The simple model of providing power, collecting revenue and securing rate increases is disappearing.” – Ben van Gils, Global Power & Utilities Leader, Ernst & Young
The power and utilities sector faces a lengthy period of transformation. To succeed, the industry needs to invest at least US$13.6t between now and 2030.1
The major challenges in transforming the industry are to:
- Integrate new technologies to reduce carbon emissions and combat climate change
- Compete for resources to replace aging infrastructure and build new capacity
- Secure reliable energy supply
- Influence, anticipate and comply with regulations and markets
- Offer affordable energy to customers
These challenges are global. Developed economies such as Europe and North America need to replace aging infrastructure. In growing countries like China and India, expansion of the power infrastructure is critical.
The credit crisis and global recession have intensified the transformation while presenting new challenges. Providing available, affordable and acceptable energy has become more difficult.
In this environment, governments struggle to reduce carbon emissions without sacrificing economic growth. And while investors’ risk appetites diminish, power and utilities companies face increased strategic risk under this period of transformation.
In the past, power and utilities investments were viewed as safe in times of turmoil. But this economic crisis led to reduced demand across all industries. The consequence of this on power and utilities companies has been reduced revenue and cash flow. Many large players had enough cash to prevail, while others had hedging strategies that made them vulnerable.
The financial crisis led to reduced revenue and cash flow. Many large players had enough cash to prevail, while others had hedging strategies that made them vulnerable.
When the economy turns around, the demand for power will recover and may even exceed previous forecasts. For example, the transport sector will need power to support its adoption of electric vehicles.
Certainly, new power plants will be needed. But given the higher costs of construction and financing, power and utilities companies will be under greater pressures to plan for long-term investment.
The industry cannot maintain the status quo. Companies must make tough decisions today.
1 International Energy Agency,
World Energy Outlook 2008 Edition, International Energy Agency, 2008.
