PwC: Massive change sweeping through power sector

While South Africa’s power utility Eskom is trapped in immediate challenges, mainly the rush to plug a major capacity hole in the national power grid, the world around it is changing fast causing the need for readjustments in the business model of traditional power utilities.

This view is clearly paintable from the 13th PwC Annual Power and Utilities Survey results released yesterday. Comments from the survey are pillared by the observation that power utilities across the globe are facing “disruptive forces”and are preparing to adjust to the potentially disorientating changes. Decentralised generation is a major theme.

Angeli Hoekstra, PwC Power & Utilities Leader for Southern Africa, said “Power utility companies will need to respond to these changes to not be eclipsed by technological and market change”.

While Eskom is expected to remain a monopoly for the foreseeable future seeds of disruption have been planted via the emergence of the renewable power movement in South Africa. Fears about Eskom’s insufficient capacity are driving households into alternative plans and mainly via solar technology.

As international investors flock into the country to take advantage of the Renewable Energy Independent Power Producer Programme (REIPP) technology advancement is following suit. These technologies will certainly find a gap in the market even though the REIPP is channelled via Eskom.

Local and international entrepreneurs are already betting for the opening up of the market. Examples include a plan by Black Lite Solar to establish a thin film solar manufacturing facility in the Eastern Cape. Local businessman, Ajay Lalu and partners teamed up with German power technologies giant Manz to establish the facility. The investment is clearly designed to take advantage of opportunities emerging out of the REIPP.

Black Lite Solar CEO Sanjay Soni has recently said renewable energy has a greater role to play in the country’s energy mix with the domestic and commercial rooftop market yet to take off. He reckons the South African domestic and commercial rooftop market could be as high 10GW by 2030.

The PwC report noted that “Disruptive forces – distributed power generation, technology changes, and a new breed of customer – mean that the traditional power utilities business model which has endured for decades is under threat”. This is recognised by overwhelming majority of respondents in the global survey.

The PwC report stated that “Many in the industry expect the existing power utility business model in their market to transform or even be unrecognisable in the period between now and 2030. The majority of utility companies (94%) predict complete transformation or important changes to the power utility business model”.

Hoekstra said “Decentralised generation is already eating into revenues of power utility companies in mainly developed countries and partly marginalising conventional generation. Ultimately it could shrink the role of unwary power utility companies to operators of back-up infrastructure.”

Results of the survey shows that four in every ten (41%) of companies anticipate business model transformation and, a further 53% expect existing business models to undergo ‘important changes’. Very few (6%) of participants globally expect the business model to remain ‘more or less the same’.

However few participants in the Middle East and Africa (MEA) and South America anticipate transformation to their business models. Instead, most or all expect it to be similar to today but with “some important changes”.

The report noted that nearly two-thirds of companies believe there is a medium to high probability that distributive generation will deliver more than a 20% share of worldwide generation by 2030. More than half of companies (57%) say there is a high or very high likelihood that distributed generation will force utilities to significantly change their business models.

In addition the report noted that companies anticipate distributed generation to push up the price consumers pay for transmission and distribution. It will increase the proportion of fixed costs in the price of electricity.

The report added that if barriers can be overcome, distributed generation could set the scene for widespread industry transformation –with energy efficiency, falling solar prices, demand-side management and smart grid technology, heading up the list of developments.

The report added that the least impact is expected from offshore wind and from carbon capture and storage technology which remains hindered by feasibility and development problems. “Interestingly, the crucial breakthroughs required in stationary battery storage that would be needed for self-generation customers to break-free from dependence on the grid, appear too far off for most companies to foresee any significant impact for the time being”.

The report noted that new sources of fossil fuel will also have a major impact on the power market. Shale gas and tight oil are set to change the economies of the energy landscape. Already, the impact of shale gas on the market is reaching far beyond North America. “Important quantities of shale gas also exist in other countries, such as South Africa, Jordan and Chile, which have limited conventional oil and gas or in regions such as Europe where conventional own supplies are becoming depleted,” said Hoekstra. However, national energy policies, ‘above ground’ economics and local community politics as well as geology will be key factors determining the pattern of shale gas exploitation.

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