Large power generators (hydro, nuclear, coal and gas) generated electricity that was brought to consumers via a grid made of very high to high voltage transmission lines and cables. Next to the large power plants are a whole range of smaller units like cogeneration plants (delivering heat and electricity) these smaller units are owned by a whole raft of municipalities, households and businesses, and they're generating their own electricity.
Large power generators (hydro, nuclear, coal and gas) generated electricity that was brought to consumers via a grid made of very high to high voltage transmission lines and cables. Next to the large power plants are a whole range of smaller units like cogeneration plants (delivering heat and electricity) these smaller units are owned by a whole raft of municipalities, households and businesses, and they're generating their own electricity.
Large power generators (hydro, nuclear, coal and gas) generated electricity that was brought to consumers via a grid made of very high to high voltage transmission lines and cables. Next to the large power plants are a whole range of smaller units like cogeneration plants (delivering heat and electricity) these smaller units are owned by a whole raft of municipalities, households and businesses, and they're generating their own electricity.
THE POWER GRID BUSINESS 1 2 TECHNOLOGY 4 ORGANISATION 4 REGULATION 4 NEW PLAYERS 6 VLERICK ENERGY CENTRE 7 Strategy & Customer centricity 8 Mergers & Acquisitions 9 Multi-Cultural Collaboration 10 Finance 11 Business Model Innovation
TABLE OF CONTENTS TECHNOLOGY For the last century, large power generators (hydro, nuclear, coal and gas) generated electricity that was brought to consumers via a grid made of very high to high voltage transmission lines and cables down to medium and low voltage distribution lines and cables. It was like a waterfall with electricity owing in just one direction, from very high to progressively lower voltages. This situation is now changing rapidly. Next to the large power plants are a whole range of smaller units like cogeneration plants (delivering heat and electricity) and renewable energy sources like wind mills and photovoltaic panels. These smaller units are owned by a whole raft of municipalities, households and businesses, and theyre generating their own electricity. While large power plants were instructed to deliver the exact amount of electricity needed to match the real-time consumption, these smaller units generate electricity either as a by-product (e.g. cogeneration) or in function of weather conditions (solar and wind). Given the fact that these smaller units receive priority by law, the role of the larger power plants is progressively reduced to ll the gap between consumption and the power generated by these smaller units. Today, already, millions of such smaller units are generating electricity all over Europe. Just how far this decentralisation of power generation will go is unknown but we can assume that this (r)evolution will go on. This new context is not only changing the business model of power generation, but transmission and distribution companies see their investments and the grid operation signicantly impacted. Where should the priority investments be made? More (very) high-voltage transmission grids (the highways of electricity transmission), more local (and lower voltage) distribution, or in making the grid more smart, or in higher efciency appliances, or demand side management, or everything all at the same time? By Professor Leonardo Meeus (Director of the Vlerick Energy Centre) and Daniel Dobbeni (Chairman of the Vlerick Energy Centre). 2 The European Commission has estimated that approximately 200 billion Euro needs to be invested in electricity and gas transmission infrastructure in order to achieve the 2020 energy and climate objectives (in the EU). Whether these investments, of which 80% are driven by the increasing share of (variable) renewable energy sources, will be put in service in due time is open for debate. The lack of public acceptance in European countries is such that it often takes more than a decade to obtain the construction permits. In parallel, local businesses and groups of consumers could decide to reduce their dependence on a central power system by integrating decentral generation, active demand side management and, in the future, storage into a self-sustaining network? Providers of electricity transmission services the Transmission System Operators (TSOs) and Distribution System Operators (DSOs) are obliged to ofer a universal service to all customers, and this often at a universal price, with limited possibilities to tailor their ofering. If and when some customers go of grid so called micro or private grids - and no longer use the central network (or only as a back-up service, and not anymore as the main source of electricity), the total cost of the grid has to be paid by a smaller number of customers. As costs go up, more customers will be tempted to leave the grid, making it even more costly for those that stay connected all year long. In some geographical areas, like California, this situation is already happening. Although there is no doubt that central and decentral generation will co-exist in the future, nobody knows what the balance and outcome will be. This context induces a major uncertainty for an industry characterised with assets having a lifetime between 25 and 50 years. 3 4 ORGANISATION While there has already been a good deal of consolidation in the energy production and retail sides of the business, up until now the networks have stayed pretty much as they have always been, namely national and regional. There are signs however that consolidation is being contemplated at municipality level between electricity networks, natural gas, water, telecommunications, waste treatment,... Taking into account the trend towards decentral generation, the clear diference between TSOs and DSOs activities - when dealing with grid congestion, balancing generation with demand, voltage control is getting blurred. Variable renewable energy generation is here also a major game changer. REGULATION There has long been a single market for goods and services in Europe, but only recently has it been applied to network industries like electricity, water, telecom, and natural gas. The institutional challenge we face is how to develop a European electricity market, serviced by a common grid that is managed by many diferent grid companies whose investments are approved by national (or regional) regulatory authorities. Even though there is also a European regulatory authority (the Agency for Cooperation of Energy Regulators, ACER), it doesnt yet know the institutional limits of its mandate and irts with the edges of what is acceptable. The trend towards more European regulation at the expense of national regulation is open for debate. For the 41 interconnected TSOs from 34 countries who, by denition, work at a transnational and European level it shouldnt really make a diference. But for the DSOs, and there are more than 2300 of them, its a diferent story. Some of these are subsidiaries of large multinationals, but many are still very small businesses. Is there room for new players, ofering combined services or not? NEW PLAYERS This power sector has traditionally developed its business from inside out. When a power grid company needed telecom services, it built its own. If specic IT solutions were required, it developed its own proprietary software. And if investment or acquisitions had to be nanced, they did it with their own resources and with very little external nancing. Since the 21st century, this situation has drastically changed, either from the power companies themselves or from new players moving into the power industry business; whether in generation, retail or demand side participation. 5 Potential challengers are everywhere: A rst candidate: car companies. If they are going to install a battery in your house (via an electric vehicle), it may as well supply electricity at a reasonable price. To date the issue has been how to get the individual correctly connected to the centralised power grid when they buy an electric vehicle, but if you turn that argument around, why couldnt the car salesman help you to reduce your dependence on that power grid and supply the electricity as well? Another challenger could be a company involved in data mining for marketing purposes. Just as companies like Google use internet based communications to send us specic advertising or supermarkets know what brands and products you prefer through their loyalty programmes, so could some players explore data from the energy consumed at a home or a business. Its not too far fetched to imagine these data miners understanding and proling exactly who you are through your consumption, and using this information to promote other products and services like electricity. All of the above trends and uncertainties are both challenges and opportunities for existing power grid companies and newcomers. Private networks are for example, a challenge to the traditional regulated business of power grid companies, but at the same time also an opportunity to provide added-value commercial services, knowing that private networks need to be owned, developed, planned, and operated. The Vlerick Energy Centre acts as a multi- disciplinary platform organising executive education for TSOs and DSOs, research and events. The Future Power Grid Managers Programme is the agship international programme organised by the Centre, and brings together senior managers from all over Europe. The Programme is a joint initiative of Vlerick Business School and Florence School of Regulation. The Centre and the Programme focus on market and non-market strategies for TSOs and DSOs, regulation, mergers and acquisitions, multi- cultural group work, nance, and business model innovation. 66 IN TURBULENT INDUSTRIES IT IS ESSENTIAL TO EXPLORE AND EXPLOIT AND TO STRIVE FOR BOTH EFFICIENCY AND AGILITY. Prof. Kurt Verweire " STRATEGY & CUSTOMER CENTRICITY Power grid companies are champions of operational excellence. The power grid business is increasingly becoming a fast moving industry so that companies have to become more agile to be able to respond to new opportunities and challenges. The asset managers that were focused on operational excellence therefore have to put more emphasis on exploration, and less on exploitation. This implies a diferent strategic approach, a more customer centric approach. In truth though, theyve only recently started to discover their customers. How do you keep your strategy moving as fast as your business? How do you thrive in turbulent markets? What does it take to be customer centric? In the Future Power Grid Managers Programme, participants work in teams on a business idea for their company. For example, one team started from the energy efciency obligations put on distribution grid companies and proposed to set-up an Energy Service Company with a innovative business model, diferent from the incumbents already present in that market. These projects illustrate how power grid companies can become service providers, rather than only asset managers. 7 THE EXPERIENCE IN OTHER SECTORS IS THAT, ONCE STARTED, CONSOLIDATION CAN GO MUCH QUICKER THAN THE SECTOR BELIEVES IS POSSIBLE. Prof. Philippe Haspeslagh MERGERS & ACQUISITIONS The energy sector has already seen a great deal of consolidation and cross-border acquisitions, but this has not yet been the case for electricity network providers (TSOs and DSOs) though there are some exceptions. Merge and if so with whom? Eat or be eaten? Is transmission going to become more and more an international business (following the example of Elia)? Or is distribution going to remain local? What will happen if transmission merges with distribution? In the next session of the Future Power Grid Managers Programme, there will be a business case about how Elia bought the 50 Hertz network in Germany (from the Swedish company, Vattenfall). The case has been prepared with the full cooperation of Elias management, and goes into stark detail about how this acquisition was made and planned. All the steps are explained, including the ups and downs, the long-term preparation and the ne details, about how Elia became a member of the GO15 club, the organisation grouping the 17 largest power grid companies in the world. 8 " 9 EXPECT A CULTURAL SHOCK IF NOT AN ELECTRICAL ONE WHEN EUROPEAN POWER GRID COMPANIES WILL BE HEADQUARTERED ON THE OTHER SIDE OF THE CONTINENT, OR THE GLOBE. Prof. Smaranda Boros 9 MULTI-CULTURAL COLLABORATION Many people whove worked in a multinational know what it means to work with people from a diferent culture but thats just not the case for those in the power grid industry. Very few of them are multinationals, yet thats clearly the way the world is going. How do you keep the benets and thinking approaches of diferent cultures and origins with a company, yet have it remain one company in vision, strategy and culture? How do you keep the right tension between inside coherence and cohesion and outside adaptability to the clients living in diferent cultures? The rst Future Power Grid Managers Programme has people from 7 diferent European countries. Participants experienced the challenges of cross-cultural collaboration, which occur irrespective of good intentions to work together. These challenges showed the importance of good up front discussions of both the common interests and views as well as the potential pitfalls and problems. They also learnt the value of informal networking to support the formal work - cross company visits and outside work exchanges (one included the France vs Ireland 6 nations rugby match, while another was an opportunity to sample all the participants national food and drink). 9 " EXCEPTIONAL INVESTMENTS IN ELECTRICITY NETWORKS REQUIRE AN EXCEPTIONAL REGULATORY FRAMEWORK TO ALLOCATE THE RISKS THAT POWER GRID COMPANIES FACE. Prof. Filip Roodhooft FINANCE In the past, power grid companies made and paid for their investments by themselves. With the rules as they were, they had virtually guaranteed incomes from these investments for years to come, and so even though returns were a long way of, they knew that the investment was worth it in the long run. All this has changed and now the future is more uncertain. How do you invest in the electricity network when the future is uncertain? When do you invest and where? Who will be blamed for stranded assets? The regulatory authority that approved the investments, or the regulated company that proposed the investments? A detailed examination of the nancial impact of major investments for 2 companies is also part of the Future Power Grid Managers Programme. The rst case, for Eandis, a Belgian distribution grid company, looked at the potential of a smart meter roll out throughout their network, while the second, for RTE, the large French TSO, worked on the expansion of their connections with neighbouring countries. The question asked to the participants was simple, Would you do the required investments under the current regulatory framework, yes or no? The case results were presented to the top executives of both companies, with excellent feedback on both sides. 10 " 11 11 TYPICAL RESPONSE STRATEGIES OF INCUMBENTS TO PRIVATE NETWORKS ARE TO EITHER IGNORE THE PROBLEM OR RUN AWAY, ULTIMATELY THOUGH ONLY BUSINESS MODEL INNOVATION WILL PREVENT THE EXTINCTION OF POWER GRID COMPANIES. Prof. Marion Debruyne " 11 BUSINESS MODEL INNOVATION The incumbents in this business are facing major decisions and dilemmas. They have large investments and costs, obligations to meet (via the regulator) and yet their revenues could decline (mainly due to the fact that people can choose to go of grid). What do they do? Create new markets and new projects, making sure they are far away from their home market and dont cannibalize their existing business? Or do they work more closely with local energy producers? The Future Power Grid Managers Programme also looks at the phenomenon of reverse innovation and most specically about how microgrids work in the developing world. It details how an MIT professor examines how these microgrids work in practice in India. It also examines other business model innovations including work done by Aliander, a major DSO of the Netherlands (including the city of Amsterdam) who has set up a new company, Liandon, to manage and maintain private networks. 12 Our view at Elia is that we need to see the winds of change blow harder through the electricity market, for just as weve experienced many changes in the last decade (unbundling, deregulation, renewable energy and so on), so the actions and decisions taken in the next 10 years will be crucial. Its a complex business, and there are no easy solutions. A quick review of the game changers: By Jacques Vandermeiren, CEO Elia Group NEW TECHNOLOGIES particularly those that have helped create the push towards renewables has and is changing the nature of our business. The fact that certain governments gave consumers lavish subsidies to install photovoltaic panels just added to the stampede. Nobody, at least on the industry side, really expected renewable energy to have quite the success it has had. EUROPEAN REGULATIONS have with the 1st and 2nd European directives - reshaped both the market and Elia considerably. One of the consequences of the unbundling requirement was an opportunity for us, and we were able to buy a major transmission network in Eastern Germany in 2008 (from Vattenfall). It has also obliged the incumbent vertical organisations (producers, distributors and retailers) to sell- of parts of their business, and concentrate on one thing only. ORGANISATIONAL CHANGES have been the result of the rst two. Some companies have got smaller, as theyve had to sell parts of their network, while others have got bigger as theyve consolidated and integrated other parts of the business. Besides that, there are many more players in the market now, and looking forward, there wont be room for them all. 13 HOW AN EARTHQUAKE IN JAPAN CHANGED THE FACE OF EUROPEAN ENERGY The earthquake of the east coast of Japan in March 2011 didnt only provoke a tsunami in Japan with all the tragic consequences and loss of life that went with it it generated an equally strong wave of change in the energy market in Europe. Shortly after this time, Chancellor Merkels German government decided unilaterally to immediately close old nuclear plants and phase them out entirely by 2022, thereby putting pressure on the whole electricity supply system in Western Europe. The result is that Germany now needs to import power and this has put a strain on an intercontinental transmission grid system that just wasnt built for this kind of work. This, coupled with the fact that much of the continents renewable wind energy is being produced along the North Sea coast, has meant that there is a real need for infrastructure investments on a major scale. This is a problem waiting to happen. With the main centres of consumption in the centre of the country, major electricity corridors are required; thats high voltage transmission lines from the north to the centre of Germany. The bill in all Europe is estimated at 200 billion Euro over 10 years according to the European Union. In truth though, the problem is not nding the money the money is available, especially if there is a good regulatory framework guaranteeing a return on investment, the big issue is permits. With 50,000 km of high voltage transmission lines required in a very dense region of Europe, nimbyism is rife as nobody wants them built in their backyards. Permits are sometimes taking 10 years to be issued, when the reality is they are required in 3 or 4. DO WE STOP INVESTING IN THE COLLECTIVE APPROACH? Are we going back to the 1950s where every council/commune invested in their own energy supply, because that may end up being the result? Countries and landen will inevitably make the choice for security of supply and start building or reopening the power supply units in their area. It seems that there has been a change of focus every 4 or 5 years: once upon a time it was security of supply, then there was a push for competitiveness (open the market), the next it was sustainability (renewables), and now were back to security of supply again. Its come full circle. Now we know there is no easy solution, but one thing is clear, we (all) need a long-term energy policy, at the very least for the Central West Europe zone. We need a coherent policy: one that decides on the investment priorities in this zone and ofers a price zone for customers covering the whole area. All the stakeholders want this, as no company wants to be at a disadvantage by being on the wrong side of the border. 14 THIS IS A REAL (AND GOOD) REASON FOR EUROPE TO WORK TOGETHER There is hope, especially as each of the countries in this area is facing many of the same challenges. We can imagine a scenario whereby France produces base electricity through its relatively cheap nuclear programme, and Germany/Denmark contribute with their inexpensive renewables (and possibly coal), while Belgium and the Netherlands use their very much more exible gas plants to manage the peaks and troughs of supply and demand. If everyone works together and shares their existing resources, it would certainly be cheaper (and better for the environment) than doing it on their own. There is a real need for the European approach of 1957 when the coal and steel producers got together for the common good. Even the United Kingdom needs this as it too juggles with the same issues as everyone else. We believe that everyone ultimately wants the same thing: greater security of supply, continue to tackle climate change, give nancial guarantees to the investors, while ofering customers a choice. Will it happen? We dont know, but we believe it should, sooner rather than later, for the good of everyone involved. Jacques Vandermeiren CEO Elia Group ESTABLISHMENT OF THE FUTURE OF POWER GRIDS-ELIA GROUP CHAIR (JUNE 2014) The Elia Group, one of Europes top ve system operators, has joined forces with Vlerick Business School to establish a Chair that will look closely at the future of the energy landscape, and more specically the impact on electricity grids. The Chair will be in place for a ve-year period. 15 16 17 For more information please contact: ENERGY.VLERICK.COM #ENJOYCHANGE M a y
2 0 1 4 PROF LEONARDO MEEUS Director of the Vlerick Energy Centre Vlerick Business School T: + 32 2 225 41 29 E: leonardo.meeus@vlerick.com DANIEL DOBBENI Chairman of the Vlerick Energy Centre Vlerick Business School E: daniel.dobbeni@vlerick.com BRUSSELS - GHENT - LEUVEN - ST. PETERSBURG VLERICK BUSINESS SCHOOL - THE BUSINESS SCHOOL OF GHENT UNIVERSITY AND KU LEUVEN STICHTING VAN OPENBAAR NUT - PUBLIC UTILITY FOUNDATION - VAT BE 0424 244 049 HQ: REEP 1 - 9000 GHENT - BELGIUM - T + 32 9 210 97 11 INFO@VLERICK.COM - WWW.VLERICK.COM