Originally published on EnergyPost.
By Simon Skillings
With Eon’s historic decision to restructure we now for the first time will have a large energy supplier not being pulled in two directions, but acting on the single imperative of bringing new energy solutions to customers. This removes one of the key obstacles that has been hindering the energy transition, writes Simon Skillings, former Director of Strategy and Policy at Eon UK and now independent consultant and associate at environmental think tank E3G. But Skillings warns that other obstacles remain: the energy market is riddled with rules and regulations that lock in a future for assets that, he says, “will not be required in the new world”.
The large German-based utility Eon recently announced that it is about to initiate a radical restructure and to de-merge into two ‘daughter’ organisations. The energy sector is constantly in the news as Governments agonise over the need, or otherwise, for change in energy policy. However, this decision has the potential to be far more significant than any policy pronouncement and could light the blue touch paper on a transformation of the energy system that will revolutionise the way energy is consumed.
The traditional utility business model has evolved to deliver stable and predictable returns to investors. This, in turn, has ensured investment grade credit ratings could be maintained enabling the companies to efficiently raise large amounts capital to finance investment in new infrastructure projects. However, this business model has significant drawbacks. It demands that the organisation is managed to deliver steadily increasing profits and this creates a difficult environment in which to grow new businesses and develop new markets – particularly if those new businesses cannibalise the core markets that generate the cash.
It is not possible to optimally run an organisation which comprises two businesses pointing in fundamentally opposite directions
Eon has already been caught out once by failing to respond to major market changes as the rapid growth in renewable energy, particularly in Germany, has had a devastating effect on profits. Eon is not alone in this regard and all major European utilities have significantly underperformed against stock market expectations in recent years. The challenges faced by the big utilities have led many to argue that European energy markets need to be reformed to shore-up the utility business model such that they are able to make the necessary infrastructure investments.
However, climate change, and the need to decarbonise the power system through deployment of renewables, is not the only transformational change affecting the utilities. The move from analogue to digital technology could create a revolution in the way energy is consumed. A raft of new smart technologies already exists that allow consumers to control their energy usage and produce their own electricity to meet their needs. Mass deployment of these technologies would have the effect of compressing the whole value chain into a set of customer facing products and services and this would undermine the basis of the traditional utility business. This new world would have huge lifestyle and cost advantages for consumers and many policy-makers have been contemplating whether, in fact, it is better to drive forward this new agenda at the expense of existing utilities.
The Eon restructuring recognises the new industrial logic of a transformed energy system and it is inevitable that other utilities will need to respond accordingly
Eon does not want to be caught out again and its decision renders this policy debate obsolete. It has recognised two key areas where a line must be drawn under the past. Firstly, it is not possible to optimally run an organisation which comprises two businesses pointing in fundamentally opposite directions. By creating one business that aims to develop new markets in customer solutions and renewable energy and another business seeking to optimise the operation of legacy assets necessary to run an integrated energy system, both businesses will be able to focus on a clearly defined business imperative and this will be to the benefit of investors and wider stakeholder community.
Secondly, Eon has bitten the bullet and taken a large financial impairment of €4.5bn. Investors must accept that the new market realities mean that it is not possible to expect returns at the level previously enjoyed by utility shareholders. This is good news for consumers feeling the pain of high energy prices and Governments seeking cheaper ways to achieve a sustainable and secure energy system. The Eon restructuring recognises the new industrial logic of a transformed energy system and it is inevitable that other utilities will need to respond accordingly.
Customers need to be taken on a journey that opens their eyes to new lifestyle benefits and the opportunity to reduce energy costs and this is a significant challenge even for the most sophisticated marketing campaign
We now have the prospect of a large energy supplier with the business imperative to bring new energy solutions to customers. This removes one of the key obstacles that has been hindering the transformation of the energy system. However, the delivery challenges are significant and a realignment of business models, although necessary, may be insufficient to achieve the change. Customers need to be taken on a journey that opens their eyes to new lifestyle benefits and the opportunity to reduce energy costs and this is a significant challenge even for the most sophisticated marketing campaign. Moreover, the energy market is riddled with rules and regulations that are designed to lock-in a long term future for assets that will not be required in the new world. This creates unnecessary costs for consumers and risks foreclosing the market to new technological solutions.
The Eon announcement is good news. It is now up to policy-makers to recognise that the world is changing and focus on solving the problems of the future rather than those of the past.
Editor’s Note: Simon Skillings was formerly Director of Strategy and Policy at Eon UK. He is currently an independent industry consultant, associate with the environmental think tank E3G and advisor to the technology company Flowgroup plc.
Reprinted with permission.
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