by Tanya Bodell, FTI Consulting
Electricity increasingly has the characteristics of a mature market. Long-term electricity demand growth has declined steadily since the 1950s, slowing from a post-World War II growth of 9.8 percent per year to 2.4 percent per year in the 1990s and an average of 0.9 percent per year from 2000-2008, according to the Energy Information Administration.
The past two years following the credit crisis experienced consecutive declines in demand, particularly anomalous considering that only three of the most recent 11 recessions experienced a drop in annual demand.
Energy efficiency programs and demand response promise to exacerbate this trend further, with plug-in hybrid electric vehicles estimated to provide only a negligible offset.
How can an electric utility meet shareholder demands for growth?
Slow overall market growth and increased competition generally results in consolidation of the industry.
Well-funded utilities may buy market share by acquiring another utility’s assets through a purchase of strategic businesses or acquisition of the entire company.
Although exploiting synergies and achieving cost savings through utility mergers has been challenging in the past, the current environment might serve to realize new opportunities by recapitalizing an acquired company’s business and providing new opportunities for the acquirer.
If valuations are attractive and integration can be managed, grow through acquisitions.
Expand Service Offerings
Although electricity is a commodity, there continues to be substantial room for growth in competitive markets and services surrounding delivery.
Regulated utilities have embarked on growth strategies through competitive affiliates investing in renewable power, independent transmission and competitive retail offerings, all outside their traditional franchise areas.
New entrants are starting to encroach on the traditional domain of utilities, offering energy storage solutions to support reliability, installing distributed generation and backup, aggregating end users into capacity blocks, communicating energy usage directly to customers, and offering energy efficiency audits and options.
Look for services, products and customers that are growing faster than industry average and position your company to capitalize on the growth in these areas. Follow the example set by successful firms in other mature industries that provide niche or customized solutions to their customers to provide value. Become a customer service provider vs. a commodity supplier.
Utilities have been feeling the pressure by regulators and customers to forgo substantial rate increases, a characteristic of mature markets where experienced buyers have leverage over producers.
This is exacerbated in electricity where regulated tariffs traditionally are tied to usage, an earnings anchor in a low-growth world. Many utilities are decoupling their rates in recognition of lower demand growth. A significant number of utilities have invested in smart meters and advanced metering infrastructure. This investment offers new opportunities to propose and implement innovative rate structures, incentivizing customers with high elasticity of demand to respond to price signals while recovering higher average prices from customers with lower elasticity of demand. Re-examine traditional rate structures and implement a program that distinguishes customers by their willingness to modify behavior.
Improve the Supply Chain
The electricity supply chain has not changed much since Thomas Edison perfected the incandescent lamp.
New technologies in distributed generation, smart grid, information systems and wireless communications could revolutionize how the industry operates.
Re-examine the value chain of electric power supply and improve production and delivery through alliances, joint ventures, integration and innovation.
A mature industry offers stable earnings and high dividends with companies characterized by low price-to-earnings ratios and limited growth. Recent declines in demand, along with longer-term trends in energy consumption growth, indicate that the traditional electricity industry is evolving into a mature market.
In such a market, growth opportunities are rare and only a subset of companies in the industry survives.
Regulated franchise monopolies are somewhat protected but increasingly will face pressures to decrease their margins at the expense of shareholder growth.
Take measures to ensure your company’s long-term survival. You can achieve growth in a low-growth world through consolidation, expansion into new service offerings, innovation of rates, and value chain optimization that takes advantage of strategic alliances and integration of new technologies.
Tanya Bodell is a managing director at FTI Consulting and co-founder of the Electricity Consulting Group. Reach her at firstname.lastname@example.org.
“Businesses need to provide a growth path, which becomes increasingly difficult in a shrinking economy.”
-Chuck Martin, The New York Times business best-selling author, speaker and business strategist