also believes that “technological advances can take us into a new era of energy efficiency”. Furthermore, although the sector still believes that government and end users must take the lead on energy efficiency, utilities are now ready to invest in efficiency, not just in their own production and transmission, but also to help their customers become more energy efficient.
The findings of this year’s survey was based on interviews with 119 senior power utility executives from 114 utility companies in 44 countries and four major regions: Europe, The Americas, Asia Pacific and Middle East & Africa (MEA). We present some of the major findings of this comprehensive and thought-provoking survey below.
Renewables take pole position
Renewable energy and energy efficiency have been moving up the survey’s list of key issues for the industry, and, alongside security of supply, they now head that list. Interestingly, utility companies in three major power markets, namely Europe, North America and Asia Pacific, identified renewable energy as the leading major development. Out of the three regions, the responses from American companies were the strongest, with their expectation that sustainability initiatives will feature prominently in coming years.
When asked what type of fuel they expect to account for an increasing share of their market’s energy consumption in the next five years, there was a large increase in the proportion of utilities mentioning wind and nuclear (Figure 1). In the 2006 survey, only 17 per cent and 19 per cent mentioned wind and nuclear, respectively. Yet within a 12-month period both had increased to 48 per cent and 45 per cent, respectively. Indeed, wind power moved ahead of both piped gas and coal in terms of its expected increase in prominence.
Virtually across the board, respondents to the 2007 survey placed an increased emphasis, compared with last year, on the importance of a wide variety of technological developments. Focusing on the specific impact of technological advances on greenhouse gas (GHG) emissions, utilities singled out the trio of nuclear power, renewables and energy efficiency as having the greatest effect.
Survey respondents were surprisingly optimistic about the impact of nuclear power in the next ten-year period, i.e. up to 2017, considering the length of time it takes to build and commission new nuclear plants.
It was also noted that many significant technical and cost hurdles to the implementation of GHG mitigation technologies remain. This is especially true when looking at carbon capture and storage (CCS). At last year’s Eurelectric annual conference, Professor K. Hage, chairman of the European Technology Platform on Zero Emission Fossil Fuel Power Plants, estimated that using CCS to control CO2 emissions might in future cost as much as €30-40/tonne ($42-56/tonne).
Energy efficiency: Is it finally here?
Although energy efficiency has been on the agenda of both utilities and governments for many years, it now appears that climate change concerns are bringing a new urgency and priority to energy efficiency initiatives.
When asked where the energy savings will come from, the majority of respondents pointed to the potential in all areas of the value chain, but the feeling is that the greatest gains in energy efficiency could come from all types of end users, i.e. industrial, commercial and residential customers.
Although utilities believe end users should take the lead on energy efficiency, the majority of respondents said they would be investing to improve efficiency. One striking point is that many plan to invest in all areas of the value chain and end-markets to boost efficiency. Indeed, 72 per cent are making some investment in demand-side efficiency. The propensity to invest is highest in the USA, which is likely to reflect the stronger public and political profile of energy saving, and therefore where the scope to reduce energy consumption is the greatest.
Future emission trading schemes
In the survey of 2006, the majority of utilities expected to see a continuation and expansion of the ‘cap and trade’ market-based approach to emission controls, so this year they were asked to identify the characteristics they believed were important in the development of such schemes.
The key concern was the expansion to cover other industries so that the burden of emissions reduction does not fall disproportionately on the power sector. This was rated as ‘highly important’ by 60 per cent of European and 55 per cent of USA respondents. In respect to the allocation mechanism for allowances, there was more support for ‘auctioning’ than ‘benchmarking’ as a process. In Europe, for example, where companies have experience of the European Union’s emission trading scheme, 48 per cent of respondents favoured auctioning for future schemes, compared with 40 per cent for benchmarking.
Supply and demand challenges
There is little doubt that concerns of supply are intensifying across the globe. This is borne out in the survey with the proportion of utilities anticipating that security of supply will have a major impact on their power (and gas) markets in the next five years increasing significantly from last year’s survey.
Utility companies report that they expect to have to deal with supply and demand conditions that are ‘significantly’ or ‘immensely challenging’. Indeed, 71 per cent of respondents rated the outlook in these terms – a large increase on the 51 per cent in the 2006 survey.
Companies are responding to upstream fuel challenges in a variety of ways. The most common response was to place the emphasis on long-term contracts and improve procurement. However, a third of respondents said they were looking to move towards upstream integration through direct investments, and 25 per cent would focus on sourcing fuel from new regions. This is particularly true among the American respondents, with 30-49 per cent looking to new sources. According to PwC, there is renewed interest in the USA in marginal sources closer to home, such as coal steam gas.
Skills shortage concerns grow
Shortage of knowledge and skills are now becoming a crunch issue for utility companies worldwide, says PwC. Investment in infrastructure, new generation and technology is driving up the demand for expertise, but this is against a background of an aging workforce and, in some countries, fewer graduates studying relevant engineering subjects.
According to research in the USA by Carnegie Mellon University’s Electricity Industry Center, by 2010, 50 per cent of current utility workers will be eligible to retire.
Regulation is a traditional key factor in determining utilities’ company strategies. PwC found that companies would respond to regulatory moves in different ways (Figure 2). Eighty per cent said they would take operational actions, covering a wide spectrum from improving business operations to unbundling. Taking part in industry-wide initiatives to influence and improve the future shape of regulatory frameworks was also highlighted. However, arguably the most controversial finding was that 32 per cent of respondents said they would review their position along the value chain.
PwC then focused on the latter group to find out more information about the nature of this repositioning and discovered that respondents from America (40 per cent) and Europe (34 per cent) were the most prepared to reposition. However, there was a significant difference between the two regions.
In Europe, there appears to be a significant shift towards generation. i.e. away from transmission. In total, 71 per cent of the 34 per cent of European respondents said that they intend to increase their generation, and 47 per cent of the 34 per cent are planning to reduce their presence in transmission. Clearly, there is an overlap between the two groups, and, indeed, two-thirds of the European respondents that said they were exiting, or intending to exit, transmission said they were bulking up in generation.
The picture in the USA is the opposite. There, 47 per cent of repositioning utilities intend to increase their presence in transmission and distribution. According to PwC, infrastructure investment is top of the list of opportunities among USA respondents, as higher costs and regulatory limits on end-use price have impeded the attractiveness of generation.
Steppping up to the plate
PwC’s 2006 survey showed that although utilities acknowledged that significant change had to take place in the industry to combat the threats of security of supply and climate change, they felt impotent because of regulatory uncertainty. It is heartening to see that in this year’s survey, the global power utility industry now appears ready to face these challenges head-on.