Europe’s utilities are currently considering a number of solutions for power problems that continue to grow in complexity and magnitude. Pressing questions of leadership and direction are being posed to governments and there is only one certainty… a revolution is coming.

Robin Rowshangohar

Conservative powers and revolutionary forces have never been the best of friends. Both have separate philosophies, separate ambitions and separate ways of achieving them. Mostly their champions remain in separate territories, working, thinking, growing, but every now and then there is a coming together, which never fails to bring spectacular results.

A conservative nature is, by its very definition, conventional and careful, both key qualities of a successful business climate. So it is with some surprise that the latest annual utility survey conducted by Price-WaterhouseCooper’s (PWC) shows that companies in one of the world’s most important industries are calling for a revolution.

According to The Big Leap, PWC’s eighth annual survey of senior utility executives, the energy industry is facing its biggest challenge of modern times. This sentiment is felt most strongly in Europe, where utilities are dealing with conflicting challenges including supply and demand imbalances, infrastructure vulnerability and environmental concerns.

The change required was described as ‘revolutionary’ or ‘very significant’ by 57 per cent of European respondents to PWC’s survey, and nearly 72 per cent expect to see the biggest change in recent history.

Identifying problems

Speaking to PEi before the launch of the document, which surveyed 116 senior executives from 98 utility companies in 43 countries, the author, Manfred Wiegand, said: “The size of the problem is the same as 20 years ago when the industry switched to favour gas fired generation.” This assertion is backed up by 64 per cent of the respondents.

There is little doubt that companies are expecting massive change, which will go a great way to softening the impact when it finally does arrive. However, as companies are preparing for the future there are concerns that need to be addressed sooner rather than later, which is reflected by the fact that many of the respondents believe that the pace of change needs to be stepped up to prevent a major shock that could have serious negative implications.

Wiegand says: “Companies are fearful that it will take a significant impact to force change. The problem does not leave us long to experiment.”

Figure 1. Europe vs. Global: What is the extent of change?
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The report finds that nearly half of all the European respondents believe that power blackouts or interruptions to gas supply are more likely in today’s climate than they were five years ago.

Behind the worries over gas, is a concern about political instability in supply countries. The fears have grown to such an extent that the European Union recently stepped up its campaign against suspected violations of competition rules. Against a backdrop of security of supply fears, 20 companies in Germany, France, Italy, Belgium, Austria and Hungary were raided by the Commission so that their dealings could be spot checked.

Confidence in coal

The first step towards dealing with any problem is identifying the cause and this is something that the power industry has taken responsibility for. It understands what needs to be done, and to some degree it has started to work towards finding suitable solutions. Well aware that this is only the start of the change process, nearly 60 per cent of those interviewed stated the need for a strong ten-year focus on reducing environmental damage, developing new technologies and finding new fuel sources.

Talking of the industry’s ability to deal with these developments, Wiegand says: “We find a sector with little doubt about the scale of the challenge facing it and it has increasing confidence that it can provide many of the solutions.”

Utilities expect technological developments in coal to be at the centre of any significant change. Coal was identified by many of those surveyed as a key fuel in meeting much of future demand growth, which undoubtedly means that carbon dioxide capturing and sequestration technologies will be required. RWE and E.ON have both announced plans within the last three months to build ‘clean coal’ plants in the UK and other landmark coal projects are planned for Germany and the Netherlands. These technologies are not ready for wide-scale commercial deployment yet, by any means, but they are getting there.

While coal tops the list of fuels expected to make the biggest contribution to meeting future demand growth, the combination of technological developments and high energy prices are also expected to increase the contribution of nuclear in the energy mix. Half of the respondents in Europe said they expect nuclear capacity to increase in the region, which is a fair reflection of what is happening in the current climate. Some countries have firmed their anti-nuclear stance, while some have re-opened the debate on a major scale.

“By stepping out of nuclear we will never achieve what we want to,” says Wiegand, leaning forward in his chair, “but the process has to start now in order to get it online when it really needs to be there.”

Nuclear and coal are again championed when the subject of renewables comes up. Although many of those surveyed feel the pace of renewable energy development lags far behind the level it should be at, the results show an industry that only ever sees it in the background.

“Wherever they [renewables] are commercially viable, they should be used, but they will never replace base load generation,” says Wiegand. “Due to the size of the need, renewables can’t help towards climate change goals. The only thing is clean coal and nuclear.”

Power in numbers

Change does not come without a price. The larger the change needed, the more investment required. This sentiment was echoed by Andy Duff, RWE npower chief executive when he announced RWE’s ambitious plans for a ‘clean coal’ plant in the UK: “It’s not cheap, this kind of technology, and the risk we are taking is significant.”

It is this risk that the PWC report found as the trigger for the latest wave of merger activity. “The need for investment and change is a driver behind recent M&A activity. Only big companies will be able to finance the necessary investment,” Wiegand explains.

Despite protestations from the EU, this trend is expected to continue in the near-term, leaving the future face of the energy industry made up of fewer, much larger super-regional generation and distribution companies. There appears to be little alternative either, as national governments, restricted by other budget commitments will not be in a position to provide the levels of investment required to meet the looming problems.

Figure 2. Europe: Likelihood of electricity blackouts compared to five years ago?
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Wiegand says this is a situation utilities are at ease with: “Companies are not looking for more money from the government. They are looking for a more certain framework to plan their investments.” He continues: “Companies are waiting to see the right policies before they invest. It has to be decided within the next year or two.”

Staggeringly, over 80 per cent of the respondents said that political and regulatory factors are inhibiting the ability of the sector to respond to the immense change challenge that lies ahead.

If strong policy framework is not outlined soon then the report suggests there is a real danger of little being done, allowing the problem to grow to unmanageable proportions. As governments dally between adopting a pure market-oriented approach or a more planned and structured environment, they should bear in mind that while decisions that need to be made may appear tough and unpopular now, the longer they leave it, the worse it is going to get. They have nothing to fear, as after the initial big leap the industry is well prepared to hit the ground running.

As time goes by

Sometimes conservative powers need revolution, to provoke a different perspective for progression or to give a final push to building momentum. The flaw in the process is that the surge brings just as many costs as benefits and it is these costs that mask the pleasure of progress, progress that is ultimately necessary for a more stable future.

Of course, there is an easier way, but it would involve conservative powers and revolutionary forces working, thinking, promoting, an evolutionary process together. This is a concept that companies in the power industry, slightly faster than governments, are starting to recognize. This call from utilities for drastic and immediate change is a call that seeks to mellow the blow of revolution in order to breathe fresh air. And if they get their way, it could mean that for forever-feuding conservatives and revolutionaries, this could be the beginning of a beautiful friendship.