Transformation in the power and utilities sector

Between the energy transition and accelerating digitalisation, this is a transformative moment for the global power and utilities (P&U) sector. Providers face acute challenges and exciting opportunities. The choices they make today are “make or break”, impacting not just their profitability but viability and social license to operate going forward.

The imperatives of decarbonisation and sustainable energy production have created new regulatory environments around the world, with profound implications for the present and future of companies in the sector. This paper highlights key challenges facing the industry and how P&U providers can ensure their future success.

CHALLENGES

Growth can no longer be taken for granted

Globally, population growth, urbanisation and economic development are driving increased demand for energy, power, and other utilities. However, even in emerging markets, growth from electrification will be largely offset by greater energy efficiency. Supply constraints, including water scarcity, will also curb growth. In mature markets like the United States, net demand for power will be fairly flat, and demand for gas is likely to shrink. Growth is no longer an automatic function of social, economic and demographic trends, but instead must be pursued strategically and responsibly.

Companies face pricing constraints

Factors influencing power and utility prices include the cost of fuels, power plants, transmission and distribution systems. The transition to cleaner fuel sources is shifting the cost mix. Increasingly common severe weather events can drive up these costs via spikes in demand, fuel shortages, and disruptions. But P&U affordability is an urgent global issue. Customers are seeking better value, and pressing governments and regulators to cap energy and utility prices. Rising costs and declining ability to pass them on mean that companies must prioritize substantial cost and price reduction along the entire utility value chain.

Decarbonisation, energy transition, and sustainability require new investment in infrastructure

P&U is joining other major sectors in its efforts to decarbonise. With the accelerating energy transition, renewable and cleaner energy sources are emerging as important alternatives to hydrocarbons. Companies are also trying to reduce their carbon footprints through improving energy efficiency and broader operational excellence. But they cannot deliver on the full promise of these shifts using existing infrastructure.

The intermittent nature of solar and wind power, and the demands of mass electrification mean the industry needs resilient power grids that can deal with multiple power sources and variable loads. It needs secure backup capacities and energy storage systems. As industrial and retail consumers pursue their own decarbonisation efforts, the P&U sector must provide or support electric car charging, heat recuperation networks, and hydrogen or CO₂ transmission. Failing to keep pace with stakeholders’ increasingly ambitious net-zero targets and commitments is risky, attracting public outcry and limiting new capital for investment.

Recent events have exacerbated energy security and access and issues

The Russian invasion of Ukraine and its ripple effects have raised energy security and independence as urgent issues, especially for major importers of Russian oil or natural gas. The EU in particular sees its geopolitical options limited by its dependence on Russia for fossil fuels. While these trends are already underway, Russia’s war in Ukraine will accelerate the push toward more renewables, greater energy efficiency, and increased diversification.

The past two years have also highlighted the P&U sector’s vulnerability to extreme weather events, supply chain disruptions, and volatile resource prices. Increased use of renewables is decentralising generation, creating more and easier targets for cyberattacks.

Beyond energy security is basic access. Universal energy access by 2030 is a UN Sustainable Development Goal. But the COVID-19 pandemic has delayed installations, placed financial strains on utilities, and increased borrowing costs in many developing countries. These issues have reversed years of steady gains, especially in parts of Africa and Asia. At the same time, rising poverty levels worldwide have made basic electricity unaffordable for over 100 million people with infrastructure access.

MEETING THESE CHALLENGES

Become more efficient and effective

Despite limited growth in their current businesses and profits effectively capped, companies must find the financial resources to invest in new infrastructure. This means increasing efficiency and effectiveness in their operations and capital deployment. This operational excellence will also be key to winning in new growth areas.

The “circular economy” offers P&U companies a framework for transforming their value chains, reducing or eliminating waste, and reusing and recycling resources. These efforts improve efficiencies, reduce costs and decrease carbon emissions. But increasing circularity is a major endeavor: business models must change to prioritize equipment repurposing or recycling, as well as better carbon capture and use, heat waste recovery, and water cycle management.

Identify growth areas and go after them

The global utilities market is expected to grow at 7.2 percent CAGR, reaching almost $6 trillion in 2025. Despite limits to traditional expansion, potential growth areas abound. Customer-centricity and technological advances are opening up new business models and market structures. The shift toward renewables means new networks and services as well as infrastructure. Many collaboration opportunities will emerge from today’s disruptions; utilities, EPCs, and technology providers will need to work together to drive efficiency, digital transformation and decarbonisation. Electricity suppliers and their customers can increasingly partner via distributed generation models for mutual benefit.

So where should P&U providers channel their investments for highest returns? Companies must balance focused pursuit of currently promising areas with strategic bets on more experimental future opportunities. This new approach to growth will require focused managerial attention, disciplined capital allocation, agile operating models, and developing the right capabilities.

About World Utilities Congress

Boston Consulting Group are the ‘Strategic Insights Partner’ for the World Utilities Congress.

Hosted by TAQA and held under the patronage of HH. Sheikh Khalid Bin Mohammed Bin Zayed Al Nahyan, The World Utilities Congress will convene the global power and water industry to converge and discuss trends and technologies impacting future power and water demand.

The event will be in-person, taking place in Abu Dhabi from 9 to 11 May 2022 at the Abu Dhabi National Exhibition Centre (ADNEC). It will be supported by the UAE’s Ministry of Energy & Infrastructure, Abu Dhabi Department of Energy (DoE), Department of Culture and Tourism – Abu Dhabi (DCT Abu Dhabi), Emirates Nuclear Energy Corporation (ENEC) and Abu Dhabi National Exhibitions Company (ADNEC).

For more information please visit - www.worldutilitiescongress.com