Lessons from change
Transforming the power and
utilities industry
Contents
2
That was then … this is now
4
Introduction: building the infrastructure of tomorrow
8
Securing your present: focusing your energy on cash preservation
Opportunities in adversity gave us a glimpse into the challenges companies in the power
and utilities industry were facing as they confronted the implications of an economic
downturn. Lessons from change goes deeper, exploring what companies are learning and
how they are using their new knowledge to prepare for the recovery ahead.
These are transformational times. The dual pressures to upgrade infrastructure on a
worldwide scale and make energy environmentally sustainable will revolutionize the
power and utilities industry.
Though perhaps to a diminished degree, the power and utilities industry remains a
safe haven for investment. However, cash can no longer be taken for granted.
Liquidity is scarce and cash management is top of mind.
12
Protecting your assets: identifying key risks
16
Improving your performance: remaining alert and adaptive
20
Reshaping your business: expecting and embracing change
24
Sustaining your future: a bold vision of a sustainable future
28
Conclusion: the transformation agenda
30
A new business agenda is emerging
Key risks lurk in all corners of the business. It’s vital to embed risk management into
your decision-making processes — new investments also carry new risks.
challenge is in getting there. A renewed focus on cost reductions in operations,
you get to your goal.
In power and utilities, some changes are hard to predict. Others come with ample
warning. The key to success is being adaptable enough to respond effectively.
Now is the time to act with imagination and to be bold about new investments.
Capital infusion from myriad stimulus programs is making its way to the industry,
!
"
During the last six months, many power and utilities companies have taken the time to
rethink their strategies and their way of doing business. Cash-poor power and utilities
businesses have had to focus on liquidity, while those that are cash-rich have been able
to tackle big acquisitions and establish new strategic partnerships.
Lessons from change
#$
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more than 40,000 client meetings and has produced more than 500 cross-industry
insights. Studying this material, we see a new agenda for success emerging.
That was then ...
In January 2009, Ernst & Young published Opportunities in adversity,1 a study that
provided insights into the issues executives were facing as they grappled with the
implications of the economic downturn.
We suggested that every company falls somewhere on a stress pendulum between cash
burn and cash earn; and for every business there is an appropriate course of action to
take. By executing that course of action quickly and effectively, management teams can
seize a potential source of competitive advantage.
Stress pendulum
Cash burn
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Executives interviewed in our study indicated that power and utilities companies have
held up well in the global recession compared to other industries, but the hard times
have taken their toll. An overall drop in industrial demand has struck a serious blow to
revenues. In addition, the scarcity of available credit has hindered the industry’s ability
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meet the needs of developing countries and meet the regulatory requirements to reduce
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should its challenges go unaddressed.
1. All survey data referenced within this report, unless otherwise noted, is from Ernst & Young’s Opportunities in
adversity survey.
2
... this is now
Opportunities in adversity gave us a glimpse into the challenges power and utilities
companies were facing, but we wanted to know more. We wanted an in-depth
lessons they were learning and applying to prepare their companies for the recovery
ahead. And so we went back to our power and utilities leaders to gain their insights.
3
67
world conducted more than 1,600 client meetings. These conversations revealed a series
of strategic actions the industry is taking to position itself for success. Not all of their
lessons from change may be new, but they are taking on new importance as power and
utilities companies strive not only to survive but thrive in the new economic environment.
Questions and considerations
As you take charge of implementing change within your organization, we invite
)
Growing your business to meet the challenges facing the power and utilities sector
requires cash. Have you considered alternative routes to funding?
)
*
!
"
Industry trends suggest a new emphasis on strategic risk. Have you reviewed your
risk management systems and processes recently?
)
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!
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+
/
)
Partnering with technology providers, such as smart metering or cleantech,
can help drive technology development and improve future performance.
Maintaining close relationships with regulators can improve access to stimulus
funding. Have you reviewed your existing and potential partnerships?
3
Introduction
4
Building the
infrastructure
of tomorrow
The power and utilities industry must undertake a massive investment to
emerging markets and the recession lifts, power demand is expected to surge.
The phrase “business as usual” doesn’t mean much to today’s power and utilities industry.
some time. These changes are driven by the need to decarbonize energy supplies, reduce
exposure to volatile commodity markets and embrace new, “smart” technologies, while
!
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These challenges are global in scope. Developed economies, such as Europe and North
America, need urgent investment to replace aging infrastructure. In dynamic, growing
countries like China and India, expansion of the power infrastructure remains a critical
economic constraint. To continue its successful transformation, the industry needs to
invest at least US$13.6t2 between now and 2030.
“If the last few years have taught the sector
anything, it’s that there’s no such thing as
‘business as usual.’ The simple model of
providing power, collecting revenue and
securing rate increases is disappearing. New
markets, new consumer expectations and
new regulation all accelerate the need for a
new vision. Companies need to be nimble,
able to implement and willing to plan for a
future that will be ever-changing.
— Ben van Gils
Global Power & Utilities Leader, Ernst & Young
2. International Energy Agency, World Energy Outlook 2008 Edition (International Energy Agency, 2008).
5
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Integrating new, clean technologies into the generation mix and
existing networks to reduce carbon emissions and combat
climate change
)
Competing for funding, talent, equipment and other resources to
replace aging infrastructure and build new capacity
)
Securing reliable energy supply while the competition for scarce
resources steadily increases in many different geographies
)
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regulations and markets
)
Offering affordable energy to customers while commodity prices
and investment needs are rising
Heeding the mandate for change was never a simple task even
under the best economic circumstances. Regardless, the credit
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transformation already underway while presenting new challenges.
Over the last two years, the primary policy demands — to provide
available, affordable and acceptable energy — have become
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grappling with the problem of reducing carbon emissions without
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companies are confronted with increased strategic risk at a time
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has diminished.
6
Historically, power and utilities investments were considered a safe
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"
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@
cash in hand to stay the course, but the crisis exposed some whose
hedging strategies proved more vulnerable than anticipated.
such unexpected weaknesses.
The current reduction in power demand is only temporary. Once
the economy recovers, power demand may rise even beyond
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of the transport sector through the widespread adoption of electric
"
Thus, the need to build new power plants is merely postponed.
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risen, increasing the pressure as power and utilities companies
plan their long-term capital requirements. The status quo cannot
be maintained in the power and utilities industry. Tough decisions
must be made today.
Case study
Performing to win
Q
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business. Utilities must keep reevaluating their use of internal and external resources to
create the greatest value for shareholders, customers and other key stakeholders.
Before utilities take any cost-cutting step — such as headcount reduction, shared services
or cosourcing/outsourcing arrangements — they need to carry out a robust analysis of the
business value of the function, its cost and the gap (if any) between the function’s actual
and potential performance. These insights can help clarify opportunities for improvement.
As part of its “Perform-to-Win” program, E.ON is considering outsourcing certain IT
resources, accounting and customer service functions.3
Most critically, any analysis must consider how the company is positioning itself for the
future, recognizing that what once worked may no longer be the optimal approach. For
example, Terasen Gas, a Canadian gas utility, recently approached the British Columbia
Utilities Commission with a proposal to replace its seven-year-old outsourced customer
care model with an in-house customer care organization beginning in 2012. Terasen says
its outsourced relationship created value for customers in the past, but the proposed
in-house organization (comprising call centers, billing operations and a new customer
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and online service delivery channels. Further, Terasen’s proposal recommends the ongoing
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printing and payment processing.4
3. “E.ON: To outsource parts of information technology arm,” Dow Jones International, 18 June 2009, via Dow Jones
Factiva, © 2009 Dow Jones & Company, Inc.
4. “Terasen Gas applies to expand customer care services with new in-house call centres and customer information
system,” Canada NewsWire, 3 June 2009, via Dow Jones Factiva, © 2009 Canada NewsWire Ltd.
7
Securing
your present
8
Focusing your energy
on cash preservation
Power and utilities companies have historically been perceived as a safe
!"
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 and more
#
Like many industries, the power and
utilities industry now views cash as an
essential component to their current
survival and future success. Even strong
companies have had to be much more
proactive in their cash management.
Companies cannot invest in needed
transformation if they are struggling to
"
In the US, when the commercial paper
market dried up, some power and utilities
=
alternative sources of cash quickly.
Some utilities went as far as cutting their
dividend payments by 50% and drawing
down credit lines. Yet Southern Company,
which serves the southeastern US,
maintained its ability to raise funds by
preserving a strong cash position.5
Examples like this underline the importance
of prudent cash management and good
"
5. "Q1 2009 Southern Company Earnings Conference Call - Final," CQ FD Disclosure, 29 April 2009.
9
Worldwide, companies are focusing on cash management in
different ways. Working capital management is one important
source of cash. “When it comes to liquidity, utilities tend to
underestimate the cash opportunity that is tied up in their working
capital,” says Joe Fontana, Ernst & Young’s Global Transaction
Advisory Services Power & Utilities Leader.“There are a lot of
potential quick wins in improving billing and revenue collection
processes,” Fontana adds.
Capital adequacy under stressful conditions
Ernst & Young’s report, Cash on the meter,6 demonstrates the type
of savings that can be made by improving accounts receivable to
enhance the short-term cash position. The opportunities for
=
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Power and utilities businesses with substantial trading positions
must maintain adequate reserves to cover adverse movements in
commodity prices. With high levels of volatility in the underlying
commodities, capital requirements have become more onerous.
For example, Constellation Energy Group, a US Fortune 500
company with revenues of US$19.8b in 2008, had very high
exposure to commodity trading. When credit conditions tightened,
this exposure caused a massive increase in collateral requirements.
As a result, the company approached Warren Buffet’s MidAmerican
Energy Holdings Company for short-term support, while parts of it
are in the process of being acquired by Électricité de France (EDF).7
)
Improving integration of legacy billing systems and processes
from recent acquisitions to enhance receivables performance
Your counterparty has counterparties
)
Implementing new tariffs, smart metering and ebilling
initiatives to release additional cash through more timely
collection of revenues
)
Adopting different approaches to new customer assessment,
to reduce billing errors and payment issues
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 your business. The immediate
past has taught us that we also need to look beyond the suppliers
"
>
!
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. In the capital-intensive power and utilities
business, being seen to manage cash well can have a positive
effect on a company’s rating. Even a small increase in the cost of
"
6. Cash on the meter: electricity and gas utility receivables: performance and leading practice, Ernst & Young, 2009.
7. "Q4 and Full Year 2008 Constellation Energy Group, Inc. Earnings Conference Call," Constellation Energy, 18 February 2009, http://ir.constellation.com/events.cfm, accessed
29 May 2009.
10
Key considerations
)
Institute safeguards for better capital management
)
Maintain liquidity by having a comprehensive strategy that
covers a variety of approaches for securing short-,
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)
Optimize cash and improve working capital performance
)
Ensure that suppliers are stable — diversify the supply base
to reduce the risk of single counterparty failure
11
Protecting
your assets
12
Identifying key risks
Today’s power and utilities companies must also be risk management companies.
They need to obtain and manage capital, as well as manage volatile commodity
costs against regulated or competitive end user prices. The power and utilities
results from Ernst & Young’s The future of risk survey8 determined that the
"
and operational risk than other sectors — and more concerned about rising
strategic risk.
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. All of these conditions dictate a
need for investment in assets that carry
more risk than ever before. These new
strategic risks, driven by the transformation
agenda, could fundamentally change the
7
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Power and utilities businesses are generally
compliance risk management for current
operations. However, companies should
continue to increase investment in risk
management systems, paying particular
attention to the current increased levels of
strategic and systemic risk.
8. The future of risk, Ernst & Young, June 2009.
13
Figure 1
Over the past 12 months, how has risk increased or decreased
for your organization in the following risk arenas?
% answering "increase" or "significant increase"
Power and utilities
All sectors
60%
50%
40%
30%
20%
10%
0%
Overall
%
Overall
compliance risk
Overall
operational risk
Shown: Power and utilities respondents vs. all sectors
Source: The future of risk, June 2009, Ernst & Young LLP
14
In this sector, many lessons applicable today were learned before
the current crisis. In the post-Enron era, many participants in the
energy markets lost their appetite for speculative trading and
complex derivatives and resumed trading around real assets.
Nowadays, energy executives practice much broader risk
`
counterparty risk.
Overall
strategic risk
At the onset of the crisis as liquidity became scarce, many energy
companies began to implement margin or collateral calls and
freeze trading where appropriate. They also courted new
counterparties or moved more trading from over-the-counter
transactions to exchanges. As a result, spreads are wider and
liquidity is down in the sector, but few catastrophic failures are
evident. The last two years have seen massive volatility in fuel
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!
commodity costs or they fail to hedge positions effectively.
As customers and trading counterparties continue to struggle,
credit risk continues to be an important consideration for the
sector. All credit ratings — including liquidity risk and capital
structure — should be monitored. This monitoring not only applies
counterparty’s guarantors. Companies need to establish formal
controls to monitor collateral, credit and related positions with
"
Finally, assessments should be forward-looking rather than
historical. 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. For instance, various scenarios
involving risk posed to some assets in a low-carbon future must be
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reluctant to allow large price increases, even in competitive
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pressure to keep rates down.
Key considerations
)
Establish an organization-wide risk management strategy
supported by robust processes and systems to identify,
measure and monitor risk
)
Make sure credit risk monitoring is part of the system
)
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scenario analyses and robust stress-testing
)
Know your situation and options — embed risk
management as the process for evaluation of future
actions and consequences
15
Improving your
performance
16
Remaining alert
and adaptive
While operational effectiveness is always important, adaptability has become
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. In particular, there is a renewed focus on cost reductions
"*"!
management.
Many companies are actively pursuing operational cost reductions — but not through the
extensive headcount reductions seen in other sectors, as our recent survey, Opportunities
in adversity, showed.
Figure 2
Power and utilities companies place a higher priority on cost savings through capital
Q: Which of the following initiatives has your organization accelerated over the
last year?
83%
86%
Cost reduction
Review of capital
investment programs
66%
43%
Power and utilities
All industries
Significant employee
reduction programs
14%
38%
Shown: Power and utilities respondents vs. all sectors
Source: Opportunities in adversity
Not surprisingly, in an industry that is asset-heavy and where lead times to construct
capital assets may take up to 10 years, power and utilities companies pay a lot more
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performance of these multibillion-dollar programs to ensure they are completed on time
and on budget.
17
Technology is a wise spend
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especially needed in the case of recent carve-outs, such as those in
response to unbundling activities in Europe. These activities have
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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
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information affects every part of an organization and many utilities
companies are now seizing the opportunity to match best practice
with other sectors. They recognize that attention to the quality of
information, and its integration throughout all departments, can
provide early warnings, point to increased cost effectiveness and
"
As shown in Figure 3, 31% of respondents in our Opportunities
in adversity survey noted they had recently increased their
IT investment, to move the organization to a lower and
more-effective cost base.
!
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~
crisis, power and utilities companies are generally streamlining
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!
they undertake and moving their focus on the few that can be
successfully completed and make a real difference. Many
companies have also used the crisis to implement cost-cutting
plans designed for both immediate and sustainable impacts. E.ON
(Germany), for example, enacted a “Perform-to-Win” performance
improvement program that aims to save the company as much as
€1.5b (US$2.2b9).10
Figure 3
Despite the economic crisis, investment in risk management
Q: Which of the following functions or activities in your business
have been most affected by a decline or an increase in investment
at your company?
Percentage of respondents who have
indicated a decrease in investment
Percentage of respondents who have
indicated an increase in investment
Many other companies have cited cost control as a key component
to their performance. “Sales have been off,” says North Carolina’s
Duke Energy Chairman, President and CEO Jim Rogers. “Controlling
our costs has allowed us to perform as well as we did."11
41%
Risk
0% management
14%
48%
31%
Information
technology
Operations
14%
Source: Opportunities in adversity
9. €1=US$1.47030 as of 2 September 2009.
10. "Perform-to-win conference call 10 February 2009," E.ON, http://www.eon.com/de/downloads/10.02.2009_Charts_Perform-to-Win.pdf, 2 September 2009.
;;<%>"[email protected]%KVXZ"?newsvine.com, 4 August 2009.
18
And the Chicago area’s Exelon recently committed to holding 2009
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includes realizing US$150m of cost savings this year. The company
also announced spending cuts which will save US$350m in 2010
from original planning assumptions, resulting in a reduction of
some 3.5% in total spending from 2009 levels. The company
expects half of the total O&M savings in 2010, or US$175m,
to be sustainable.12
India’s Andhra Pradesh Power Generation Corporation Ltd.
€Q…†\
series of potential cost reductions. APGenco’s Managing Director,
AK Jain, asserts that the corporation could bring down costs
!
raw material costs. Jain says they “have also created complete
consciousness about the importance of cost reduction at the
executive level.” He adds that they will renew their “focus on cost
reduction as there is still a long way to go.”
Key considerations
)
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processes
)
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%
success is likely
)
Develop workable plans to take out costs without
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industry transformation
)
Focus on current team and assets; ensure that gains in
!
Cost-cutting may result in reduced headcount, but there is general
agreement on the importance of being selective in this process.
Safeguarding the company’s knowledge base during the time of
transition from old to new infrastructure is essential. Doing so
provides for reliable and affordable service in the short term, and
could prove to be among the key success factors in the long term.
12. "Exelon Earnings Conference Call 2nd Quarter 2009 July 24, 2009," Exelon,
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTEwNzB8Q2hpbGRJ
RD0tMXxUeXBlPTM=&t=1, 24 July 2009.
19
Reshaping
your business
20
Expecting and
embracing change
economic crisis. Economists globally are associating green technologies as
the next driver for growth. Governments globally are responding in kind by
working sustainability initiatives into their stimulus models. These trends
affect a wide range of industries, but power and utilities is among those in
the forefront.
Companies should carefully consider what’s
ahead and conduct a careful reconciliation
of legacy investments to the future
direction of the industry. To maintain a
horizon, a thorough reevaluation of
business portfolios should be conducted
to establish which relative values could
change in the new low-carbon environment.
Moreover, companies should be prepared
to make bold decisions about their
future direction.
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,
=
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.
21
Tomorrow’s watchwords:
anticipation and agility
In this sector, regulatory decisions are one of the most important
factors in investment. For instance, the South African utility Eskom
regulatory framework that would only allow for a stepwise increase
of tariffs and subsequently unfavorable credit conditions.13 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. Effective communication on this issue will be crucial
to achieve a successful outcome.
Tomorrow’s watchwords are anticipation and agility. 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 minimizing losses. Companies need
to set up systems and processes that facilitate asset acquisition
and disposal in short timeframes; speed is essential if a company
is to realize the best value from transactions.
Focusing on the core business can make all the difference.
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. Because market drivers
and valuations are susceptible to rapid change, tomorrow’s
operating model will likely involve shared service approaches and
the outsourcing of certain functions.14 Shared services can be
very effective, especially in postmerger integration situations;
outsourcing must be carried out carefully because of the potential
adverse impact on customer relations.
In areas where change and focus are required, their potential
impact on the customer should be taken into consideration. If a call
center is to be outsourced, for instance, how might customers feel
about those potential interactions? At the same time, there is a
need to determine whether areas that don’t directly touch the
customer (IT, internal audit) can be improved.
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BusinessReport, 12 August 2009.
14. Opportunities in adversity: power and utilities survey snapshot, July 2009, p. 5,
Ernst & Young LLP.
22
)
Key considerations
)
‡
scenarios and prepare to react quickly as the situation
becomes clearer
)
Q
!
the government
)
Focus corporate development activities on new
strategic assets
)
Carefully choose assets for divesture and get in a position
to execute at the right time
)
Consider shared services approaches, especially in the
areas of IT and internal audit
Case study
Setting the stage for transformation
Some European utilities are using the recession as a
time to reshape their businesses. Several factors set
the stage for transformation. Europe has the highest
concentration of large utilities — 8 of the top 10 global
utilities are headquartered there.15 The region also
markets in the world,16 and the industry has recently
!
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These factors are driving Europe’s leading utilities to
streamline their portfolios and improve their strategic
positions through big, bold acquisitions.
ˆ}@
‰
Š}7
Executive Board member Leonhard Birnbaum told
reporters in late December 2008.17 Birnbaum not only
Š}7
and upstream oil and gas, but also stated that “there is
also scope for external growth through mergers and
acquisitions.” A few weeks later, RWE announced the
acquisition of Dutch utility Essent for US$12.7b. RWE
made the investment to build “strong market positions
in gas and power retail markets in the Netherlands and
Belgium."18 The deal, which includes a large renewables
Š}
@
from power stations,19 before the next phase of
emissions trading in Europe begins in 2013.20
>
acquisitions this year. NUON (the Netherlands) is being
taken over by Vattenfall (Sweden). EDF (Électricité de
France) expanded its nuclear portfolio with the
purchase of British Energy and the offer for 49.9% of
Constellation’s US nuclear power assets. Again, each of
these deals strengthens the buyer’s strategic market
position and lowers its carbon intensity.21
Many utilities are divesting noncore assets to fund
these acquisitions, which also gives them the
opportunity to streamline their portfolios. For example,
EDF is considering the disposal of its electricity
distribution business in the UK, to maintain the balance
sheet strength necessary to take forward its massive
"
=
and to focus on its regional core areas and energy
trading business, Vattenfall is also considering a sale of
its electricity transmission grid as well as its minority
stakes and shareholdings in municipal utilities in
Germany.22 Such a move would also help it focus on its
regional core areas and energy trading business.
However, due to challenging market conditions, assets
have not always attained as high a price as originally
expected. While Vattenfall originally expected €1b
(US$1.4b23) for its transmission grid, the price
expectation has halved over the last 12 months.
Utilities considering disposing of noncore assets should
prepare thoroughly. An early and incisive separation of
disposal, with a clear allocation of all assets to the
different business units, is one key step. This action
enables a utility to dispose of the assets in a timely
manner, capitalizing on the most favorable market
situation and realizing the highest possible price.
15. Ranking by market capitalization, Ernst & Young's Global Power & Utilities Center.
16. Measured by switching rates on retail markets, Ernst & Young's Global Power & Utilities Center.
17. “2nd UPDATE: RWE Determined To Grow In Current Econ Crisis,” Dow Jones International News, 16 December 2008.
18. “RWE and Vattenfall go Dutch,” Utility Week, 19 June 2009.
19. “RWE Eyes Dutch Offshore,” International Oil Daily, 6 July 2009.
20. “RWE and Vattenfall go Dutch,” Utility Week, 19 June 2009.
21. A new era for renewables in Europe: tough targets, structural change and the race for capital, Ernst & Young, November 2008.
22. E.ON also will sell its electricity transmission grid and RWE its gas grid, principally to avoid action from the EU competition authorities rather
than for strategic reasons.
23. €1 = US$1.47105 as of 27 September 2009.
23
Sustaining
your future
24
A bold vision of a
sustainable future
Power and utilities has traditionally been a more risk-averse sector, where
long-term decisions are made on the basis of exhaustive deliberation and
justification. Meeting the needs of a changing world and projecting a bold
vision of a sustainable future may require a shift away from this innately
cautious attitude. The power and utilities industry may need to consider
a faster decision-making and a more flexible, entrepreneurial approach.
Changing regulatory and legal requirements
will continue to drive value within the
sector but, with climate change negotiations
far from resolved, regulatory certainty is in
short supply. As a result, the industry is
moving from its present low-risk comfort
zone into a more complex future risk
environment. And it must adapt to survive
that change.
To help with this adaptation, some power
and utilities companies are beginning to
hire from outside the sector. The goal is
to leverage the talent and skills from
more entrepreneurial fields, such as
the cleantech sector, to help lead the
cultural change.
Sustainability has a dual implication for
the power and utilities industry. First,
the debate over climate change and the
regulatory steps underway to reduce
carbon emissions are focusing the industry
on reevaluating existing assets while
investing in sustainability programs.
Second, the industry must find ways to
retain the qualified talent needed to
build new power stations and power
infrastructure, as well as train new recruits.
Meanwhile, the world is just beginning to
feel the effects of government stimulus
programs. As of late August 2009, the US
Department of Energy (DOE) had awarded
only US$9.9b of the US$38.7b authorized
under The American Recovery and
Reinvestment Act of 2009 (ARRA), and of
the amount awarded, only US$462m has
been spent.24 In the UK, the London
Array25 (a wind farm in the Thames
estuary), which involves investment from
DONG Energy (Denmark), MASDAR (Abu
Dhabi) and E.ON (Germany), faced delays in
the final investment decision until sufficient
government stimulus funds were made
available to support the project risk.
24. Per Recovery.gov, the U.S. government’s official website providing easy access to data
related to Recovery Act spending. http://www.recovery.gov/?q=content/agency-summary&agency_code=89.
25. "DONG Energy, E.ON and Masdar give green light to build world's largest offshore wind farm," Targeted News
Service, 12 May 2009, via Factiva.
25
Accessing government stimulus funds and developing new
strategic alliances can help share these risks. The London Array,
as it moves forward, is a good example of such strategic alliances
at work. Another good example is the development of smart grids,
in which several sectors (power and utilities, telecommunications,
technology, consumer products and even media and entertainment)
must come together for a successful outcome. A variety of
consortia and partnerships have been established to test the
=
!
change possible.
As new technologies are developed, their generally higher cost and
greater risk must be taken into account. Consumer prices will need
to go up, and utilities will need to help consumers understand the
scale of price increases that will be necessary.
The industry in particular needs to articulate its position to
governments and regulators, since, in the end, it is the power and
utilities companies that must implement and sustain policy
initiatives. A clear and coherent viewpoint on all regulatory matters
is essential, including an understanding of the potential impact of
any policy changes on consumer prices.
26
Key considerations
)
Adopt a new entrepreneurial spirit, based on the vision of
a low-carbon, sustainable future
)
greatest long-term value potential
)
Develop increased use of strategic alliances, including
)
Understand that investments in smart-grid and smartmetering technologies can aid the transformation
)
Invest more heavily in research and development
Case study
Investing in the new reality
As a new reality dawns, power and utilities companies
are increasingly forced to think about a business model
that allows for sustained success in the future.
‡
%
energy investments and increased research and
development activities are tending to be the most
popular initiatives to achieve this.
The economic stimulus measures put in place by
governments often alleviate the corporate decisions
that have to be made, as these funds are directed at
technologies such as clean coal, renewables and the
smart grid. In the US, American Electric Power,26
Exelon’s PECO subsidiary27 and Progress Energy28 have
all applied for federal stimulus funding to accelerate
the development of the smart grid. US-based
Duke Energy and China-based Huaneng Power Group
have agreed to form a strategic alliance to develop
clean coal technologies.29
>
'
China’s US$30b directed at clean technologies has
triggered State Grid Corporation of China to invest
heavily in its transmission facilities, with a view to
establishing a smart grid by 2020.30 Around the world,
power and utilities companies have now invested in
renewable energy units to secure access to markets
that offer substantial growth prospects in the future.
Some companies have gone beyond this rather reactive
approach to planning for the future, establishing
dedicated venture capital partnerships. Examples
include Germany’s RWE, which, through its venture
capital arm, has acquired minority shares in two
Scandinavian biomass start-ups,31 and Scottish and
Southern Energy whose investments include fuel cells,
waste-to-energy and community heating via its SSE
Ventures unit.32 In the recent past, power and utilities
companies in competitive markets would not have
taken on such R&D risks. Now, most seem to have
realized that it is these long-term visionary investments
that will secure sustainable success in the future.
ˆ*
'
7
up to the power and utilities
companies to make smart use of
the technologies and funds
available for the transformation of
the industry.”
— Ben van Gils
Global Power & Utilities Leader, Ernst & Young
26. “AEP unit seeks $75 mln in DOE smart grid funds,” Reuters, 31 August 2009, accessed via Dow Jones Factiva, © 2009 Reuters Limited.
27. “Exelon's PECO Announces Plan for Smart Grid,” Midnight Trader, 6 August 2009, accessed via Dow Jones Factiva, © 2009 Midnight Trader,
All Rights Reserved.
28. “Utility seeks stimulus money; Grant would pay for Smart Grid,” The News & Observer, 13 August 2009, accessed via Dow Jones Factiva,
© 2009 Distributed by The McClatchy Company.
29. Ibid.
30. “Electric giants eye future prosperity of smart grid,” Xinhua Business Weekly, 27 July 2009, accessed via Dow Jones Factiva, © 2009 Asia
Pulse Pty Limited.
31. “RWE Innogy makes investments in Scandinavian companies,” Renewable Energy Report, 13 July 2009, accessed via Dow Jones Factiva,
© McGraw-Hill, Inc.
32. "About us," Scottish and Southern Energy, http://www.scottish-southern.co.uk/SSEInternet/index.aspx?pageType=1&rightColHeader=20&id=2
72&terms=SSE+ventures&searchtype=1&fragment=True, 21 May 2009.
27
Conclusion
28
The transformation
agenda
Power and utilities companies have not been as severely affected as other
demand has been hard hit, demand for energy among residential customers
is relatively stable. To some extent, government support and subsidies have
"
During the last six months, many power
and utilities companies have taken the time
to rethink their strategies and their way of
doing business. Cash-poor power and
utilities businesses have had to focus on
liquidity, while those that are cash-rich have
been able to tackle big acquisitions and
establish new strategic partnerships. As in
other sectors, pressure on weak performers
'
!
will survive.
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.
Improving business performance by
focusing on key areas like shared services,
IT systems and customer care processes
is a reasonable answer to many of the
"
~
!
the strategic direction right. Companies
='
competitive, no matter how the industry
transforms in the future?
We are entering a new and changing world.
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.
29
A new business agenda is emerging
Lessons from change
#$
%
papers based on more than 40,000 client meetings and has
produced more than 500 cross-industry insights. Studying this
material, we see a new agenda for success emerging.
The new normal
While cash is still a critical issue for many organizations, many
"
>
in some stage of cash distress and may be challenged to survive
in the future.
The global economy may be back from the brink of disaster,
but companies do not expect a return to the “normal” conditions
we have experienced for much of the previous decade.
*
'
)
‘
)
)
>
)
j
)
‡
!
)
Q
!
)
Š
increased transparency
Emerging cross-sector insights
}
!
Lessons from change are taking as they prepare for success
in the new economy. These actions, taken from the lessons
these companies have learned, culminate in eight key
'
)
Embed innovation and
constantly challenge your existing business models against the
new business environment.
)
!"
Increase the
(
(
and leveraging resources.
)
Š
continued importance of cash and constricted funding by
optimizing the availability and deployment of capital for a more
"
)
# Optimize your global market
reach and product/service mix to exploit opportunities, achieve
optimum returns and mitigate risk.
)
$%#" Make and
execute decisions more quickly to take advantage of shorter
windows of opportunity and respond more quickly to
adverse developments.
)
# Identify the full risk
complexity of the market and develop and align a strong control
framework for your business.
)
& Gain, retain and deploy
a management team that is capable of addressing the complex
market and organizational environment.
)
&#' Regain and retain
!
"
30
Power and utilities sector insights
Looking at these cross-sector insights from a power and
!'
)
As in many industries, power and utilities companies now
view cash as an essential component to their current
survival and future success. Even strong companies have
had to be much more proactive in their capital allocation.
Companies cannot invest in needed transformation if they
"
)
Power and utilities has traditionally been a risk-averse
sector, where long-term decisions are made on the basis of
"
accelerate
corporate decision-making, some power and utilities
companies are beginning to hire outside the sector to
leverage the talent and skills from more entrepreneurial
cultural change.
)
For power and utilities companies, strategic risk
management is directly related to the new low-carbon
agenda, the increasing insecurity of traditional energy
supplies and a potential skills gap. All of these conditions
dictate a need for investment in assets that carry more risk
than ever before. These new strategic risks, driven by the
transformation agenda, could fundamentally change the
7
!
"
About Ernst & Young’s Global
Power & Utilities Center
In a world of uncertainty, changing
regulatory frameworks and environmental
challenges, utility companies need to
maintain a secure and reliable supply,
while anticipating change and reacting
to it quickly. Ernst & Young’s Global
Power & Utilities Center brings together
a worldwide team of professionals to help
you achieve your potential — a team with
deep technical experience in providing
assurance, tax, transaction and advisory
services. The Center works to anticipate
market trends, identify the implications and
develop points of view on relevant industry
issues. Ultimately it enables us to help
you meet your goals and compete more
effectively. It’s how Ernst & Young makes
a difference.
Contacts
Ben van Gils
Global Power & Utilities Leader
+49 211 93 52 21 557
[email protected]
Louise Wilson
Global Markets Leader
+44 20 7951 3584
[email protected]
For more information on Lessons from change
#$
%
'
ey.com/lessons-from-change
31
Ernst & Young
Assurance | Tax | Transactions | Advisory
About Ernst & Young
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of which is a separate legal entity. Ernst & Young
Global Limited, a UK company limited by guarantee,
does not provide services to clients.
© 2009 EYGM Limited.
All Rights Reserved.
EYG no. DX0067
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This publication contains information in summary form and is
therefore intended for general guidance only. It is not intended
to be a substitute for detailed research or the exercise of
"
|
6†*
—
member of the global Ernst & Young organization can accept
any responsibility for loss occasioned to any person acting or
refraining from action as a result of any material in this
publication. On any specific matter, reference should be
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Lessons from change Transforming the power and utilities industry