Mark Coughlin, PwC Australia’s energy, utilities and mining leader, examines the forces set to shape the power utilities sector in 2016.
When the Prime Minister last year said “There has never been a more exciting time to be an Australian,” he could have extended that to say “an Australian energy provider”.
Never before has the industry experienced such a convergence of change. Climate change, asset sales, new technology, regulatory scrutiny, evolving customer expectations – the list goes on.
At a more granular level there are also market forces bringing changes forward to today that many in the industry didn’t expect to see for a decade or longer.
When we published Utility of the Future – an Australian Context in 2014 we had some very robust discussions with the ‘flat earth society’ that change was coming quickly and that the industry was not doing enough to respond.
Many of our predictions have been correct, but they happened much more quickly than we expected. The pace of change is extraordinary, and historically, rapid change isn’t something the sector has had to deal with. Moving too slowly now has become a major strategic risk.
Recent PwC research with global energy company CEOs told us that the largest shapers of strategy in the sector are governments, regulators and customers.
That might seem obvious, but the point here is the rapid increase of the impact of the customer in this conversation. Historically, the biggest influencers of strategy were policymakers and regulators, with customers a very distant third.
A huge leap in thinking had occurred, with many in the sector now acknowledging that customers are more important than the engineering and technical elements of their business.
This shift in thinking will provide the platform for future success, and already we are seeing examples of how the sector is looking to put meat on the bones of this customer-centric rhetoric.
For example, the popularity of distributed generation continues unabated. Distributed generation, including solar photovoltaic (PV), is now present on more than 1.3 million Australian homes, with capacity now outstripping that of major power plants.
The removal of government subsidies has also been offset by economies of scale driving down costs. We don’t see the uptake of distributed generation slowing.
Energy storage is rapidly becoming an economic option in more than just niche applications. This factor alone has the potential to change one of the fundamental assumptions underlying power market and power system design: that electricity cannot be stored.
We see the conversation shifting within energy companies that have traditionally had a monopolistic view on the world – the customer is now a competitor and challenging the monopoly.
What is really exciting is that many companies are working through how they can best capitalise on this and create new value streams. The question is whether market structures are ready to cope with this important development.
As battery storage technology becomes more commercially viable, customers will be able to combine solar PV generation and storage, enabling them to offset usage during peak tariff periods, rectifying the current symmetry between solar generation and energy consumption patterns.
We expect to see moves to better price signals in time-of-use tariffs for residential customers, and some very innovative commercial arrangements for business customers. We have just seen major industrial players make announcements on how they are planning to enter the energy market as a participant.
So what does all this change mean for the sector and, more importantly, what will it take to thrive in this environment? What role will government, regulators and other stakeholders play?
For the innovative and brave, there will be more opportunities than risks in the current and future energy market. The measure of success will be the development of good business strategies and their successful execution. The normal drivers of business will apply.
In our view, the key to transforming Australia’s energy sector and setting it up for long-term success will depend on number variables.
From a legislative perspective, it is absolutely crucial that we develop a stable longterm government energy policy and associated 21st century regulatory framework. How close we are on either is widely debated. We must establish a truly deregulated and open national electricity supply and services market. The world is looking at how Australia deals with the challenging energy market conditions in my old home state of South Australia.
The suppliers that will thrive will be those which put their customers’ needs at the centre of their organisation. This means developing excellent customer understanding, with a particular emphasis on the power of social media to underpin new customer- centric corporate strategies.
Customers are now also creating vast amounts of data which can be used to refine offers, incentives and strategies – competitive advantage will flow to those who create value from the data they have, and deploy data management and analytics tools to support management decisions.
Utility companies should be the leaders in the technology revolution, rather than followers – technology will be the platform through which new, more flexible business models can be launched. The additional benefit of leveraging technology is that it will ultimately give customers what they are looking for – choice and flexibility.
Industry participants who succeed over the next decade will not be the ones who blame the market or external events. It will be those that influence the agenda and who best respond to the ever-changing needs of customers. These are core capabilities for the Utility of the Future.