Deloitte

December 03, 2009 08:00 ET

Urgent Need for Capital Required in Power and Utilities Sector

Deloitte report recommends diversified investment approach in face of uncertainty, urges regulators to create an environment that encourages investment

TORONTO, ONTARIO--(Marketwire - Dec. 3, 2009) - The power and utilities sector is faced with a significant looming capital requirement and the numbers are mind-boggling. Research conducted by the International Energy Agency has shown that the global cumulative infrastructure investment needed between 2007 and 2030 amounts to US$26.3 trillion (in year-2007 dollars). While this urgent need for capital predates the global financial crisis, the current economic climate, uncertainty over government climate change policies and immaturity of some competing energy technologies have exacerbated the situation. In addition both the power and utilities sectors must compete with all other sectors of the economy for access to equity and debt markets.

According to a new Deloitte report, Empowering ideas: A look at the top emerging issues in the power and utilities sector, organizations are faced with constantly shifting environmental, regulatory and consumer demands and many traditional utilities are having trouble finding, and getting regulatory approvals, for investments that provide a rate of return commensurate with all the risks facing the industry. Similarly, where organizations have access to capital there is the challenge of choosing where to invest.

"Given this ambiguity, Canadian executives may be tempted to take a wait-and-see approach, but giving into this temptation may be a tactical error," says Jane Allen, leader of Deloitte Canada's Utilities practice. "Organizations are more likely to succeed by taking diverse positions that account for different possible futures, instead of placing one big bet. In short, this will be about learning how to manage in uncertainty."

According to the Deloitte report, funding for the replacement of aging infrastructure is only one aspect of the financial challenge. In the near term, the International Energy Agency says power and utilities organizations will need to double their base load generation (from both traditional and renewable sources) to address the growing energy demands of our global economy over the next 30 years. They will also need to invest in new carbon-reducing technologies for carbon capture and storage, smart metering and demand side management, in the absence of universal benchmarks or global standards. In addition, the electric power industry will need to work with provincial, state and national regulatory authorities to reconfigure, enhance and expand existing transmission and distribution systems to successfully integrate new sources of energy.

"And they must do all this amid the resource constraints caused by competition for capital, and a looming talent shortage across the industry," added Allen.

Succeeding amidst challenges

According to Deloitte, the top overarching issue remains the need for additional investment in energy infrastructure. "To succeed in the current landscape, it will be important for organizations in the power and utilities sector to carefully assess the investment opportunities and requirements in view of emerging technologies and regulations, and set priorities based on a thorough analysis of risks," explains Allen.

"Whatever organizations decide to do-whether they're investing in renewables, implementing a first wave of smart grid technologies or deciding on the next 100 megawatts of generation-it is critical that they have a full understanding of the costs and risks, and communicate the rationale for their investment to all their shareholders and stakeholders."

Top ten emerging sector issues

To help organizations navigate investments and strategic planning in this complex sector, Deloitte's Power & Utilities practitioners from around the world have identified ten of the top emerging issues in the global power and utilities sector.

1. The carbon conundrum - The race to reduce is on. A rising concern over emissions from fossil fuel energy conversion has spurred governments around the world to action. By 2020, the Canadian government plans to reduce emissions to 20% below 2006 levels, the U.S. Waxman Markey Bill is targeting a 17% reduction in greenhouse gas emissions below 2005 levels, the European Union has targeted a 20% reduction below 2005 levels, and the U.K. aims to cut emissions by 34% below 1990 levels. In order to reduce greenhouse gas emissions and mitigate the possibility of climate change effects, organizations must transition to non-greenhouse gas emission technologies. This will have an impact on power companies with large fossil fuel portfolios.

2. Betting on renewables - Organizations unclear where to turn. Given the need for power generators to reduce greenhouse gas emissions, investing in renewable energies will become an increasingly important area of focus. On the government front, Canada has a goal of having 90% of its power from non-emitting sources by 2020. Yet in this evolving environment, identifying profitable renewable energy projects is no easy task. Recent Ontario legislation provides some attractive financial incentives, and it remains to be seen if other jurisdictions will follow suit.

3. A nuclear renaissance - Regulatory and political risks remain. While there is a great deal of expectation regarding nuclear generation, the progress towards the pouring of concrete is slower than desired. However, international trends suggest that a nuclear renaissance is imminent, and power and utilities organizations in many jurisdictions are grappling with the challenges this presents. In the immediate term, the current economic climate, combined with extensive capital investment requirements, is making it imperative for governments and power companies to carefully weigh this option and prioritize their investments. In Canada, the Provinces of Ontario and New Brunswick, and their utilities, are currently facing important decisions around the further development of nuclear power.

4. Turning power into profit - Plant efficiency improvements pay off. The issue comes down to improving commercial performance by minimizing the costs of production. By putting the right foundations in place, power and utilities organizations can more easily respond to market shifts by simply fine-tuning their existing processes. The advantages delivered by improving efficiency are enormous.

5. The generation gap - Will electricity demand outstrip supply? Though the recession has resulted in reduced electricity consumption in many jurisdictions, worldwide demand is forecast to continue to increase. Determining what type of plant to build is complicating the effort, but ignoring the problem will lead to potentially serious supply constraints.

6. Public and private - Divergent ownership models abound. For the foreseeable future, it appears that capital costs related to electricity, gas and water utilities are on the rise. This trend requires both government and privately-owned utilities to display innovative management. In both cases, long-term success depends on an organization's ability to manage public expectations and its own governance process. As the power and utilities sector trends towards selective re-regulation, organizations must hone their abilities to effectively manage the regulatory process.

7. Technological transformation - The digital revolution presents no clear path. To make informed smart grid investments, power and utilities companies must do more than identify the low and high risk technologies. They must also learn new ways to manage their data, procure and source their equipment, and integrate disparate systems into a seamless solution, that benefits both the utilities and their customers. Smart grid pilot projects are underway in several parts of Ontario, which sees itself as being on the forefront of this transformation.

8. Labour shortages - Workforce planning enters a new era. In countries with static or declining birth rates and aging populations approaching retirement, talent shortages loom in virtually every sector-a threat which is particularly acute in the power and utilities industry. Employers in this sector need to think about how to attract and retain specialized skill sets or they will be caught unprepared when the economy corrects itself.

9. Tackling infrastructure obsolescence - Trillions needed to finance future growth. Recent research shows that the U.S. alone would require US$1 trillion in additional capital over the next five years to refinance existing generation and network assets and invest in both existing and new assets. To complicate matters, power and utilities organizations and their governments are being asked to commit existing funds in an environment of serious regulatory and technological uncertainty. Without a clear understanding of the most economically viable power sources and technologies, organizations will need to build strategic flexibility into their generation planning.

10. Managing demand - Keeping an energy crisis at bay. As the power and utilities industry grapples to secure power supply, it is essential to remember that there is a flip side to this coin. In essence, organizations are being challenged both to curtail demand and to find ways to meet demand beyond increasing generation. Effective demand management can be achieved only if all industry participants come to recognize that power supply security is about more than increasing installed capacity-it is also about balancing demand by improving energy efficiency and encouraging multinational system integration.

Obtain a copy of the report

For a more detailed discussion of the top emerging issues in the power and utilities sector and suggested courses of action, the full report Empowering ideas: A look at the top emerging issues in the power and utilities sector is available at www.deloitte.com/ca/empoweringideas.

About Deloitte

Deloitte, one of Canada's leading professional services firms, provides audit, tax, consulting, and financial advisory services through more than 7,700 people in 57 offices. Deloitte operates in Quebec as Samson Belair/Deloitte & Touche s.e.n.c.r.l. Deloitte & Touche LLP, an Ontario Limited Liability Partnership, is the Canadian member firm of Deloitte Touche Tohmatsu. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms.

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