Leading consultancy KPMG is in a good spot to track how the energy incumbents are facing disruption from the clean energy revolution.
The incumbent utilities have a trick of playing it cool when questioned about the rising presence of renewable energy sources and how they are pushing themselves into the grid. Some will remind you it will be many decades yet before coal or gas are squeezed out, and others will shift focus to parallel clean energy projects of their own. The truth is we may never really know what they’re thinking. Some may be trained in “green speak”, others true believers.
Another route to finding out what’s going on in the world of energy supply might be to simply ask around the top levels of the consulting fraternity.
KPMG partner national industry leader energy and natural resources Ted Surette has covered the industry for 15 years with the group, including power utilities, mining, water, oil and gas. He oversees about 50 partners and 750 staff, with a personal focus on electricity distribution networks and transmission networks. “My sweetspot is a focus on innovation, business transformation and dealing with regulation and reform,” he tells EcoGeneration on level 38 of the firm’s six-green-star-rated Sydney headquarters.
The message from Houston
Surette got a window into how the big players are adapting their business models for disruption from clean energy when he moderated a session at KPMG’s 16th Annual Global Energy Conference in Houston in June. Panel participants included TEPCO of Japan, Missouri-based utility Ameren and Pacific Gas & Electric of San Francisco.
How are utilities adapting to disruption? How are they changing their culture to engage better with consumers? “Their take was very much that technology is viewed as the easier part and changing the culture is a lot harder,” he says. The incumbent utlities are like ocean-liners – hard to turn around. “We have a lot of people in the nuts and bolts of these distribution businesses that have been there any number of years and it’s been largely a conservative mindset, and that was also impacted here in Australia by the very strict reliability rules.”
The realisation is setting in that things are changing, he says. “If you want to bring out innovation and take more risk and have a perspective of risk reward – think about your customers differently – you’ve got to change your mindset.”
We’re seeing the same thing here, Surette says, as KPMG’s clients look at how do they make their businesses more agile, more customer-focused.
Distribution businesses enjoy monopolies and are being tested as consumers turn to their own sources of generation behind the meter. They still must remain relevant, Surette says, and they need to be competitive and deal with threats to the value of their assets and changes to the market. “What they are doing, and I see it here, is investments in analytics, internet of things tools, technologies that will make them more efficient and help them deal with the expansion of resources on the network.”
A defined and valuable role
As more resources come on the grid more work will be required to manage it. Networks need to apply innovation and at the same time provide a better service to customers, he says, and deal with the evolution of cost-reflective pricing and connection of more and more services behind the meter. “All of that is shaping them,” he says. “You’ve got utilities coming out and saying we’ve got to lift our game, and they’re going out in the market and being very public about that.”
Will utilities scoop up companies like Power Ledger and GreenSync if their peer-to-peer trials work or is everyone vulnerable to players like Apple or Google, who can manage data in their sleep? It’s hard to say. Utilities’ business is 95% regulated and the game now is to grow the non-regulated part with additional services. “That’s where there’s going to be a lot of action.”
There will be market changes in the 95% regulated part following Finkel, but Surette is reluctant to forecast what the differences may be other than to say utilities are looking at how they remain relevant and what services will add value to customers and earn profits.
Rooftop solar, batteries in homes and at businesses, peer-to-peer trading, solar plants popping up all over the place … are the utilities flexible enough to absorb these shocks and survive? Everyone’s business models are being disrupted, he says, but distribution companies and networks are entrenched, closely monitored monopolies that provide an essential service. Better that they adapt intelligently than put their heads in the sand.
Over the horizon
Surette jets around a fair bit in his job, filing “Ted Talks To” videos throughout his travels from energy projects around the world including wind and tidal facilities in Nova Scotia (pictured) in his native Canada (he arrived in Australia 25 years ago). He’s always asked about what’s happening back here in Australia, and his summary is upbeat. Investors are keen in our market, he says, and the boom this year is being driven by lower cost of capital and the Renewable Energy Target out to 2020.
Required investment returns are being pushed down by the surge of investors entering the market, and the lower returns from experienced investors further reduces the cost of renewable energy.
He lists three key influences on bringing down the cost of capital: investors are getting more comfortable with the risk profile, the understanding of renewables; foreign investors entering the market have access to cheaper money, and; the banking market is aiding supply of leveraged money and debt funding. “We’re getting phone calls from overseas and investors and institutional investors wanting to take advantage of the Australian marketplace,” he says.
One last task
There is a shadow, however. The longer the fiftieth recommendation of the Finkel Review, a Clean Energy Target, lingers unresolved the greater the impact on the pipeline post-2020. “We understand where the future’s going, but we do need a sensible transition,” says Surette, whose clients all feel the pain as their energy bills rise.
“Gone are the days of cheap electricity prices, but there is a better place to get to.”
The rise in energy prices, he says, is the result of a confluence of factors. To Surette, prices have been pushed upwards by policy, network investment spend that occurred 8-10 years ago, closure of power plants, the wholesale price and the impact of renewables.
The majority of companies support the Finkel recommendations, he says. “They’ve come out and articulated their voice, that’s been broadly the feeling I’ve had from clients.”
If only the commentary in the industry ran the same way, instead of the dissonant barrage of partisan sermonising. “One thing I do find about this industry is on many sides people will put their point of view and it will just go on one element of that point of view, and it will negate the whole thing.”
Surette worked for Goldwind in the acquisition of Stockyard Hill from Origin, helped Edify Energy with the recent BlackRock transaction and KPMG is providing services to the Queensland government on the reverse auction of 400MW of renewables and storage.