Plenary session Ι Transformation as Business opportunity?

Wednesday, 13 September 2017, 11:00-11:30h/P01

The transformation of the European utility landscape

Frank Klose, Boston Consulting Group, Germany

For decades, the story in the European utility industry has been the same: Large, vertically integrated utilities invested in and managed hard assets such as power generation plants and electric grids, earning stable returns. And investors looking for predictability made utilities a key component of their portfolios.

Today, virtually every aspect of that story is being rewritten. Powerful forces are fundamentally altering the utility industry in Europe and many other regions. Among the most significant are stagnating demand, the shift from conventional to renewable energy, and the growing popularity of distributed power, which allows users to generate energy on their premises. As a result, the profit pools for utilities will shift dramatically. For example, in power generation, once a major source of earnings, profits are eroding. And the impact of the shifts will intensify over time. The commodity retail business of selling power to businesses and consumers, for instance, will become less profitable as lean and mean digital players undercut established companies with lower prices and improve the customer experience through digital tools. Meanwhile, new segments, such as decentralized energy solutions, will capture a growing share of industry profits.

Our study of European utilities suggests that utility executives must rethink every aspect of their business. As the profit pools change, so will the sources of competitive advantage—and success will demand new capabilities. This is certainly true for emerging opportunities such as decentralized solutions, which call for digital expertise and an intense customer focus. But even traditional segments will require new approaches. In generation, for example, flexibility and lean operations will be more important than plant availability—a shift that will call for an entirely different corporate culture. In addition, the investment proposition for utilities is changing, necessitating a rethinking of their very structure. Scale within individual businesses will become more important, particularly in fast-growing service businesses, and the benefits of vertical integration will diminish.

To succeed in this period of unprecedented change, utilities must move quickly to transform their business. They need to decide which segments to focus on, shedding those that will not be strong earnings contributors and developing a compelling investment thesis based on a new, clearly defined vision. At the same time, they must radically improve the efficiency of their core operations. While many utilities have already reduced costs, they must make even more drastic changes in the years ahead. And, perhaps most critical, utilities need to become dramatically more agile, honing the ability to innovate and adapt to continuous change. Those that fail to make this switch will invite shareholder revolt—and the necessary changes will ultimately be forced upon them.