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Navigating in the Age of Uncertainty

Business models are evolving to suit a shifting industry landscape.

Fortnightly Magazine - September 2011

and approvals. Recent mergers have, for the most part, been characterized by low premiums and low post-merger savings in exchange for more rapid regulatory approvals. While utility mergers have, on average, destroyed shareholder value, the latest wave of mergers is likely to be, on average, shareholder-neutral, and will result in stronger balance sheets to tackle cap-ex investments.

The second force is characterized by a shift in the demand-supply balance. The most immediate supply-side shift is new environmental regulation currently being reviewed by the Environmental Protection Agency (EPA). 2 The North American Electricity Reliability Council (NERC) estimates that the four rules being considered by the EPA have the potential of lowering U.S. grid capacity between 33 GW and 77 GW by 2015, or 10 percent to 20 percent reduction in coal capacity in just three years. This capacity reduction would result from the retirement of small and mid-size coal units as well as some derated capacities across the U.S. coal fleet. This reduction in capacity will mostly be replaced by natural gas combined cycle units—existing or new—and could increase the overall demand of natural gas from existing plants by an expected 1.9 to 2.8 Tcf per year. 3 This is in addition to a predicted 8.8 to 10.3 Tcf per-year increase in natural gas consumption from gas fired plants planned or under construction. In total, this will drive a 150 percent to 200 percent increase in natural gas demand from the electric utility industry in the next 10 years, which will put significant upward pressure on the price of natural gas—even assuming continued growth in shale gas exploration.

In addition to these rules, the EPA also announced in December 2009 that it considers greenhouse gas emissions an endangerment to public health. This finding was driven by the U.S. Supreme Court decision that greenhouse gas (GHG) emissions should be covered under the Clean Air Act and defined as air pollutants. Today, there’s no specific regulation, but the ruling is expected to be a catalyst for potential new GHG emission regulations for utilities in the near future. Additionally, 29 U.S. states are mandating renewable portfolio standard (RPS) programs. Utilities will have to build 250 GW of new generation capacity to offset retirements and meet new demands through 2035, and this new supply will be primarily comprised of natural gas and renewable capacity.

The third force is the introduction of smart grid systems and other new technologies that will significantly alter the current structure of the value chain. Accenture’s analysis, summarized in Figure 1, predicts that we will witness a tipping point in the take-up of this technology 10 to 15 years from now. Once this inflection point is achieved, take-up will be very rapid, as is the case with digitally based technologies that follow an exponential evolution. Progress toward this tipping point will be heavily driven by deployment in such emerging markets as China, which will take the lead in smart grid investments over the next five years.

The introduction and growth of smart grid and other new technologies, such as distributed generation, renewable energy,