PwC

The utility of the future must act now

Australia Energy Week

21 June 2016

PwC

The utility of the future must act now!

The 3 things…

1. Factors driving the emergence of the utility of the future?

2. Its all about the customer

3. Surely we can wait?

2

PwC

The utility of the future must act now!

What factors are driving the creation of the utility of the future?

3

PwC

• Carbon management a core focus

We are seeing the impact of megatrends on all sectors across the globe

4

• Impact of digital natives

• West to East

• Capital market shifts

• 2/3 of global population will live in cities by 2050.

• Plummeting unit costs and take-up speed rising.

• How long to ubiquity?

Demographic and social change

Shift in global economic power

Rapid urbanisation

Climate change and resource scarcity

Technological breakthroughs

Most impactful on energy markets

Four broad interconnected themes that will have a significant impact on the industry over the next decade

• Decline of the core fossil fuel generation market

• More players and broader service offerings change nature of competition

• New profit pools emerge

• Maturing solar PV, electric vehicles, battery storage, energy efficiency, demand-side management and smart grid technologies

• Policy-makers and regulators can’t ignore what customers want

• Market models are changing and new markets being built

• Customers more mobile, social, interconnected -expect engagement

• Customers demand greater control

Disruptions to energy value chain

Influence of technologies on the energy value chain

Impact of the new energy customer

Changing tasks and roles of regulators

5

PwC

A range of business models expected to deliver success in the new and evolving market environment

• One size won’t fit all

• Only a quarter of viewthat current businessmodels will remaindurable.

• The view that ‘change isbecoming urgent’ isshared by 66 per cent.

6

PwC

The utility of the future must act now!

Its all about the customer

7

Strategy& | PwC

Price

Reliability

Services

The telecom sector provides insight into how technology evolution and customer buying attributes can reshape markets

Buying Attributes

Control

Attribute

Importance

Time1984 1992

ILLUSTRATIVE

The energy value chain is evolving - value and control shifting downstream, away from centralised generation

Centralised

generation

Transmission Distribution Metering/

Data Distributed generation Demand

response

EV

Storage

Behind-the-connection

• Falling demand

• Significant overcapacity

• Growth in higher-priority renewables and distributed generation

• Plug and play• Increasingly

complex and volatile energy flows

• Emerging role of the complex system operator

• Creating value?

• Growth in smart tools to optimise demand patterns

• New data-driven services eg. energy advisory

Retail

• High churn• Price-based

competition• Expanding

into energy services

• New competitors

• More power to consumer

• Maturing DG, storage and EV technologies

Dri

vers

of

valu

e

sh

ift

Value is broadly shifting to behind-the-connection services and offerings

Home

Automation

Energy

mgmt

services

• ‘Make my life easy’• Demand for usage

insights and control solutions

• Is home automation and the IoT nirvana?

Valu

e g

row

th

/ d

eclin

e

9

The future consumer has a choice of becoming smart and

sustainable while having their own business model

Traditional Utility Model Value-added Model Energy Enabler Model

• Electricity as a commodity

• Supply-driven system

• Competition: Price-fighters, pure-play green energy retailers

• Value-add services – solar PV installation, EV charging, visualization

• HVAC & EV-based flexibility

• Competition: Innovative service offerings

• Platform-based balancing and demand response services

• Behind-the-meter data becomes a key asset

• Competition: Innovative contracts, real time pricing, platform offerings, cross-bundling

Traditional customer Connected consumer Prosumer

• Commodity market

• Intense competition

• Low barriers for switching

Customer focused on cost and reliability – commodity centricity

• Customers sensitive to technology adoption

• Significant investment in new services

Customer alignment required to maximize RoIand lock-in

• Customer in control - negotiating power increases significantly

• Disruptors entering the market

• Customer trust become a competitive factor

Customer centricity and agility are key to stay relevant

Business Model Characteristics

Why customer centricity is key

Business Model

Customer typology

Today Intermediate Term Longer Term

PwC

The utility of the future must act now!

Surely we can wait?

11

Strategy& | PwC

The network is rapidly evolving to a distributed and digital micro-network that more directly engages customers …

ILLUSTRATIVE

Sources: IEA; Strategy& analysis

Electrical infrastructure

CommunicationsGas infrastructure

Future

Industrialcustomer

Commercialcustomer

Residentialcustomer

Energystorage

High-temperaturesuperconductor

Storage

Sub-station

Sub-station

Electricvehicles

Products & services

Distributioncontrol center

Transmission control center

Products & Services

Distributioncontrol center

Transmission control center

CNGvehicles

72

Strategy& | PwC

Confluence of ‘triggers’ provides the right conditions for a market reflecting both ‘technology push’ and ‘customer pull’

Technology Dimensions Customer Dimensions

Regulatory policy – particularly in pricing and cost recovery –

lags technology introduction

New Entrants

Improved Functionality

Increasing Parity

Expanding Production

Accelerating R&D

Increasing Awareness

Emerging Choices

Changing Behaviors

Financing Availability

Broadening Offerings

Industry

Disruption

Strategy& | PwC

Several innovative technologies, each with unique growth drivers, have the potential to disrupt the utility value chain

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NOT EXHAUSTIVE

High efficiency gas turbines• Low fuel prices

• Steady retirement of coal plants

• Environmental policy pressures

Small modular reactors• Reduced capital needs compared to ‘big-box’

nuclear

• More flexible production profile to match load

• Potential path to decarbonization

Distributed generation• Falling component, soft, and financing

costs

• Cost savings vs. retail electricity rates in

more markets

Microgrids and networks• Mitigation of outage risks on large concentrated load

or critical infrastructure

• Initial uptake in university, military, and corporate

campuses

Behind the meter energy services• Integration requirements of solar, EV, and

storage

• Improved automation to achieve energy

efficiency savings

• New entrants looking to partner with utilities

and consolidate offerings

Energy storage• Rapid reduction in cost – continued innovation in

chemistry and applications

• Evolving rate structures, gov’t mandates, and

incentives supporting market

Electric vehicles• Increased number / variety of electric

vehicles with improved range and

performance

• Cost declines, gov’t mandates /

incentives, and charging station

penetration

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Strategy& | PwC

Possibly over $0.5 tn global market size for new tech by 2020

15

High Efficiency Gas Turbines• Consider retrofits and further integration into long term

resource planning, including as low-cost option for

renewables integration

Small Modular Reactors• Start considering SMR as data from SMR

pilots become available and costs become

more predictable

Distributed Generation• Monitor technology cost trajectories and

policy dynamics to assess threat and

identify new business model

opportunities

Micro-grids and Networks• Monitor service territory for potential micro-grid

expansion threats

• Consider role as micro-grid developer in de-

regulated business

• Evaluate potential use to manage peak demand

Behind the Meter Energy Services• Develop new ways to engage customers and

meet efficiency mandates / demand

• Consider partnerships and new offerings to

avoid customer disintermediation

Energy Storage• Collaborate with regulators on new rate

mechanisms, tariffs, and policies

• Evaluate different storage applications and funding

mechanisms

• Leverage to defer T&D investments

Electric Vehicles• Develop economical, sustainable, and

convenient ways to charge EVs

• Equip real-time awareness of energy

supply and demand to enable vehicle-

2-grid

72

$50-100B

$10-50B

$1-5B

$150-200B$5-10B $50-100B

$50-100B

Estimated 2020

Global Market

Sizes

Strategy& | PwC

Five divergent potential futures exist for the utilities industry

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Losing Touch

Utilities

72

Smart Hub

Players

Customers

Off Grid Mobile & Virtual Data Rich Scaled Down

Smart Analytics

Companies

Strategy& | PwC

… which are likely to arise under different timescales with variations by geography

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Primary Adoption Timeframe

2016 2020 2025G

en

era

tio

nG

rid

Be

yo

nd

-

the

-Me

ter

‘Scaled Down’

‘Data Rich’

‘Mobile and Virtual’

‘Off-Grid’

‘Losing Touch’

ILLUSTRATIVE

The utility of the future must act now!

www.pwc.com/utilities

Australian Energy Week

June 2016

Mark Coughlin

Energy Utilities and Mining Leader

https://au.linkedin.com/in/coughlinmark