Navigant Research Blog

Europe’s Energy Transition Megatrends and Tipping Points, Part IV: Delivering Shareholder Value through Mergers and Acquisitions, Restructuring, and Divestment

— August 24, 2016

AnalyticsJan Vrins coauthored this post.

In our initial blog on Europe’s energy transition, we discussed seven megatrends that are fundamentally changing how we produce and use power. The increase in merger and acquisition (M&A) and divestment activity is reshaping the utilities industry. Large acquisitions and restructuring maneuvers are happening globally, with some particular impacts on the European utility markets, which we will discuss below.

What’s Happening?

In the search for increased shareholder value and to address policy changes by governments encouraging clean energy, companies are looking at scale, synergies, and reducing exposure to lower-yielding parts of the business. Europe has seen renewables leader DONG Energy become the largest IPO in 2016 with a valuation of approximately €13.5 billion (~$15 billion), and RWE Innogy is slated for its own IPO by year end. E.ON announced it will be separating its more traditional forms of power generation into a new company that is expected to be listed during the second half of 2016. Engie and Centrica are investing billions in new distributed energy resources (DER, which includes distributed generation, energy efficiency, demand response, storage, and more) development and energy services businesses through numerous strategic acquisitions. Even the oil majors are getting back into new energy, making strategic investments well beyond their traditional oil & gas businesses.

What’s Driving This Change?

There is a widely recognised downturn risk, with global growth forecast downward, the impact of the UK referendum, the mature European market, and the growing awareness of the impact of the slowdown of four of the largest emerging economies (China, Russia, Brazil, and South Africa). Despite this, there is evidence of healthy deal flow in the utility sector affecting incumbents and new participants alike. The main drivers behind this are low demand growth (which limits earnings growth), increased carbon reduction policies, changing customer demands, the growth of DER, and the attractiveness of the steady returns from regulated assets in the sector.

But it goes further than that. With the emergence of the Energy Cloud driving a broad and deep digitalisation of the industry, utilities, manufacturers, technology companies, and others are looking for ways to retain their customers, improve their market position, and grow earnings. They are targeting a completely new market of technologies and services, including DER, building-to-grid, electric transportation, smart cities, the Internet of Things (IoT), and transactive energy, which Navigant has estimated will generate $1.3 trillion in new annual industry revenue by 2030. The European energy transition in many ways is leading the way globally, and we see the following acquisition, new venture, and divestiture scenarios playing out across the industry.

Utilities Acquiring Other Utility Companies or Assets

A combination of falling deal value in Europe and rising deal value in other parts of the world resulted in a decline in European utilities’ share of the of the global mergers and acquisitions (M&A) deal market over the last 4 years. A large part of this was due to European acquisition targets being in short supply, being less attractive when coupled with the policy constraints faced by many European power utility companies, and the US government’s clampdown on cross-border tax inversion deals.

Utility M&A Deals 2012-2016

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(Source: Mergermarket)

However, there has been targeted activity driven by a renewed search for international growth and synergy savings. Enel Green Power (EGP) in January 2016 took the first step into the German renewables market with the acquisition of a majority share in Erdwärme Oberland (EO), a company that specialises in the development of geothermal projects. In addition, Iberdrola made a $4.4 billion acquisition of UIL Holdings in the United States, which is the most notable outbound move by a European utility for expanding outside Europe, and MET Group made an acquisition of Repower’s energy supply operations in Romania as part of its expansion along the value chain. We do see large-scale M&A increasing again after this year once divestitures and IPOs have stabilized and the overall investment climate in Europe becomes more favourable.

Institutional Investors and Private Infrastructure Funds Acquiring Utility Companies

Institutional investors’ search for steady yields remains undiminished across the world. The steady, long-term returns available from regulated assets in the power utilities sector are attractive to investors, particularly in today’s low interest environment. Institutional investors, especially cash-rich private equity funds from the Far East and China, are moving into generation, where in previous year the interest was based in network assets.

We have also seen an increasing number of investment yield vehicles and holding companies designed to give Middle Eastern investors in particular access to portfolios of longer term contracted assets, with the renewables sector being a particular focus. A number of the largest deals announced in 2016 fall into this category, with 16 deals worth a total of $4 billion in the first quarter. The most notable of these were Beijing Enterprises Holdings’ acquisition of German energy-from-waste company EEW Energy for $1.6 billion, ISQ Global Infrastructure Fund’s $1.1 billion acquisition of Viridian Group, and Danish pension provider PKA and Kirkbi A/S’s acquisition of 50% of DONG Energy’s UK offshore wind farm project for $1 billion.

Divestitures and IPOs

Divestment of non-core assets to focus on capital projects and growth through acquisitions will be the likely source of restructuring activity in Europe in 2016. The number of divestments marks the highest half-year deal count since 2003, according to figures published by Mergermarket. DONG Energy’s intended divestment of its oil & gas pipelines and review of its exploration & production business will be a significant deal in this respect. This deal would represent a milestone in unbundling one of Europe’s largest power utilities.

Other landmark deals include RWE’s separation of its renewable power generation and distribution business into Innogy and selling a 10% stake through an IPO later in the year. The company intends to use the funding from the IPO to increase its capital expenditure in renewable energy and trends of the energy world of tomorrow. There’s also E.ON’s separation of its conventional power business into a separate entity called Uniper, which is expected to be listed in 2016. While developments both were in response to Germany’s drive to develop more renewable power capacity at the expense of more conventional coal and gas-fired plants and to close its nuclear stations, all big utility companies in the major European markets are reviewing their portfolios in response to the decarbonization drive and to optimise their balance sheets. In the UK, National Grid’s intent to dispose of a majority stake in its gas distribution business is likely to attract considerable interest from a range of institutional funds. Similarly, competition is likely for OMV Group’s planned sale of up to a 49% minority stake in Gas Connect Austria.

Utilities Buying Energy Technology Companies

Globally, we see more technology companies being acquired by utilities with acquisitions of renewables, energy storage companies, and DER. In a recent cross-border transaction, French utility giant Engie took a majority stake in Green Charge Networks. In Europe, this trend is distorted by the size of the deals falling below the radar; many of the deals are small to midsize in nature or joint ventures and tend to focus on beyond-the-meter service offerings, energy storage solutions, and other disruptive technologies. In March 2016, Ecova, a leading US energy company, acquired Power Efficiency Ltd., a leading European energy procurement and carbon reduction service provider. In late 2015, E.ON signed an agreement with Samsung to develop a business model for targeting applications for lithium ion batteries in selected markets. Earlier that year, E.ON sold its Italian solar operations to private infrastructure fund F2i SGR as it exited the Italian solar market. F2i subsequently signed an agreement with EGP to form a joint venture to boost the development of solar PV in Italy. In that same year, EGP opened its first solar power plants combined with battery storage facilities with technology partner General Electric.

A development we are seeing in the United States that has yet to make its way to Europe is the acquisition and investment of analytics companies by utilities in an effort to adapt to the increasingly complex distributed energy environment. A recent example is the $20 million investment in AutoGrid Systems from Energy Impact Partners, a utility group that includes Southern Company, Xcel Energy, Oncor, National Grid, and Envision Ventures.

Oil Majors Diversifying Into the Sector Through Acquisitions

When Chatham House warned oil majors that they must transform their business or face a short and brutal end, no one expected the ensuing events. There were always signs that oil & gas majors were moving into the power market for their resource production, with Gazprom being the most notable until now with its $4 billion purchase of Moscow Integrated Power Company in 2013. With Shell and Total now diversifying their portfolios into the local carbon and cleantech markets, the landscape has genuinely changed. We see oil & gas majors making investments in renewables, DER, transportation, smart infrastructure and cities, and energy management.

In the first half of 2016, Total acquired Lampiris, a renewable power vendor based out of Belgium, for $225 million, as well as battery maker Saft for $1.1 billion. Total has a stated ambition to be the top renewable and electricity player within 20 years; the company previously acquired a majority stake in solar company SunPower, and in April announced the creation of a Gas, Renewables and Power division. Shortly after, Shell, Europe’s largest oil giant, established a new division called New Energies to invest in renewables and low carbon power generation. With close to $2 billion in capital investment already attached to this business and an estimated $200 million in annual funding, the company has ambitious plans to be at the leading edge of the transition to lower carbon economies.

Manufacturers or (Energy) Technology Companies Acquiring Other Manufacturers and (Energy) Technology Companies

Globally, this category has seen significant activity with solar companies acquiring other solar companies, solar companies merging with energy storage companies, and even technology companies buying other technology companies. In the United States, from Google buying Nest to Oracle buying Opower, there is an acute interest to be part of the momentum, and companies are looking for unique and differentiating technologies and capabilities to stay ahead of the competition. In Europe, we see a tremendous number of new companies coming into the energy space, selling new and innovative energy technology products and services. This is expected to be the growth area for the volume of deals, with a significant amount of investment pouring into newer, greener ways of producing, managing, and using power. Europe is at the beginning of a greentech groundswell, and IKEA is leading the way with a pledge to invest $650 million (on top of its earlier investment of $1.6 billion) into cleantech energy projects.

So What Does This All Mean?

Our advice to utility companies is threefold. Your landscape is changing rapidly, and technology improvements and new participants in the market are forcing the pace of this change to unfamiliar territory. If you take the “low regret cost” option, you will end up with stranded assets as new entrants will innovate, provide utility products and services, and gain market share. Think out of the box on how to diversify your revenue streams from new products and services along the value chain, as well as complementary products. Look beyond your comfort zones into emerging markets and form partnerships with local incumbents.

Your customers today can become your competitors tomorrow (as seen with IKEA), or they could seek to be energy self-sufficient, as seen in Apple’s search for European sites with renewable energy sources to power its data centers. This emerging trend with customers using the grid infrastructure to buy and sell power (i.e., transactive energy) where the traditional utility companies are required to maintain the infrastructure has the real risk of forcing you down the low ROI direction. If you are not proactive in forming strategic partnerships with non-traditional participants to explore opportunities, however insignificant and tangential it may seem in your current environment, you will become a reserve source of energy rather than a primary one.

The transition from fossil fuels to a low carbon mix due to technologies and market players will transform the sector from what it looks like today. Embrace green technology—your customers and your stakeholders are. If you do not, then you will lose customers who opt for newer, greener technologies as they change their strategy to meet their own customers’ desires for low carbon energy consumption.

Balancing today’s business with tomorrow’s opportunities is key. Thinking through strategy and future case scenarios will help you understand the opportunities and threats. Existing planning horizons and tools, such as strategic plans and integrated resource plans, are insufficient. A more agile strategic planning approach is needed to pinpoint the trends, opportunities, and threats, and to introduce new technologies and business models successfully to address market and customer needs. Our latest white paper, Navigating the Energy Transformation, offers a framework for approaching strategic planning within an industry facing historic transformation, outlining five steps industry participants should follow to prepare their organizations to maneuver around disruption and capture value in the Energy Cloud. Navigant can help clients understand the impacts of the many industry changes in their business and develop and implement a Strategic Identity and Growth Plan (10-15 years), as well as an agile Energy Cloud Playbook (6-12 months) that will help you navigate a path forward and take control of your future.

This blog is the fourth in a series discussing how industry megatrends will play out across Europe as well as at the regional and country level. Our next blog will be about the globalisation of energy resources. Stay tuned.

Learn more about our clients, projects, solution offerings, and team at Navigant Energy Practice Overview.

 

Europe’s Energy Transition Megatrends and Tipping Points, Part III: Shifting Power-Generating Sources

— August 17, 2016

Energy CloudJan Vrins coauthored this post.

In our initial blog on Europe’s energy transition, we discussed seven megatrends that are fundamentally changing how we produce and use power. In this third blog in the series, we discuss the shift in power generation fuel mix and how this is transforming the European power industry.

European electricity-generating facilities that use oil, coal, and nuclear are devaluing and at risk of becoming stranded as generation sources shift to less expensive renewable generation and natural gas generation. This shift is playing out in different ways across Europe.

Generation Fuel Mix Shift Is Accelerating

According to the US Energy Information Administration (EIA), net European generation capacity will increase by 7 GW in 2016. Much of Europe’s new capacity TippingPointcomes from renewables, with close to 75% of new capacity coming from wind (44%) and solar (29%). While new coal (16%) and gas (6%) capacity was added, far more coal assets were decommissioned. As a result, net new capacity in Europe is virtually 100% renewables. While recent subsidy cuts have tempered solar’s growth, wind is marching onward. There is still no effective utility-scale solution to the inherent intermittency in renewable generation, as storage solutions and grid interconnection/active management are still lacking penetration at scale. Natural gas is the bridging fuel during the shift to renewables, supported by the abundance of natural gas available globally, lower long-term prices, and increasing import capacity in Europe.

What Are the Drivers Behind This Shift?

We see five main drivers for the shift in generation resources described above:

1. Climate Change Policy: Europe has taken definitive steps to decarbonize its power generation, including relatively generous support for renewables and economic penalties for carbon emitters via the EU Emissions Trading System (EU ETS). See our previous blog on the rising number of carbon emissions reduction policies and regulations.

2. European Market Coupling: A second aspect of Europe’s power sector is the physical and economic integration of markets. Interconnection growth has been strong, and the economic incentives via use of power exchanges for dynamic price signaling has provided further support for low-carbon generation.

3. Generation Economics: While policy and regulatory support for low-carbon generation has taken centre stage, the economics of various forms of generation have also been shifting. Within 7 years, solar power has gone from a heavily subsidized resource to a key component of the generation mix, even with zero or minimal subsidies. Europe continues to lead the world in development of offshore wind, particularly in the North Sea. Thermal generation economics have also changed—despite relatively low gas and coal prices, low marginal cost renewables are increasingly forcing thermal plants to shift from stable baseload operation to less efficient cycling and reliance on ancillary service contracts.

4. Decentralization of Generation: The scale of distributed energy resources (DER) is not yet huge across Europe; however, this trend is already shaking the traditional utility business models. The rise of the prosumer is gathering momentum, be it an industrial customer who invests in combined heat and power, a new commercial building with a biomass boiler, or a housing development with rooftop solar panels.

5. Public Sentiment: This driver cannot be underestimated given the prevalence of democratically elected governments in Europe. Public support for action to curb climate change despite the costs has been most obvious in Germany, where the changes via nuclear shutdowns and solar growth have been massive—and expensive. In the UK, it is more expensive to construct offshore wind than onshore, but the public and political preference is that location trumps economics.

How Does This Play Out Across Europe?

Navigant Research forecasts that 66% of European installed renewable generation capacity in 2016 will be in five countries—Germany, Italy, France, Spain, and the UK. In the struggling economies of Portugal, Italy, and Greece, the rate of renewable growth has slowed to just 0%-2%. Countries that are still dependent on coal as a fuel source face economic and fuel supply obstacles.

Beyond the recognized elements of the shifting power generation trend in Europe, there are a series of potential tipping points that will have pronounced consequences depending how they fall:

  • New Nuclear: This is a topic of much debate in the UK and France. Germany has all but made its mind up, barring a major political reversal. Until recently, the UK Department of Energy and Climate Change (now part of the Department of Business, Energy and Industrial Strategy) was a strong supporter of new nuclear in a portfolio of low-carbon generation. The new Hinkley Point C nuclear facility was planned to begin a renaissance of new nuclear, but with new skepticism rearing its head in the UK media, there is still a chance that the nuclear renaissance will stall and the UK will turn to a mix of more gas and offshore wind. France is another country to watch given its historic strength in nuclear power. Unless the struggling Flamanville facility can turn the corner soon and get commissioned, the growing renewables may get a massive boost that goes beyond current political support. Public sentiment is also an important card to play in the nuclear game. As the power system shifts from the traditional centralized model toward a more dynamic, distributed environment, there are both significant strengths and significant weaknesses in retaining large inflexible baseload generators. Ultimately they are likely to look increasingly out of place in the new world order.
  • Electricity Storage Technology and Economics: Elements of storage in the electricity system are not new, but pumped hydro storage and fuel storage to provide thermal generation are increasingly being surpassed in the perceptual stakes by other new technologies. The recent National Grid Enhanced Frequency Response tender in the UK was massively oversubscribed. Among all the disruptive technologies that affect the electricity system, a breakthrough in electricity storage technology and economics offers perhaps the greatest potential to radically change the power system of the future. The US Department of Energy is so convinced of this that it is funding 75 breakthrough research projects developing electricity storage solutions. These include radical new options such as organic flow batteries, which avoid the need for costly and rare metals such as lithium and vanadium. The race is on to find ways to bring storage costs down below $100/kWh or €90/kWh at present exchange rates.
  • European Shale Gas Developments: Shale gas has proven revolutionary in the United States; however, it remains questionable in Europe. Even though it is highly unlikely to have the same supply and economic characteristics as it does in the United States, it may indeed prove a further tipping point in favour of gas-fired generation if significant quantities of shale gas are produced within Europe. Security of supply is always of paramount importance, so the notion that countries in Europe would produce then export most of their supply would be hard to comprehend. Whereas coal is struggling to find favour other than in countries with little alternative, Europe has a great deal of relatively modern gas-fired generation that is not being well utilized. There may be a trend toward smaller, more flexible plants, but gas-fired generation has a viable future under most scenarios for many decades yet.
  • Carbon Target Commitments for 2030: While COP21 was a major milestone in global climate change, when the microscope is turned on European national commitments to decarbonize power generation, the image is less rosy. Some countries such as Spain and Italy appear to have reached peak renewables, where their appetite to push on and manage the ongoing system impacts are not high. Germany is struggling to digest its huge solar investment and accept the consequences on battling local firms such as RWE, E.ON, and Vattenfall. The UK has repeatedly backed away from committing to 2030 carbon targets, preferring to stick with existing 2020 and 2050 numbers. Until firm 2030 commitments by country are made in early 2017, there is insufficient muscle to power Europe forward.
  • Interconnect and Brexit: No article about Europe is complete without a mention of Brexit. The immediate question and a potential tipping point is how European interconnect developments will fare, especially those proposed in the North Sea to connect Scandinavia, Germany, the Netherlands, France, and the UK. These projects greatly affect the larger renewable generation economics, allowing easy and unrestricted export and import of power between countries as wind, sunshine, and other renewable sources vary between nations. Most commentators assume that the UK will retain its close ties to European energy markets; however, if this changes, it could precipitate an unravelling of arrangements with far-reaching consequences.

What Does This Mean for Generators?

More traditional generation assets, particularly coal and nuclear, face an uncertain future. For coal without carbon capture and storage, every scenario looks at best bad and at worse grim. As evidenced by Navigant’s Generation Knowledge Service (GKS), the average capacity factor of coal plants has declined by 20%-30%, which translates to a 20%-30% drop in gross revenue opportunity. To deal with the combination of lower realized revenue and higher operating costs, companies are evaluating their plants to determine if they can survive in the new world. They are actively seeking new ways to reduce costs through staffing changes, fewer planned outages, and higher operating efficiencies while maintaining high reliability to support the increased use of variable generation. Older coal plants are being phased out and others converted to burn biofuel. Revenue support from capacity contracts and better ancillary service contracts such as black-start capability is also becoming crucial.

Nuclear power today accounts for 25% of all European electricity produced, and any change in nuclear’s role in the generation mix will take time to implement. However, nuclear also highlights the significant differences in national energy policies across the EU and the wider European context. Nuclear was effectively killed in Germany, yet may still enjoy a renaissance in the UK; new plants are under construction in France, Finland, and Slovakia.

As a result, the economics have changed and some of the existing (coal and nuclear) assets are experiencing eroded profit margins. These margins are resulting in challenging economics and, in some cases, significant devaluation. More generation assets are increasingly at risk of becoming stranded investments, as the fuel mix is shifting more quickly than envisioned.

And to Make Things Worse: The Move from Big to Small Power

With the rapid growth of distributed generation (DG), all central generation (coal, gas, hydro, nuclear, and wind) will face more changes in its role on the grid. DG installations are expected to reach 256 GW in 2016; thus, DG is growing faster than central station generation (7 GW additions, minus 8.5 GW retirements, using the EIA forecast). On a 5-year basis (2015-2019), DG in Europe, with some variance by region, will grow almost twice as fast as central generation (47 GW vs. 28 GW), excluding retirements.

Path Forward

As a path forward, generators must clearly define the mission of each generating unit to understand their new role and how to survive economically. To succeed, we believe companies must do the following:

  • Conduct a strategic review of generating assets and determine what, if any, changes need to be made in their generation portfolio and/or how these assets are managed under several regulatory and commodity pricing scenarios.
  • Find innovative ways to reduce O&M costs while maintaining the reliability required by the independent system operators during target operating periods (for plants that will continue to run in the near term).
  • Seek new sources of revenue to replace the capital-intensive position for large generating plants by considering investments in renewables and DER, particularly energy storage, and optimizing commercial contract opportunities with system operators.
  • Have a strategy to manage significant reductions in staffing levels and loss of critical experience across the board, including dealing with the impacts on funding pensions and local economies when plants are retired.
  • Plan for a changing workforce that will include deeper knowledge of digital technology and an understanding of how to optimize operations in a more variable power market.
  • Assess options for global asset diversification given the changes and new opportunities in traditional parts of the value chain such as transmission and distribution.

An understanding of the above disruptive trends and how they affect your company and the rest of industry is crucial to shaping our energy future. Navigant aims to help our clients understand, progress, and protect their business’ future in the context of this massive amount of change.

This blog is the third in a series discussing how industry megatrends will play out across Europe as well as at the regional and country level. Stay tuned for our next blog in this series.

Learn more about our clients, projects, solution offerings, and team at Navigant Energy Practice Overview.

 

The Real Value of Digital Transformation for Commercial Buildings

— August 5, 2016

Home Energy ManagementThe Internet of Things (IoT) and digital transformation are hot topics that appear to be reaching a buzz, but there are practical implications for customers within these developments. The idea is that digital transformation and IoT deliver better information for comprehensive insight and management strategies. IoT is a platform of devices, communications, and analytics that creates a comprehensive picture of the commercial building. IoT enables a digital transformation of a commercial building that results in a data map that can be translated into vital information to orchestrate new business models for bigger revenue streams and a smaller risk to the bottom line. The generation of data from equipment operations and occupant behaviors married with weather and grid conditions help customers save money, minimize power outages, and maximize the occupant experience.

Data for Optimization

The intelligent building is defined by integrated controls and automation that optimize how space is used, how equipment is operated, and how behavior modification is directed because of insights garnered through software analytics. A pinnacle in optimization, the intelligent building maximizes the effects of capital expenditures, operations and maintenance management, and occupant engagement. This is all made possible by data. Today’s reality is that many buildings are far from data rich and, therefore, incapable of optimization. There is a major shift underway thanks to technology innovation beneath the umbrella of IoT.

IoT is about the proliferation of devices, the connectivity of systems, and the access to data. In the commercial building environment, this is a major shift that will redefine how buildings are operated. IoT is the foundation, the data platform that enables the digital transformation for unprecedented business value in corporate and commercial real estate. It is all about better information for better management. A recent survey by Dell highlights the customer perspective: “Investing in cloud applications, cloud infrastructures, mobile and/or IoT solutions to transform their businesses. By adopting these technologies, most companies hope to drive up employee productivity (75%) and grow their businesses (67%).”

The commercial buildings industry is known as a slower mover, but there is gaining momentum around digital transformation. Major technology incumbents, software startups, and even electric utilities are moving to promote solution adoption. A few interesting examples include:

  • Bala Ram, the vice president of SAP Labs, explained the growing momentum of digital transformation: “Across multiple sectors, whether it’s manufacturing, energy and natural resources, healthcare … there is a big awareness right now that we must use this sensor data to create new business opportunities, and then solve the existing problems.” Ram’s statement highlights that the pace of adoption may vary, but customers across the economy now understand the power of data.
  • IBM recently explained the benefits of digital transformation, stating that it will “help us to create buildings that can sense, respond, self-improve and communicate, putting them in far greater harmony with humans and the planet.”
  • New York State Energy Research and Development Authority has announced $30 million available for Real Time Energy Management system implementation and services with Noveda Technologies for up to 5 years. “These funds will support the use of advanced technologies to help building owners fine-tune their building’s energy systems, identify capital projects to cut energy costs, and reduce operations and management costs by an expected 5% to 25%.”
 

Europe’s Energy Transition Megatrends and Tipping Points, Part I: Take Control of Your Future

— August 3, 2016

Energy CloudThe pace and impact of change in the utilities industry globally is unrelenting. Europe is no exception, and you could argue that the pace of the energy transition in Europe is faster than anywhere else in the world. The European Union (EU) as a market is the largest energy importer in the world, importing 53% of its energy at an annual cost of around €400 billion (~$447 billion). This drives many aspects of energy policies, including placing the EU at the vanguard of grid reform over the past decade. In this blog series, we will share our view on the energy transition in Europe by describing the megatrends and tipping points. Each of the following megatrends is changing the way we produce and use power in Europe. Together, these megatrends are revolutionising the energy industry.

1. Rising number of carbon emissions reduction policies and regulations: The long-term impact of the Paris Climate Agreement will be significant. The agreement will focus on limiting global warming to well below 2 °C (3.6 °F) by the year 2100. A record number of countries (175) signed the agreement, which they must now each ratify and approve, which could take some time. But European countries, provinces, cities, and utilities are not waiting. They are taking actions now toward the outlined objectives and targets of the agreement. In fact, sustainability objectives between government, policymakers, utilities, and their customers are more closely aligned than ever before. Globally, numerous cities have committed to 100% clean energy, including European cities like Copenhagen, Denmark; Malmo, Sweden; and Munich, Germany. The EU has shown no signs of slowing down in its ambition to standardise reform across unique markets through regulatory and policy momentum. A single energy market for EU member states is an enabler—if not a necessary condition—in a policy of an “ever greater union,” with or without the UK. Meanwhile, the UK has enacted legislation to deliver emissions reductions consistent with the 2 °C target through the Climate Change Act of 2013 and the commitment to remove 100% of coal-fired generation from the UK system by 2025. As the EU moves with ever greater momentum, Navigant believes other European countries in the hinterland around the EU will also be swept along. This is in part because these counties will seek to gain from the triple bottom-line benefits (climate sustainability, increased efficiency and productivity, and greater energy security), and in part because the EU as a trading partner will require compliance with these standards, policies, and regulations.

2. Shifting power-generating sources: According to the U.S. Energy Information Administration (EIA), net European generation capacity will increase by 7 GW in 2016. Much of Europe’s new capacity now comes from renewables, with close to 75% of new capacity coming from wind (44%) and solar (29%). While some new coal (16%) and gas (6%) capacity was added, far more coal and gas assets were decommissioned. As a result, net new capacity in Europe is virtually 100% renewables. While recent solar subsidy cuts have tempered its growth, wind is marching inexorably onwards. There is still no effective utility-scale solution to the inherent intermittency in renewable generation, with storage solutions and grid interconnection/active management still lacking penetration at scale. Natural gas is therefore the obvious bridging fuel during the shift to renewables. Given the abundance of natural gas availability globally, lower long-term prices, and increasing import capacity in Europe, we expect more natural gas generation capacity to come online in the future, at least for the mid-term. More traditional generation assets, particularly coal and nuclear, face an uncertain future. For coal, every scenario looks dark—at best bad and at worst grim. Older coal plants are being phased out; others are being converted to burn biofuels. Nuclear power accounts for 25% of all European electricity consumed, and any change in nuclear’s role in the generation mix will take time to implement. However, nuclear power highlights the significant differences in national energy policies across the EU and the wider European context. Nuclear was effectively killed in Germany, yet still may enjoy a renaissance in the UK if the British government decides to move forward, and new plants are under construction in France, Finland, and Slovakia. Germany has undergone the most significant generation source transition in Europe: it leads the market in renewables capacity, while its nuclear decommissioning programme has been accelerated. As a result, its two largest utilities are separating their businesses to focus on the one hand on renewables, grid modernisation, and distributed energy resources (DER), and on the other hand traditional generation and trading. Germany has become a net exporter of power and the knock-on effects of this shift in power generation sources means neighbouring countries have had to significantly change their networks to manage the impact of intermittency on their own systems and more investment in their own grid.

3. Delivering shareholder value through mergers and acquisitions (M&A), restructuring, and divestment: New industry ventures, M&A, and divestitures are happening at a rapid pace. In the search for shareholder value through scale, increased synergies, and reducing exposure to less performing businesses, this is a path that utilities will continue to explore. European renewables leader DONG Energy became the largest IPO in 2016 with a valuation of approximately €13.5 billion (~$15 billion), and RWE Innogy is slated for its own IPO by year-end. Engie and Centrica are investing billions in creating new DER and energy services businesses with numerous acquisitions. EDF, Enel, and others continue to acquire assets outside Europe in a search for global expansion and shareholder value. All this has been occurring while much of the 2016 M&A activity so far has been the divestment of non-core assets, with 1 GW of utility-owned wind assets sold to investors in 2016.

4. Globalisation of energy resources: The EU actively seeks to deliver Europe’s 2030 climate and energy targets while ensuring security of supply and affordable prices. The EU also seeks to be a world leader in renewable energy. Achieving these goals requires a transformation of Europe’s electricity system, including the reconfiguration of individual member state electricity markets into a single energy market. The EU must also achieve a balance with meeting consumers’ expectations, delivering benefits from new technology, and facilitating investments in renewables and low carbon generation while also recognising the interdependence of member states. A critical part of this initiative is connecting isolated national and regional electricity systems to secure supply and helping to achieve a truly integrated EU-wide energy market—a key enabler for the continent. While the UK’s vote to leave the EU raises a number of questions about future policy, it is too early to call what impact Brexit will have on the UK’s participation in the EU’s future single energy market. What is clear is that a focus on greater levels of interconnection (both offshore and onshore) and energy efficiency will continue to be necessary aspects of EU energy policy and will continue to receive much scrutiny.

5. New entrants and converging industries: With €1.3 trillion (~$1.5 trillion) in new industry value up for grabs globally, new entrants see value in European power markets, which is disrupting the traditional utility industry and taking market share away from utilities. These new entrants include manufacturers; technology companies (from startups to global powerhouses like Apple, Amazon, and Google); telecommunications and other data, content, and network providers; and even some oil & gas companies (like Total). For utilities, it will become more expensive to address a smaller market with the resulting impact on margins. Europe is no exception, and with significant opportunities for growth across the value chain and new energy and digital technologies available, we see new entrants investing in renewables, DER (distributed generation, energy efficiency, demand response, energy efficiency, etc.), energy management, smart cities and infrastructure, and transportation. Navigant sees many cross-industry movements between utilities and oil & gas. Shell getting back into renewables and Total announcing the creation of a Gas, Renewables and Power division—which the company has said will help drive its ambition to become a top renewables and electricity trading player within 20 years—are examples of this new competition’s encroachment on traditional utility markets.

6. The power of customer choice and changing demands: Whether residential, commercial, or industrial, customers want to control their electricity usage and spend, as well as when and what type of power they buy. But beyond having supplier options (in competitive markets), customers now want the ability to self-generate and sell that power back to the grid. Many residential customers in Europe have and will continue to install rooftop solar, and despite the reduction of subsidies in some countries, overall residential distributed generation will continue to grow. On the commercial and industrial side, large corporations like Amazon, Apple, Cisco, Google, HP, Mars, and many other large energy buyers in Europe have increased their focus on sustainable energy solutions. For example, Swedish furniture retailer IKEA plans to completely shift to renewable energy by 2020 and will invest up to €1.5 billion (~$1.7 billion) in wind and solar energy as part of new safeguard nature strategy. The company does not rule out becoming a net energy exporter, potentially selling the surplus of energy to suppliers or customers. The key question is who will capture the value of more local (distributed), broader (energy management), and individualised energy—the incumbents or the disruptors?

7. The emerging Energy Cloud: Old infrastructure is being replaced, and the trend toward a cleaner, distributed (flexible), and smarter energy infrastructure, known as the Energy Cloud, will accelerate. The Energy Cloud is an emerging platform of two-way power flows and intelligent grid architecture expected to ultimately deliver higher quality, greener, and more affordable power. While this shift poses significant risks to incumbent power utilities, it also offers major opportunities in a market that is becoming more open, competitive, and innovative. Fuelled by steady increases in DER, this shift will affect policy and regulation, business models, and the way the grid is operated in Europe. The work by EU member states in decarbonising and digitalising the grid has made the region a global leader in energy transition and puts Europe at the forefront of testing Energy Cloud reform through policies that mitigate carbon emissions, expand the role of distributed generation, and promote smart grid initiatives.

These megatrends cannot be underestimated. They are accelerating transformation in the European energy industry, enabling the entry of new players, putting pressure on incumbent players, and altering traditional strategies and business models. Organisations will need to adapt, and there will be winners and losers as this transformation takes shape. Our advice to senior leadership of energy companies is to take an integrated, holistic view of the opportunities and challenges that are flowing from these megatrends. Only then will you be able understand the full impacts and path forward—and that is the only way you can really take control of your future.

This post is the first in a series in which we will discuss each of the megatrends and the impacts (“so what?”) in more detail. We will attempt to discuss how these megatrends play out at the European level as a whole, as well as within the diverse set of regions and countries. Stay tuned for our next blog in this series.

Learn more about our clients, projects, solution offerings, and team at Navigant Energy Practice Overview.

 

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