Il energy sector is invested by epochal and pervasive changes in all stages of the supply chain. Companies must manage intense processes of change bearing in mind that they either ride the transformation or are candidates for disappearance. In Europe, fossil fuels are in crisis: in 2014, 80% of the additional capacity was renewable, while the role of large plants is increasingly marginal. The old generation distribution model has been joined by a new one. In Italy, 31 GW (over 50% of peak demand) are connected to local networks; in Germany this value rises to 71 GW (85% of the peak). The above dynamics is also influencing electricity grids, with the growing importance of the role of local grids.
Also on the consumption front challenges and problems are not few. The contraction in the demand for electricity and gas after 2008 was strong and in gas it even accentuated in 2014. The possibility of recovery is unlikely: in Europe the consensus is on a progressive decline until 2035 also because efficiency is spreading energy and responsible consumption styles. The figure of the prosumer (producer and consumer together) is then established both at an individual and collective level (e.g. SEU): in Italy over 10% of the electricity consumed is self-produced locally but the figure could grow considerably.
Continue then the fall in electricity and gas prices; unconventional storage systems are born (such as batteries, but not only), new very aggressive traders enter the sale of gas and electricity, "energy nationalism" grows with policies that increasingly aim at self-sufficiency.
These are just some of the points of change that require serious strategic reflections on companies and policy makers. It was E.On who broke the ice which, with the plan announced in early December 2014, aims to clearly separate, by creating a new company, what they call the "traditional world" from the "new world" to then cede the "Traditional world". But all the companies in the sector are reviewing their development plans, focusing investments on renewables, networks and customer services, as well as in countries with the highest potential. The Management magazine of Utilities and Infrastructures (see: www.magazine-utilities.com) following the new business plans; in the last issue we examined that of Hera and E.On; in the next those of Enel, Terna, Eni and Snam the four of the state energy companies.
THE IMPACT ON THE COMPANIES
The aforementioned dynamics impacted the income statements and balance sheets of the main players in the sector. Not in equal measure, however: performance is affected by size, international presence, positioning on the supply chain, technological mix and business sector. For example, in 2014 the 42 large pan-European energy groups analyzed by the Observatory held up thanks to their diversified technological and geographical portfolio. Revenues and profitability, compared to 2013, remain unchanged at rather high levels (average ROS 15%) but are much lower than in the pre-crisis years. Forecasts for 2016 see a situation of stability continuing.
On the other hand, it is the mid-sized players focused on energy that face a serious situation, especially those focused on a single country and with a strong presence in gas-fired generation. The overall profitability of a representative sample of the main Italian players has been in constant decline since 2008. The independent traders analyzed in the report appear financially fragile but increase their revenues considerably: for the first 4 Italian players the increase is 400% in the period 2008- 2013; strong growth is still forecast for 2014. Profitability is rather low but it is compensated by the large volumes of intermediated energy.
Furthermore, the 2015 report of the Observatory shows how revenues and profits of Italian multi-utility companies in 2014 are in line with the previous year even if lower than 2008; the estimates for 2016 converge in believing that this situation of stagnation will continue. It should be noted that without the presence of regulated businesses, such as water, waste or distribution networks, the situation would in many cases be much worse. A further criticality for these subjects lies in the high level of debt.
WHICH STRATEGIES TO BEAT THE CRISIS?
Given the complexity of the situation, there is no single strategy for energy operators to deal with the profound changes underway. In any case, there are three basic directives:
1) Rationalization of existing activities. Many companies aim to maximize efficiency also through synergies between different businesses and markets. Many players are changing the organizational structure, lightening the holdings and introducing optimized or standardized management of assets and processes also with a view to flexibility. Rationalizing also means selecting the sectors in which to operate and selling those where it is not possible to reach levels of excellence. Actions with even a symbolic content are grafted into this scenario, such as the closure of 23 power plants by Enel (or their conversion to something else), which will probably be followed by others by other operators (for example, A2A is thinking).
2) Redirect existing activities to better answer the question. Especially where there is competition, such as in electricity and gas, it appears increasingly important to satisfy demand with new or better services. The centrality of the customer is fundamental: the satisfaction of consumers, who are becoming increasingly demanding also due to digitization processes, and is the basis of customer retention and customer expansion. The extension of the offering is a path that has already been trodden and which, if well structured, gives certain satisfactions. Customer engagement, which is relevant in other sectors, is also becoming fundamental for utilities.
3) Finally, aim at the development of new synergistic activities such as energy efficiency services, electric and hydrogen mobility or the development of "fuel-free" district heating. The major groups, even at an international level, pursue the path of synergistic diversification either through cooperation agreements (such as with Siemens or GE which appear to be very active in the sector) or through acquisitions often of small companies but bearers of interesting innovative products typically for the web, but not only.
In short, management and technological innovation at all levels, a path appears that the best companies are following: think of the Virtual Power Plants, to put non-programmable plants into a system like a single power station; computer systems for weather forecasts in order to better manage non-programmable renewables; smart grids, to better manage network loads and bidirectional flows between producers and consumers.
There are still relevant possibilities in Italy, but also in Europe, to achieve growth through business combinations homogeneous to exploit the relative economies of scale. However, it does not seem probable in this historical phase that mega mergers will develop, i.e. aggregations between large companies, while it is likely that there will be progressive takeovers of smaller companies by large operators. International development is also a path of sure interest, even if not without complexity. But certainly it is feasible only (with very few exceptions) for larger groups. Enel, for example, is progressively unbalancing its commitment abroad where, as mentioned, there is the most significant growth potential. There is also the opportunity to exploit the technologies and skills of Italian companies, as has happened, for example, in renewables where many operators, even small ones, have expanded into developing countries or the United States.
The strategies are then strongly conditioned by the financial situations. Often the companies in question have robust debts which lead to the mentioned rationalisations; while it is true that rates are very low today, it is also probable that before proceeding with important growth processes, many companies will have to restore their economic and equity balances. Seizing this situation, we note the entry into the energy sector at full speed by institutional investors (for example: insurance companies, infrastructure and sovereign funds, pension funds) who push themselves not only to the purchase of regulated or quasi-regulated businesses (typically transport and distribution networks as well as renewables) but also free businesses. A striking example and the first ever is at the end of December 2014 with Macquire which acquired the Iberian division of E.On. for 2,5 billion euros. In short, the fronts are broad and articulated and here we have mentioned only a few of the many discussed in the Observatory's reports.
STRATEGIES, NEW NEEDS OF METROPOLITAN TERRITORIES AND CITIES
In the strategic reorganization, according to many, and we are among them, it is important to recover the sense of the relationship between utility and territory, a sense that legitimized its birth in the early 900s. The territory must be seen as a fundamental asset and strategic lever. The relationship with local stakeholders must be strengthened with a structured and inclusive approach, in order to adequately listen to the requests of the customer-citizen, who must be placed at the center of the strategic action. In this context, the contribution that the utility can make to the economic and social development of territories is also important, with a view to increasing their attractiveness from all possible points of view: environmental, social, economic, productive, etc.
For example, with respect to possible new services, the utility as an infrastructure manager can be an enabler of the smart city, facilitating and coordinating other players suitable for developing innovative applications. In doing so, we must not lose sight of the focus on traditional activities with a view to excellence, rapidly and effectively implementing new solutions and technologies. In short, it is essential to seek a dynamic balance between current and prospective needs of the territory, cost-effectiveness and technological change.
The metropolitan city represents a test of the system's ability to change and contribute to progress. The wider geographical boundaries must correspond to a growth in the size of the operators, an ability to look to the future and also to guarantee operational efficiency. Also in this sense, aggregations must be made that have an industrial sense, which generate economies of scale, which create synergies, which allow the management of services at a lower cost. The execution risk is not negligible: some parties, in this regard, have yet to make past integrations fully effective.
In summary, attention to the territory and serious industrial projects (including aggregation) are a strategic key to successfully face the crisis and the increase in competition. In this sense, the concept of "back to basics" applies: going back to the origins to find a new impetus for development. Efforts, however, will be in vain without an adequate legislative framework, which has defined, simplified, stable rules.
