Are utilities, investors and regulators prepared for the low carbon transition?

30 June 2017

Jonathan Grant  comments on a discussion between energy utilities, investors and regulators about long term planning that we hosted with Preventable Surprises last month.

Once a dependably boring part of investor portfolios, energy utilities are undergoing a rapid transition driven by technological innovation and shifts in the regulatory landscape.  The model of centralised generation is being replaced by one of decentralised, low carbon producer-consumers with utilities providing baseload and back up.  New business models and approaches to pricing will emerge from the digital and smart revolution, making the power sector more complex and less predictable.  Parallels were drawn with the pricing and business models adopted in the telecoms sector during the 1990s.

“The energy system will be decentralised, democratised, electrified and decarbonised.”

For investors, the dividend-rich, defensive stock of old is disappearing as utilities adapt to new challenges.  Investors will need to adapt their strategies to reflect these new business models that look more like a technology and data company than an infrastructure one.  They also need to assess whether a company's strategy and financial plans are fit for future climate scenarios.

Regulators need to make the transition too.  As technology leapfrogs policy, how do governments and regulators ensure that their policies enable the transition and keep up with the pace of change in technology and business models or even accelerate it?  Creating the right incentives is difficult given the fast pace of change in the sector—and a history of incentives that bet on the wrong technologies.

PwC teamed up with Preventable Surprises to bring together utility companies and investors to discuss the challenges of planning for the long term energy transition. The group considered what it will take to meet IEA’s target of 95% clean energy by 2050, while continuing to grow shareholder value.  The roundtable discussion focused on three main topics: (a) how the industry has changed over the last 10 years, (b) parallels to the telecoms sectors, and (c) the key challenges and opportunities that lie ahead for investors, policymakers and utilities. 

A more detailed 3-page report on the event is available here.

“Utilities, investors and regulators need to work together during this period of disruption.” 

Finally, the group agreed that the low carbon transition also offers opportunities: electricity demand could double as it replaces natural gas for heat and transport fuel.  This transition won’t be easy.  Interaction and information sharing between the big utilities and their investors must expand to achieve a shared understanding of the risks and opportunities ahead.

Jonathan Grant | Director, Sustainability & Climate Change
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