Utility of the XXI century – what will change?

In 2016 I was transferring my child from one Moscow school to another. When I brought the documents to the Director’s office, I saw on his desk an “Atlas of new Professions”, released in 2015.  It is an almanac of promising industries and professions for the next 20 years, published a year earlier by Agency for Strategic Initiatives. I was happy that schools were beginning to think about the skills and knowledge that will be required in 15-20 years. The interest in disappearing and new professions remains strong – Google gives more than 5 million results on the request “what professions will disappear in the future”, including articles in Forbes, The Economist and The Guardian.

Soon after my daughter moved to a new school, I asked myself – what professions will disappear in my industry? My business development skills being better than my labor market analysis skills, made me reformulate the question: what will energy companies be like in the XXI century? There was also a specific reason for the question – at that time VetroOGK has won the right to build 610 MW of wind farms, and I was leading the launch of a new business of Rosatom – wind power. We were in the midst of planning, formulating a vision of the future company, defining the business model. It was getting obvious that VetroOGK will be different from other energy companies in Russia.

Spoiler – I have not found the answer to this question, but came to the conclusion, which I believe is important to further search for an answer. The world’s largest energy companies such as EDF, Enel, Engie, RWE are revising their business models today. They are transforming from operators of power plants to companies, providing consumers with services: electricity, telecom, energy efficiency, “smart” houses, and even the modeling of “smart” cities. From my experience working with some of them, I see that these moves are aimed at finding new niches now – and are not part of a well-thought strategy. It is rather an attempt to make the maximum number of possible bets, in the hope that some of them will succeed, very similar to venture investors.  Fear is the motivator. Fear of disappearance of business of large electric power companies in the XXI century.

Energy utility companies exist for two reasons. First, it is expensive to build power plants, and second, special skills are required to manage them. To solve the first problem, the size of the company is matters – energy companies have sufficient assets to attract money from investors or the state for the construction of large power plants. To solve the second problem, the companies concentrate special skills to manage four things:

  1. Fuel
  2. Staff
  3. Repairs of equipment
  4. Markets and regulators

The first three are cost components. The latter relates both to costs, such as meeting the requirements for the reliability of power equipment, and to the revenue – sale of electricity in the markets at free prices or regulated tariffs.

New technologies of energy generation, transmission and distribution deprive power companies of their usual advantages. The expansion of renewable energy, the development of small power plants, micro-networks and digitalization are changing the architecture of the power system. Small companies, up to individuals, can build and operate their own power plants.

Let’s see how it happens. First, no fuel is needed. Fuel costs make up to 80% of all costs of electricity generation. Renewable energy does not require fuel. This eliminates a lot of work done today by energy companies: no need to purchase fuel, control delivery, quality, remove waste, etc. Second, the power plant of the future is cheap to operate. Old, large coal-fired power plants employ a thousand or more people. Mini combined heat and power plants, solar panels, wind turbines operate in standalone mode and do not need maintenance personnel. Third, equipment suppliers include repairs in their services – energy companies do not need to keep maintenance and repair workers. There is also no need to plan repairs – predictive maintenance sensors and algorithms allow the manufacturer to remotely monitor condition of equipment, and independently plan the replacement of components and repairs. The same is true of markets and regulators.  Electricity markets generate troves of data and thus can follow the path of financial markets in digitalization. Working with regulatory bodies can also be automated or shifted to the equipment manufacturers for ensuring compliance with reliability and safety requirements.

This scenario may seem fantastic. But it is being implemented today. Take for example the JSC “VetroOGK”, a company Rosatom, which will build in the next five years 1 GW of wind turbines. A wind turbine does not need fuel, the maintenance personnel will be provided by a subcontractor and trained by the equipment supplier. Repairs are included in the contract with the supplier. Technical condition of a turbine is also monitored by the equipment supplier. However, to work in the Russian electricity market today still requires inhouse commercial and dispatching departments, but their main task is limited to timely payments of fees and levies. Automation of wind power plant management and algoritmization of trade in the electricity market is only a matter of time. Finally, 90% of the financing for the construction of the WPP is provided not by Rosatom, but by a financial investor – Gazprombank, and the cost of the WPP construction already competes with gas-fired power plants.

Development of renewable and distributed energy generation eliminates the concept of a traditional energy utility company. Developing countries are immediately “jumping” the era of centralized energy systems and are moving towards a distributed power system that does not assume large corporations that manage the generation and transmission of electricity. For example, in India, the construction of WPP is financed by international investment banks and development institutions. They remain the owners of the assets, and the sites and equipment are supplied by the manufacturers. Over the past 10 years, Europe’s largest energy companies such as Engie, Enel, RWE have been getting rid of the generation assets of the last century and acquired energy service companies, entering the consumer services market, changing their business model and transforming from energy companies… into something else. I don’t know what. But the company that can find an answer will survive in energy business of the XXI century.

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