Until recently we spoke, somewhat academically but this time with good foresight, of the the need to extend the offer by companies in the energy sector to face a demand that seemed to be in difficulty. Today the theme has become a matter of survival for many companies in the sector, that is, of life or death, which requires the adoption of courageous choices. Just think of the decision taken by the E.On Group to leave Italy after it entered it not many years ago on the occasion of the 2007 agreement with Enel which closed the very costly battle for the conquest of the Spanish Endesa.
At the origin of this situation, let us remember it once again, there is a structural change in the demand for energy, i.e. for electricity and gas. For many observers and operators, the decline in consumption now seems destined to last over the years. According to some, consumption in the commercial and residential sectors could even pick up again; however, it is very probable that industrial demand will not pick up again and even a recovery of the economy will have much less energy intensive connotations than in the past; the high cost of energy in Italy, together with other factors linked to the drop in demand, has prompted many companies in energy-intensive sectors (for example, steel, paper, basic chemicals, cement, etc.) to move their productions in more convenient places. The effect of investments in energy saving was significant, and may be even more so in the future; here too the forecasts are uncertain and complex but according to some scenarios proposed by authoritative sources (such as the Politecnico di Milano) very serious effects on energy demand also in short time horizons (2020) cannot be excluded.
Prices also seem destined to decrease, and with them the profitability margins of companies. Some factors have pushed and will push in the next few years in this direction. First of all, the production overcapacity which could even increase due to the achieved cost-effectiveness of renewables for residential use; also in 2013 there was an increase in installed capacity precisely with renewables and this creates further pressure on prices. The overcapacity also affects the European countries bordering Italy, making exports in those directions unlikely.
Secondly, the entry of new operators should be mentioned, some of which adopt very aggressive commercial policies, sometimes borderline and risky for the entire system, which however have seen the emergence of companies with very few years of life in important positions. They mainly operate as traders, buying and selling energy they don't have and which they procure on the markets, sometimes even following highly speculative logic. Then there are other subjects, think of the recent case of Altroconsumo, which also involve many thousands of users by leveraging their credibility and ability to aggregate demand. In short, the market has become much more complex and competitive and the traders, now measurable in several dozen, are increasingly interposing themselves between producers and consumers, unhinging the historical relational model. Proof of this is the growing switching rate that has characterized the last few years.
Finally, it should be noted that the trading activity is carried out both by pure traders, who do not have generation plants, and by mixed traders, who instead have available capacity; it is evident that the strategies will be differentiated and also the levels of risk exposure.
Exposure to market pressure varies greatly from company to company. In particular, companies that have generation capacity in the water sector, where marginal costs are almost non-existent, run little or no risk. On the contrary, companies heavily unbalanced on combined cycle production are the ones most in difficulty and very often have plants that are largely underutilized if not shut down. Their situation is made even more complex by the rigidity of the large natural gas suppliers who seem unwilling to revise prices, except after exhausting international arbitration, and even these revisions do not seem sufficient to relaunch gas production. This resistance to downward prices of large suppliers derives from the idea that it is preferable to wait for better times than to sell the precious raw material at low prices; this also considering the growing demand, for example, of Asian countries which, in general, have little gas.
In this complex picture, how can companies react? An operator at the top of a company active in Europe, therefore with the situation not only in Italy in mind, developed this reflection in December 2013: “The future scenario is that energy will be a commodity sold with tight margins, or even at a loss; profitability and turnover can only be recovered with other additional services or products. But this requires very extensive organizational and cultural changes as well as a solid ability to develop inter-company collaborations.”
A drastic choice is to abandon Italy and other European countries to focus on economies with more interesting growth profiles, ie most of the world. E.On decided so, but other companies are also moving decisively towards more attractive markets. But what can those who are in Europe, wholly or in part, do? The path of extending the offer appears mandatory and, in any case, is followed by many operators and certainly by the major ones. In our work three years ago with Accenture "A Power shift: Transforming Utilities Offering" we already signaled this path decisively, gathering some perplexities. Today, the way is mandatory and the theme shifts to how to implement this extension.
This year's study by the Alliances and Strategies Observatory in the Pan-European Utilities Market” (http://www.agici.it/osservatorio-utility/) presented on the occasion of the annual conference on 5 March 2013 shows the attention it is necessary to devote to the theme of the widening of the offer.
Broadly speaking, the paths followed are as follows:
Distributed generation plants (DG). For example, the installation of solar panels or small biomass plants or mini wind farms.
Thermal renewables. For example, supply and installation of heat pumps.
Efficiency of electrical systems. For example, from consumption monitoring systems to the supply and installation of superior class electric motors.
Thermal system efficiency. For example, cogeneration or boiler revamping. Energy saving goods. For example, selling CFL bulbs.
Insurance services. For example, policies that provide for free repairs in the event of an electrical system failure.
Of course, these are in any case not easy paths, which depend a lot on the activity and previous skills of the energy companies. They range from relatively easy additions to the offering that do not require particular adaptations of the organization (think, for example, of insurance policies for damage to homes), gradually up to very demanding additions, such as energy services, which also require imagine separate organizational structures because they are culturally and technologically distant from the existing ones.
The implementation phase of the offering extension strategy constitutes another element of complexity. The lack of internal expertise requires significant moves such as, for example, the acquisition of companies or the creation of complex collaboration agreements. In both cases there are risk profiles to be managed with caution.
Everything must then be considered from the point of view of at least prospective profitability. It is not clear how much new products/services can bring in terms of additional net margins; some of them, think of energy efficiency, are grafted onto existing markets, where there are other operators who have taken on solid positions over time that are not easily ousted. And then the costs and risks of creating new structures and making the necessary investments must be carefully considered. All without forgetting that the historical markets, even if a little feeble, competitive and declining, are still there and will be for many years…
In short, the challenges are numerous and not simple. What we can say is that the major groups, and the most dynamic subjects, are moving with determination and certainly in the coming months and years we will see significant changes in business models and in the logic of competition.
