Low carbon opportunities for the global electricity utilities industry: report

Reading time: 7 minutes
5 May 2016

Justin Keeble, Managing Director at Accenture Strategy, talks about a new report which looks at how to decarbonize the electric utilities sector. This is part of The Climate Group's Home2025 project.

Accenture Strategy recently published a joint report with the CDP “Low Carbon, High Stakes” looking at the opportunities of the low carbon economy for the global electricity utilities industry. The report identifies two new sustainable business models for electric utilities that positively empower consumers and help them decarbonize electricity usage.

  • First, “Energy as-a-service providers” deliver energy services to customers instead of a commodity. For example, Eneco is one company that has embraced this business model by placing the customer-centric energy management device “Toon” at the core of its strategy. Toon helps consumers control their building heating, lighting, and other smart devices, and is the perfect contact point for Eneco to leverage new services.
  • Second, the “Local low carbon energy access providers” partner with communities and individuals to help them access locally generated low carbon energy. An example Is East African for-profit social enterprise M-KOPA Solar, which partners with telecommunications companies Safaricom and Vodafone to provide residential integrated solar systems to poor and low income customers through an innovative technology and financing platform with micro payments via SIM cards.

Find out more about how all five new sustainable business models outlined in “Low Carbon, High Stakes” will enable utilities to significantly reduce greenhouse gas emissions and help them tap into a multi-billion value pool.

Executive summary

In the quest toward a low carbon energy system, the electric utilities sector — with a 25% share of all carbon emissions globally — plays a crucial role. How can utilities move away from fossil fuels in an economically sustainable way? Five new sustainable business models will enable utilities to significantly reduce greenhouse gas emissions and capitalize on €245 billion (US$280 billion) to €380 billion (US$434,5 billion) in value created annually in new products and services by 2030.

The global community continues to direct its collective strength to combat climate change. A major milestone in these efforts was achieved in December 2015, when the annual UNFCCC Conference of Parties created a universal agreement to limit the rise in average global temperature to 2 degrees Celsius (°C) - a significant drop from the prevailing trend of 3.6°C. It is an ambitious goal, but one that is necessary to significantly reduce the impact of greenhouse gas emissions and increasing water scarcity.

With a 25% share of all carbon emissions globally, electric utilities must successfully embrace low carbon solutions for the 2°C goal to be achieved. Yet because their business model is little changed from a century ago, utilities also will encounter major challenges in substantially reducing - and ultimately eliminating - their reliance on fossil fuels.

Utilities have been making progress to reduce greenhouse gas emissions and increase their share of renewable energy. But the reality is that merely continuing doing what is required by climate regulation will no longer be enough. They will need to substantially accelerate efforts to realize the long-term ambitions required in a 2°C world.

The drive toward a 2°C scenario is just one element pressuring utilities to change. It is part of five broader global trends undermining the industry’s prevailing business model and pressuring utilities to radically transform themselves to embrace sustainable alternatives:

  • Policy pushes for CO2 reduction. Policy has been the main driver for the shift to low carbon electricity supply, as governments have introduced climate policies and regulation calling for reductions in demand and incentivizing investment in low carbon sources of electricity.
  • Technology enables low carbon energy at scale. While policymakers are stepping up these efforts, advances in technology — the biggest game changer — are making alternative sources of energy more attractive to consumers and businesses.
  • Climate change impact threatens the current and future energy supply. Climate change itself imposes new challenges to utilities through changing precipitation patterns, extreme weather, rising air temperatures, and the risk of water shortages, potentially affecting the fuel supply chain and cooling of thermal power plants.
  • End users demand energy efficiency and low carbon energy. Rising costs of electricity, climate change concerns and technology developments together are convincing and incentivizing end users to reduce their energy demand and shift to (and possibly produce their own) low carbon energy.
  • Non-traditional entrants challenge incumbents. Increased competition, particularly from new entrants from other industries as well as more innovative utilities, pose a growing and significant threat to traditional utilities’ business.

Together, these trends make it clear that the established utility value chain, based on selling electricity as a commodity, is not equipped for a low carbon transition. In fact, Utilities will face rising costs and risks from increased complexity and cost of carbon, as well as pressure on revenues from selling electricity, in the next 15 years.

According to our analysis, the costs of building and operating power generation facilities and networks could more than double between 2015 and 2030, if we continue business as usual. Increasing demand for electricity will be a major factor, while the impact of climate change and carbon pricing will also add to rising operating costs.

Electricity prices would need to rise by almost one-third on average to make up for this increased investments and carbon costs—a solution that is neither politically acceptable nor socially sustainable. So how can utilities facilitate the transition to a low carbon energy system in an economically sustainable way?

The good news is that while utilities’ traditional value pool is at risk, new ones could be created. Our analysis has found that the industry as a whole has a value opportunity of €135 to €225 billion (US$154 to US$257 billion) in saved and avoided costs and €110 to €155 billion (US$125 to US$177 billion) in new revenue per-year worldwide in 2030.

The electric sector players can realize these value opportunities by considering three emerging power plays:

  • Low carbon energy producer optimizing the mix of energy sources
  • Distribution platform optimizer meeting demand with the optimal sources of supply
  • Energy solution integrator providing entirely new services to help customers optimize their energy production and consumption

These represent platforms under which low carbon business model pathways can support utilities in moving away from fossil-fuel while growing profitably.

Adopting these business model pathways will not be easy, and each utility will face unique challenges along the way. Furthermore, the details of the transformation – strategies, roadmaps and timelines – will vary by utility depending on a variety of factors. However, there are four high-level actions that all electric utilities will need to consider as they begin their transformation:

  • Take leadership and commit by ensuring all levels of their organization know what the 2°C scenario means for their business and how their organization is responding.
  • Keep optimizing their current operations to reduce CO2 emissions and free up funds for the transformation to the new models.
  • Choose where to play and transform by developing new business models and strategies that build on their current capabilities and are tailored to local market conditions.
  • Join forces to develop capital-intensive innovations in electricity storage and carbon capture and use (CCU) technologies.

As the world continues to work to address the climate change challenge, it needs an engaged, motivated, and effective power sector that is committed to transforming itself to adopt new low carbon business models. A number of utilities have already taken significant steps in doing so.

By following their lead, other utilities can help the international community achieve its 2°C goal while positioning themselves to ensure their existence in a more sustainable future.

Back to Home2025. For information please contact us at home2025@theclimategroup.org

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