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WHITE PAPER: A WIND OF

CHANGE IS BLOWING THROUGH


THE POWER GRID BUSINESS
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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).
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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.
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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.
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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.
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IN TURBULENT INDUSTRIES IT
IS ESSENTIAL TO EXPLORE AND
EXPLOIT AND TO STRIVE FOR
BOTH EFFICIENCY AND AGILITY.
Prof. Kurt Verweire
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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.
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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.
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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
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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).
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"
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.
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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
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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.
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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.
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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.
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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.
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For more information please contact:
ENERGY.VLERICK.COM
#ENJOYCHANGE
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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
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HQ: REEP 1 - 9000 GHENT - BELGIUM - T + 32 9 210 97 11
INFO@VLERICK.COM - WWW.VLERICK.COM

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