Meeting global challenges

Power and utilities businesses must assess their core assets and determine which new assets and functions will help them remain competitive in the transformed market


In the last article, we looked at the lessons learned by banks as they respond to the economic crisis. In this article, we look at how power and utilities companies react to the crisis and plan for the road ahead. Power and utilities companies held up well in the global recession compared to other industries but there are lessons from change that are taking on new importance for these companies as well, to thrive in the new economic environment.

The simple model of providing power, collecting revenue and securing rate increases is disappearing. The power and utilities sector faces a lengthy period of transformation. New power plants will be needed but given the higher costs of construction and financing, power and utilities companies will be under greater pressures to plan for long-term investment. The industry cannot maintain the status quo. Companies must make tough decisions today.

Tomorrow’s infrastructure
The power and utilities industry must undertake a massive investment to address global challenges in new ways. As new technologies find their way to emerging markets and the recession lifts, power demand is expected to surge. The sector faces a lengthy period of active transformation that is projected to continue for some time. These changes are driven by the need to decarbonise energy supplies, reduce exposure to volatile commodity markets and embrace new, “smart” technologies, while continuing to show a profit under evolving market conditions.
The major challenges in transforming the industry are:

• Integrating new, clean technologies into the generation mix and existing networks

• Competing for funding, talent, equipment and other resources

• Securing reliable energy supply

• Influencing, anticipating and complying with ever-changing regulations and markets

• Offering affordable energy to customers

Cash preservation
Power and utilities companies have historically been perceived as a safe business and investment haven. To some extent this perception is still justified particularly given the recession’s heavier impact on other industries. However, cash can no longer be taken for granted. The recession saw customer demand decrease, bad debt increase and credit become less available. Worldwide, companies have had to be much more proactive in their cash management. Power and utilities businesses with substantial trading positions must maintain adequate reserves to cover adverse movements in commodity prices.

Counterparty has counterparties
Financial instability in key suppliers can prove to be a lethal contagion for any business. Counterparty risks can be found within several degrees of separation from the business. Ongoing assessment of counterparty risk can help prevent a crisis. In addition, diversifying the supply base is a straightforward way to reduce counterparty risk. Now more than ever, it is important to achieve and maintain a strong credit rating.

Identifying key risks
Today’s power and utilities companies must also be risk management companies. For power and utilities companies, strategic risk arises directly from the new low-carbon agenda, the increasing insecurity of traditional energy supplies and a potential skills gap. These new strategic risks, driven by the transformation agenda, could fundamentally change the industry’s entire risk profile. As customers and trading counterparties of energy companies continue to struggle, credit risk continues to be an important consideration for the sector. The risks of long-term storage, capacity or transportation contracts should continue to be evaluated, but power and utilities companies need to go further, assessing the full spectrum of potential risks.

Remaining alert
While operational effectiveness is always important, adaptability has become an increasingly essential trait. The strong impact of the global financial crisis has elevated the existing focus on performance improvement. New operational models need to be adopted to help the power and utilities industry recalibrate its business successfully as it transforms, particularly around carbon reduction and green initiatives.

Technology is a wise spend
Creating more effective and efficient IT systems has a massive influence on cost containment and reduction. New IT systems are especially needed in the case of recent carve-outs. With significant changes on the horizon — including advanced metering, smart grids and low-carbon generation — legacy systems are unlikely to be able to meet even medium-term needs.

The current economic crisis has also had a positive effect on financial transformation initiatives in the sector. Financial information affects every part of an organisation and many utilities companies are now seizing the opportunity to match best practice with other sectors.

Embracing change
There can be no doubt that the significant strategic changes in the power and utilities industry during the last five years have been heightened by the economic crisis. Economists globally are associating green technologies as the next driver for growth.

All players in the industry should be prepared to pinpoint exactly where the business stands in the value chain and build the best case for that position. To prepare for a low-carbon, competitive landscape, any asset acquired must fit into a portfolio of activities that respond to an impending reality. And low-carbon, renewable resources, nuclear power, advanced carbon capture technology and smart-grid capabilities are components of the energy portfolio of tomorrow.

Anticipation and agility
In this sector, regulatory decisions are one of the most important factors in investment. As the supply chain and the market become more complex, there is a strong need for companies to maintain close relationships with regulators, governments and customers, which will allow them to explain the realities of delivery against the expectations for change.

While the credit markets are beginning to loosen, access to capital will undoubtedly continue to be relatively tight during the next 18 to 24 months. Companies needing cash will have to dispose of noncore assets, with a view to minimising losses.
The transformation agenda

Power and utilities companies have not been as severely affected as other sectors by the financial crisis and the downturn. Although industrial power demand has been hard hit, demand for energy among residential customers is relatively stable. To some extent, government support and subsidies have leveled out demand fluctuations. However, the sector has faced increased financing costs and problems accessing finance.

The main lesson from this downturn is that the business environment is more challenging. Decisions must be faster and bolder, and based on a clear vision and a core strategy that embraces the transformation agenda. Executives, who show ingenuity, have the courage to make tough decisions and demonstrate the foresight to apply lessons from change will guide their companies to success in the power and utilities sector. They will be the leaders who establish the foundation upon which our new global economy will rise.

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