Utilities Market Drivers: Corporate Agenda

Publication Date	September 2006
Publisher	Datamonitor
Product Type	Report
Pages	13
ISBN Number	not applicable
Product Code	DAT00433

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Summary

Introduction

Even where governments have no significant shareholding in a utility, there is a perceived strategic national interest in maintaining the national character of the incumbent utility. Utility consolidation is partly driven by these efforts to create and sustain national champions. The Suez-GdF merger is an instructive example.

While the general business process outsourcing and offshoring trend is increasing, there is a counter-trend with respect to front office functions that go offshore. Many utilities have refrained from sending front-office processes offshore because they fear irreparable brand damage if customer service quality falters.

In power, most European utilities have a Net Trade Requirement over 100% of their supply obligations. This provides utilities with a wide scope to sell power on the wholesale market or serve Major Energy User customers from their own power stations. In gas, the Net Trade Requirement is reversed.

Scope

Understand what is driving M&A activity in Europe, and how it is likely to evolve.
Understand cost-to-serve drivers and how business process outsourcing is being used to boost profitability.
Benchmark against the Net Trade Requirements for Europe's largest utilities.

Content

Catalyst
Summary
Methodology
Analysis
- Utilities pursue M&A strategies to access future growth, protect themselves from hostile takeovers, and create national champions
- Utilities pursue M&A strategies as a defensive tactic
- In continental Europe, government intervention to create national champions spurs consolidation
- In the UK and US, liberal foreign investment regimes will be put to the test by future utility acquisitions
- The need to expand customer portfolios pushes utilities into an acquisition-based strategy
- The growth imperative pushes utilities into an acquisition-based strategy
- Increased competition is forcing incumbent utilities to focus on business processes in the search for improved profitability
- Utilities will continue to outsource business processes to boost profitability
- Moving front-office functions off shore is not popular with energy utilities, which fear irreparable brand damage due to low quality
- Many utilities in newly liberalized markets will be focusing on cost-to-serve for the first time
- The largest European utilities have the lowest cost-to-serve
- Technology, not foreign expansion, improves cost-to-serve
- Wholesale price volatility is a key strategic risk to utilities without an adequate structural hedge
- Utilities manage wholesale price volatility with structural hedges
- In power European utilities are over-hedged, in gas they are under-hedged
Appendix
- Datamonitor Consultancy
- Ask the Analyst
List of Figures
- Figure 1: Consolidation in the industry has created a top tier of utility giants
- Figure 2: Indicative service costs for European suppliers of three different sizes
- Figure 3: Competitive pressures have helped equalise cost-to-serve across UK utilities
- Figure 4: Most major European utilities have a structural hedge for over 100% of their power supply obligations
- Figure 5: European utilities are not sufficiently hedged in gas
- Figure 6: Only four utilities have some form of structural hedge in gas