The future of energy companies
Two forces shaping the energy world will both lead to bigger companies running lost of small assets.
Two forces are pulling at the energy companies.
1. The race to the bottom
2. The rise of the prosumer
To survive in the race to the bottom energy producers will be involved in a continuing consolidation in the energy market. On the other hand the energy production landscape is becoming more and more fragmented by decentral generation.
The two forces will come together in the IT infrastructure of the main producers. This IT infrastructure will link decentral production and storage with intermittent renewable energy and the remaining fossil fuel based production.
1. The Race to the Bottom
The producers of power are in a race to the bottom, who will be selling their MWh against the lowest margin. In this race to the last euro above cost price the necessity to merge with other energy companies will be strong. This consolidation of market power in a few major players has slowed down recently for various reasons.
- E.on and RWE are trying to divest some of their assets to cover for the losses incurred as a consequence of the “Energywende”
- Vattenfall is selling of some of its assets to free up capital to invest in renewable energy and to pay for the take over of Nuon
It is not likely that this slow down means that the trend will be reversed.
- Gazprom and ENI/Distrigas recently entered the Dutch end-user-market increasing the level of competition, reducing margins even further and probably re-affirming the need for further consolidation.
The race to the bottom will lead to the creation of a small number of very big energy producers.
2. The rise of the Prosumer
The urge to reduce the speed at which the average global temperature is rising (without being able to stop this rise) has meant that governments have spend inordinate amounts of money on the encouragement of renewable energy.Renewable energy in the shape of wind and power have as a clear disadvantage that they are intermittent and require a back up by other energy production assets or energy storage. This obviously does not apply to (well managed) geothermal heat pumps. The move to intermittent renewables has encouraged the research into and the development of smart grids.
Smart grids enable the existence of various (small) production units. These small production units have benefits:
- Users of energy do not want to be reliant on fossil fuel and its current high and volatile prices. De-central production is not necessarily cheaper but it reduces exposure to the volatility of prices (the costs are more predictable).
- Users of energy are worried about future government regulation making the use of fossil fuels very expensive. A move away from fossil fuel reduces that exposure.
- Clients of producers (or the clients of these clients) demand a reduction of CO2 emissions related to the product they are purchasing. As long as energy producers have a substantial portion of their generation capacity in fossil fuels it will look better if a company actually produces some of its own energy in an environmentally friendly way.
- Small is beautiful in the eyes of the consumer. (In case in point why support for major windfarms is not as big as one might expect)
The rise of the prosumer will reduce the market share (in terms of MWh produced) of the big energy producers
The trend towards bigger companies and a lot of smaller production units however does all come together in the IT systems of the major energy companies.
Energy companies will be the IT interface
The main role for energy producers in this decentralised world will be the provider of the IT interface linking all the small de-central production units and the energy storing units with the consumers and the major production facilities such as the major wind farms and the remaining fossil fuel (gas) powered generation units.
To be able to fulfill this role the energy companies will require size so as to be able to respond to fluctuations in demand and supply.
This means that the two forces shaping the energy world will both lead to bigger companies running lost of small assets.