TILITIES ÜSSELDORF Utilities Unbundled...The cost of building Liquified Natural Gas (LNG)...

Utilities UnbundledISSUE THREE — NOVEMBER 2007 — ANALYSIS AND COMMENT ON CURRENT ISSUES IN UTILITIES

GL O BA L UT I L I T I E S CE N T E R

DÜ S S E L D O R F — GE R M A N Y

Affirmative to AlternativeHow are utilities taking alternative energy forward?

Clean Technology Powering AheadE.ON and Suzlon rise to the challenge

Is US Energy LegislationInevitable?…and will it help utilities ramp up renewables?

Harnessing Alternative Energyto Manage Uncertainty

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CONTENTS

ERNST & YOUNG – UTILITIES UNBUNDLED – ALTERNATIVE ENERGY

IntroductionHarnessing alternative energy to manage uncertainty page 3

Utilities NewsIndustry roundup page 4

Deals Roundup: Q2 2007Worldwide transactions overview page 6

Main FeatureAffirmative to alternativeAlternative energy rises to the top of the agenda for utilities page 8

Regional ReportsYou never miss your water…Australia’s drought concerns bite hard page 13

Water privatization heating up for Saudi ArabiaAmbitious restructuring plan forges ahead page 14

Industry Trends Clean technology powering aheadE.ON and Suzlon rise to the challenge page 16

Green taxation: is US energy legislation inevitable?- and will it help utilities ramp up renewables investment? page 18

Finding the right balance for Europe’s energyHow will new EC unbundling proposals affect utilities? page 19

CommentNot here to save the world? page 20

Ernst & Young ContactsThe authors page 22

Contents

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INTRODUCTION

The world’s economic development hasalways depended on secure, affordableenergy supplies. But recent reports1

confirm that our traditional fossil fuelreserves are running out faster than ever.As stocks of oil and natural gas dwindleover the next 40-50 years, the availabilityand security of future fuel resources willcontinue to be a front-of-mind issue forpoliticians, energy producers, andcustomers alike.

The interdependence of the worldcommunity is perhaps more evident inthe field of energy than in many others.The economic and social welfare ofindustrialized and emerging countriesalike depends on how efficiently we canfind, transport, and trade fuel resourcesinternationally; on what we do to makeenergy development sustainable; and on how we improve energy efficiency – and emissions standards –for a better environment.

So we turn to alternative energy. Five years ago, it was hardly a hot topic.Times have changed, largely due toKyoto, advances in technology,movements in pricing, and the fact that carbon or environmental constraintsof some form are now acknowledged as here to stay. Many utilities are nowreaching the conclusion that alternativeenergy (AE) could provide the best routeto a successful, sustainable future, and are becoming deeply involved in itsdevelopment and commercialization.

What does harnessing AE mean for theworld’s utility businesses? First andforemost, it means expenditure. This newfamily of energy-generating assets comeswith a large price tag, particularly interms of establishing new infrastructure.

Utilities also face difficult and complexchoices: there is an extensive array of AEtechnologies to choose from, each ofwhich has its own individual usage limitsand impacts on the energy mix. Althoughmajor investment is already underway,no-one really knows which of thesetechnologies will provide long-termsolutions and be the ultimate winners.So there is potential to make seriousprofits – but also serious losses.

In the meantime, energy producers andbuyers will need to become accustomedto the reality of higher costs andpenalties for CO2-negative types of fuel.We also – collectively and individually –have more reason than ever before tomake our communities, businesses, andhomes ‘energy positive’ (producing morethan we consume) to counterbalance thecost – and there could be a role for utilitiesto manage this endeavor in future.

In this issue of Utilities Unbundled,we have looked to our key people in the utilities field around the world fortheir viewpoints and opinions on AE and related energy issues. Our leadarticle, starting on page 8, investigateshow utilities are responding to thetechnological, asset ownership, and commercialization challengespresented by AE – and how AE interacts with the five key drivers of today’s utilities industry.

Other articles assess the development of green taxation in North America and how two leading energy players,E.ON and Suzlon, are getting to gripswith clean technology.

On another environmentally-related front, we also look at how advancingtechnologies and changing attitudes to privatization are helping the waterindustries of Saudi Arabia and Australia to solve their own very diverse challenges.

Do feel free to call any of our authors if you want to discuss any of the issues or ideas they raise.

Ben van GilsGlobal Utilities LeaderErnst & Young Global Utilities CenterGraf-Adolf-Platz 1540213 DüsseldorfDirect tel: +49 211 9352 21557E-mail: utilitie s @ de.ey.com

Introduction by Ben van Gils.

Harnessing AlternativeEnergy to ManageUncertainty

1BP’s latest World Energy review, published in June 2007, notes that globally we have just 40 years of oil and 63 years of gas left

ScottishPower, now part of Iberdrola S.A., has announcedplans to contract farmers in Scotland to produce 250,000tonnes of biomass carbon-neutral fuel for the Cockenzie andLongannet power stations. If successful, the project will utilizeabout 12% of Scotland's total agricultural land, and displace5% of ScottishPower's coal requirement by 2013.

Torrent Power Ltd’s gas-fired power plant in Gujarat, Indiahas been registered as the largest project under the UnitedNation’s Clean Development Mechanism (CDM). The project isnow set to earn almost 3.2 million carbon credits annually from2007-2012. India is a leading market for CDM projects (witharound 600, see chart, right).

According to carbon analysts PointCarbon, the US-based utilityAES expects to generate 26 million tonnes of greenhouse gasoffsets per year by 2011. Projects include capturinggreenhouse gas methane from landfills and agriculturalsources.

To meet its ambitious renewables target of 15% by 2020, Chinawill spend around US$266 billion – or 10% of its 2006 grossdomestic product (GDP) – to fuel renewable energydevelopment.

Utilities News

Certified Emission Reductions (CERs) up to 2012 (millions)

No of projects

900

800

700

600

500

400

300

200

100

0

1000

India China Brazil Mexico Other

UTILITIES NEWS

4 ERNST & YOUNG – UTILITIES UNBUNDLED – ALTERNATIVE ENERGYERNST & YOUNG – UTILITIES UNBUNDLED – ALTERNATIVE ENERGY

(((Market Forces)))French Suez S.A. and state-backed Gaz de France (GdF) have announced a merger for early 2008. The total marketcapitalization of the combined entity is estimated at €90 billion.

In India, public sector non-banking lender Power Finance Corp(PFC) plans to launch an overseas private equity fund to raiseresources for the domestic power sector, which requiresinvestments of some US$250 billion.

RAO UES of Russia CEO Anatoli Chubais has pledged fullaccess to the competitive power market in Russia. Foreignmoney and technologies are needed to modernize Russianinfrastructure, Mr. Chubais told the Financial Times. Italy’s Enelhas entered the Russian power sector with a 25% acquisition of OGK-5 (for US$1.5 billion). Other European utilities like E.ON and Fortum are joining Enel in the wind up of the Russian power monopolist.

National Grid plc has successfullycompleted its acquisition of Keyspanin the US for a total consideration ofUS$11.8 billion. National Grid is thelargest utility in the UK and becamesecond largest in the US after acquiringKeyspan.

TXU shareholders have approved the takeover by private equity investorsKKR and TPG. While TXU’s board hasalways been confident of settling the deal in 2007, analysts had voiced skepticism over the amount of debt needed tofinance the transaction under the current credit crisis.

Meanwhile in Europe, Dutch utilities Nuon and Essenthave called off merger talks. According to a joint statement, the parties could not reach an agreement on the conditions of the merger.

Number of CDM Pipeline Projects and Emissions Reductions (Source: United Nations Environment Program and New Energy Finance Ltd. 2007)

(((The Evironmental Challenge)))

Source for all information: Factiva; Ernst & Young

(((Profitability of Revenues)))The competitive UK domestic supply market continues to see innovation in tariffdevelopment from energy retailers. Rising energy prices in 2005-2006 spurred onthe widespread introduction of fixed price or capped price tariffs, and this hasbeen followed by the introduction of a tracker tariff, which more closely reflectschanges in wholesale prices.

The US power industry reported increased profits throughout Q2 2007. While 70utilities and power generators were profitable, only nine had lost money over theperiod. Overall, profits rose 22.5% year on year.

Chinese power producers’ 2007 profits could be seriously affected by rising coalprices. Several generators have urged the Chinese government to raise electricityprices. Raw coal prices have increased 3.5% over the past six months in China,and are expected to remain high due to transportation restrictions and capitalexpenditure costs.

(((Security of Supply)))

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UTILITIES NEWS

(((Regulatory Forces)))The European Commission (EC)proposed new legislation on EU energyliberalization in September. Opinionamong EU member states remainsdivided over the need for unbundling.France and Germany (along withAustria, Bulgaria, Cyprus, Greece,Latvia, Luxembourg and Slovakia)wrote to the EC urging it to view theunbundling of energy production and distribution as only one of anumber of possibleoptions forincreasingcompetition. Pro-unbundling countries includeBelgium, Finland, The Netherlands,Romania, Spain,Sweden, and the UK.

The Central Electricity RegulatoryCommission has given in principleclearance to the proposal of MultiCommodity Exchange (MCX) to set upIndia’s first energy exchange. PTCIndia plans to pick up a 26% stake inthe exchange. Financial institutionsand power sector utilities are alsolikely to contribute to the equity.

Arizona regulators seek to limitFERC’s (the US Federal

Regulator) transmissionauthority. The Arizona

CorporationCommission said it“…believes thatfederal pre-emptionof Arizona’s linesiting authority isunnecessary andinappropriate.”

The cost of building Liquified Natural Gas(LNG) production facilities is rising. Shelland Qatar Petroleum recently announcedthat the budget for their QatarGas IVproject had risen from the 2005 estimateof US$6 billion to US$8 billion in July2007. Since 2000, the cost of buildingliquefaction plants has doubled.

E.ON strengthened its Europeanupstream gas presence when itsRuhrgas business bought a 28% stake inNorway’s Skarv-Idun complex fromShell. This is the company’s second forayinto the Norwegian upstream: E.ON alsoholds a 30% stake in the Njord field.

Indian power generation, transmissionand distribution company Torrent PowerLtd has joined the rush for Botswana’scoal. It plans to invest US$500 million inmining and exploration prospects togenerate and distribute power in theSouthern African nation.

NTPC Ltd, India’s largest powergeneration company, has moved a stepcloser to formal agreements securinglong-term gas supplies for its powerplants from Nigeria. It has been reportedthat a contract for the supply of threemillion tonnes of LNG per year is likely tobe settled in return for the constructionof two power stations in the West Africancountry. The Nigerian block will enablegas procurement at US$3-4 per millionBritish thermal units (m Btu) overcurrently paid spot prices of US$8-10 perm Btu in the international market.

Australia and Russia have signed acontroversial deal on uranium supplies.Under the contract, Russia must not sellthe nuclear fuel to third parties or use itfor military purposes.

Source for all information: Factiva; Ernst & Young

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DEALS


The Big PictureGlobal M&A markets in the second quarter (Q2) reveal a few interesting trends. In general, utilities are buying other utilities, rather than renewables companies;domestic deals dominate; and the pace of investment by funds has slackened. Onceagain, the US and Europe are the global hotspots for M&A activity, a trend that mayincrease with the dawn of stricter regulations to unbundle network activities in Europe.

What are utilities buying?Out of 22 Q2 completed deals where utilities were the acquirer, only two involvedrenewables companies. Transactions were primarily domestic, with only seven cross-border. The total deal volume where utilities acquired other companies was US$27.4 billion in the quarter, with an average deal size of nearly US$900 million.Markets have seen a slight increase in the number of deals compared to Q1, but witnessed a big leap in deal value (eight times higher in Q2 v Q1).

Who is buying utilities?Institutional investors were not as active as utilities in acquiring utilities. Only four of the 24 transactions in Q2 involved non-sector investors – and only seven involvedforeign investors. The lower number of non-sector investors could be an early signalof reduced activity due to a dramatic reduction in leveraged buy-out (LBO) debt on a global basis. On average, utilities or subsidiaries were acquired for US$790 millionin Q2 and the total market size for utilities as acquisition targets was nearly US$30 billion (nearly four times higher than Q1).

What are the regional themes?Two transaction hotspots dominated global M&A activity: the US and Europe. As wehave seen over the past several years, US players continue to shy away from overseasinvestments, focusing largely on domestic industry consolidation. European players,on the other hand, are taking a more global approach and entering emerging marketssuch as Turkey and Russia. Russia, in particular, seems likely to remain attractive tonon-Russian players over the long term, given its market reforms and significantneed for investment in aging infrastructure. The question is: will overseas investorsbe allowed to succeed?

Renewables – not everyone’s darling?While consolidation between renewables companies was the main theme of Q1,investors with different backgrounds were involved in a much higher percentage of deals in Q2. Mining companies, oil and gas players, and funds are buying intorenewables companies for their future prospects. At the moment the deal size issmall, corresponding to the relatively small size of these emerging companies. Of the six deals, only two involved utilities as the acquirer.

Global Utilities Deals (Completed)

Deals Roundup: Q2 2007

Completed deals roundup Q2 (Q1 numbers for comparison)

Utilities acquirer

Utilities acquiree

Renewables acquiree

Total no of deals

22 (19)

24 (27)

9 (12)

No of cross-border deals

7 (7)

7 (9)

3 (5)

No of cross-sector deals

2 (5)

4 (8)

6 (5)

Total deal value(million US$)

27,453 (3,658)

29,938 (8,687)

<100 (est) (440)

Average deal value(million US$)

897 (366)

790 (543)

<10 (est) (110)

Source: Datamonitor; Ernst & Young

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DEALS

Completed transactions in Q2 show a dominance of domesticdeals, the effects of the credit crunch, and a big leap in dealvalue compared to Q1. Report by Joseph Fontana.

Renewables – a dynamic market

The highlight of the Q2 M&A marketswas the completed acquisition ofScottishPower by Iberdrola, a transactionthat went through very smoothlycompared with other major deals. This acquisition makes Iberdrola thelargest renewables energy player in the world.

While in Q2 utilities were largely absentfrom the renewables transaction market,this is a dynamic market and thingschange very quickly. For example, theannounced US$2.15 billion acquisition of Horizon Wind Energy by Energias dePortugal (EDP) represents a significantinvestment by a utility in a renewablesbusiness. However, I believe it’s not aquestion of when utilities will be active in the renewables transaction market, but rather how they will implement a successful renewables strategy. The key question is: which utilities havegeneration as part of their growthstrategy?

n Some utilities will simply be buyers of renewable power – not generators.Some US utilities, for example, have chosen to focus on transmissionand distribution and have eitherlimited or no generation in theirunregulated businesses – NationalGrid and Consolidated Edison of New York, for example.

n Others will see renewable power as an integral part of their generationgrowth strategy. These utilities will seek to develop renewablesopportunities and make strategicacquisitions when conditions are favorable and the proposedacquisition represents an assetportfolio or opportunity that it cannot easily replicate.

The credit crunch – what’s ahead?

The recent crisis in credit markets hascreated a lot of uncertainty as to whetherhighly leveraged buy-outs such as thepending LBO of TXU by private equityinvestors KKR and TPG are likely to dryup in the short to medium term. The impact of the crisis on private equityand infrastructure funds as primaryusers of highly leveraged debt has beennoticeable, as lenders have beenunwilling to issue commitments for new deals. In fact, they have beenrenegotiating commitments made earlier this year in the hope that bettercovenant terms will enable them to sell on the loans.

Although private equity andinfrastructure funds have been affectedby the credit crunch, utilities don’t seemto have been affected as severely, as more traditional forms of debt andequity are available. Interestingly, withprivate equity and infrastructure fundscurrently on the sidelines, utilities havemore opportunities to win deals againstfewer buyers – assuming their prices are acceptable to sellers. Europeanplayers may also look to fill the voidcreated by private equity andinfrastructure funds, as competitionlegislation limits possibilities forexpansion in their domestic markets.This is particularly true for newlyemerged national champions such asGdF-Suez (Belgium and France), but alsofor others such as Iberdrola (Spain), Enel (Italy) and National Grid (UK).

Although utilities may fill the void oftransactions completed by private equityand infrastructure funds, it is my viewthat we will see the number and dollarvalue of deals being announced andcompleted drop off until these fundsreturn to the transaction market.

Deals Commentary

Increased political desire totackle climate change, andconcerns about security ofsupply, are pushing renewable and clean energies to the top of the agenda for utilitycompanies. How will theyrespond – and what effectsdoes the search for newenergy sources have on keyindustry drivers? Report by Ben van Gils, Michael Cupit, John Hope,Sudipta Das and Tony Ward.

Affirmative to Alternative

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MAIN FEATURE


Despite the big fossil fueldiscoveries we continue tomake, and the fact that higherprices are increasingexploration efforts, estimatedglobal reserves are strugglingto keep pace with demand. BP’s latest World Energy review, published in June 2007,notes that globally we have just 40 years of oil and 63 yearsof gas left – and there could be much less if consumptionrates continue to soar.

So even if climate changeconcerns did not warrant a move to low- or no-carbontechnologies, the reducing

supplies of higher-price fossilfuels would still drive the searchfor non-fossil alternatives for ourprimary energy needs. We alsoneed to push for improvements inenergy efficiency; acceleratereliance on renewable energysources; and develop the storagetechnologies to facilitate theiruse. By 2050, many of today’s‘alternative’ energies will, bynecessity, be in the mainstream.

Growing acceptance of the urgentneed to respond to environmentalchange has created both seriousmarket demand and regulatorypressure for alternative energy(AE) development. This potentially

has massive effects on utilitybusinesses – both immediate and long term. Concerns oversecurity of supply make AEoptions highly attractive, becausethey tend to be national orregional solutions. But the newtechnologies, infrastructure, andoperating models required tomake the shift to AE successfulpresent utilities with a potentiallycomplex, expensive, and riskychallenge, and will heavilyinfluence their ability tooutperform their peers.

In the following pages we exploresome of the key ways utilities areresponding to these challenges.

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MAIN FEATURE

Influence of Alternative Energy on Five Key Utilities Sector DriversUtilities are taking a pragmatic attitude to alternative energy. First and foremost, it has to make commercial sense. Their involvement is motivated by market forces, regulation, and a need for supply security – they are not directly driven by environmental concerns.

Utilities

drives drives

affect affect

requires influence

eSecuring

competitivsupplies

Profitablerevenues

eAlternativenergies

Environmentalchange

Market forces

Regulatoryforces

Source: Ernst & Young

eSecuring

competitivsupplies

Profitablerevenues

eAlternativenergies

Environmentalchange

Market forces

Regulatoryforces

What do we Mean by ‘Alternative Energy’?Alternative energy is a wide-ranging term which includes a number of technologies to rival and/or displace fossil fuels. Key criteria are that they should be low in carbon emissions and sustainable. Some are suspicious of using the term ‘alternative energy’ at all – since it means different things to different people.

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MAIN FEATURE

Challenge 1:Securing Revenuesin the Face of Big AE CostsBecause most AE technologies arecurrently more expensive than traditionalones (i.e. gas, coal, and oil), investmentchoices and future profitability have to bedriven by incentives such as tax breaksor feed-in tariffs. Alternative energy willbecome even more economicallyattractive if users of traditional fuelsources are penalized for emittinggreenhouse gases like CO2.

Anticipate demand andincentive designOf course some forms of AE are alreadycommercially viable. Producing electricityfrom wind and geothermal sources canbe cost competitive when supportmechanisms are long term, predictable,and hence bankable. Where this is thecase, the critical action for utilities is toanticipate relative demand and incentivedesign well in advance, and establishhow to attract the biggest incentivespossible – as well as taking everyopportunity to develop and commercializethese technologies to a greater extent.

Which next-generationtechnologies to choose?There are also a series of other near-commercial technologies. The bigdecision for utility managers is which

technologies they want to bring forwardinto the mainstream, as part of theirlong-term revenue building portfolio.Some utilities have already started toinvest in solar1, wave, wind, and variousmicrogeneration technologies. The finalchoice depends on the features anddynamics of various host markets (fromweather through to tariffs), but no clearwinner is emerging yet.

As far as the way retailers make moneyis concerned, we are already seeing thebeginnings of a new model in terms ofproviding home energy services and adrive for energy efficiency. We can expect to see energy utilitiesreconfiguring to a business model where profit flows not from charging for consumption of energy, but fromstewardship of resources.2

Challenge 2:The ‘AE Effect’ on SecuringCompetitiveSuppliesAlternative energy is by nature a moresecure supply: since it is mostlyproduced within national or regionalboundaries, it sidesteps the need for imports as well as being highlycomplementary to the fuel generationmix. Alternative energy sources increase a utility’s agility by widening

the availability and choice of fuels, and providing flexibility in the balance of emissions and the cost of energyproduction.

But there are caveats. Making the moveinto AE may require major infrastructureenhancements, which can reduce an organization’s agility and involves big expense. There also have to beallowances for the intermittence thatrenewable energy sources, such as wind and solar power, can exhibit. These are weighty concerns for networkoperators – and for regulators, who need to allow for these major capitalexpenditures in any targets they set.

Supply chain shifts?Another interesting development we are seeing is a shift in the nature of the supply chain. Suppliers are seeking

The supply chain isshifting: we could see thetechnology providersbecoming the powerproducers, with utilitiesmorphing into platformsfor delivery, dealing withtransmission, distributionand retail. How manyutilities have planned for this?John Hope

1The UK’s Scottish and Southern Energy recently took a further equity stake in solar power business2For more on this topic see ‘Come wind, come weather’ Utilities Unbundled #2 June 2007 – see www.ey.com/utilities


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Renewable energy• Onshore/offshore wind • Wave/tidal power• Hydropower• Geothermal energy• Solar• Biomass and biofuels• Hydrogen (as a vector)

Energy efficiency/demand side• Combined heat and power (CHP)• Energy efficiency and storage• Smart metering• Load management• Distributed generation

Low-/no-carbon use ofnon-renewable fuels• Clean coal• Carbon capture and storage• Nuclear• Gas to liquids• Coal to liquids

WasteWaste to energy Landfill

gas

Source: Ernst & Young

MAIN FEATURE

to reduce certain of the risks that utilities do not want to take, for example:

n It is currently difficult to finance windprojects because of the high price(and waiting list) for wind turbines.The turbine manufacturer Suzlon hasresponded by developing wind sites at its own cost, before the utilitiestake over to operate them.

n The last few years have seen a ‘gold rush’ for uranium, with spotprices for U3O8 increasing 100% inthe six months to June 2007, and by afactor of 10 in little more than fouryears3. Nuclear technology providerssuch as France’s Areva arenecessarily becoming key investors inuranium mining and production toprotect their businesses – witnesstheir US$2.5 billion acquisition ofUraMin in June 2007.

n Service industry contractors are nowdeveloping their own investmentfunds to produce and sell renewableenergy from wind and wave power.

Developments like this show howtechnology suppliers themselves couldincreasingly compete with traditionalutilities in the energy market. In future,they could take over as the powerproducers, with utilities morphing intoplatforms for delivery – dealing with thetransmission, distribution, and retail end.How many utilities have planned for thisscenario?

Challenge 3:The RegulatoryChallenge – Lobby for FavorableIncentives,Anticipate Future RulesThere is a clear desire to see AE andcarbon neutrality successfully delivered,on the basis of a sustainable, embeddedinfrastructure and price mechanismwhich will support AE in the long term.However, there doesn’t yet seem to be acoordinated view across the major globalmarkets of how that might happen.

Can the regulator deliver afair market?There may well be more legislation thanregulation at work in terms of AE, but wecan assume that the role of the regulatorwill increase. Although the energyregulators can work to establish a levelplaying field with controlled prices andproper margins, in practice this may betoo ‘one-dimensional’ and may notproperly regulate the entire supply chain.Global supply chains contain manyparties who can identify and absorbavailable incentives and make largeprofits outside of the regulators’ control,before those incentives and profits getanywhere near the utility companies. The reality is that a lot of non-utilitybusinesses up and down the supplychain are probably going to make a great deal of money at the expense of the consumer or taxpayer.

Maintaining dialog withregulatorsSo how can utilities contribute toregulatory or legislative regimes that work, and do not contrive to drainout their profits, or limit the verydevelopment of the markets that they are intended to support? The answer liesin anticipation and communication.Utilities need to understand the differentand changing role of the regulator in different markets and territories. They need to anticipate futureregulations on AE and to keep up open,regular dialog with both the legislatorsand the regulators. The goal is to be in a position to influence both thedevelopment and operational stages of the political process in determiningsupport schemes.

Establishing an objective view of adherenceUtilities also need to be thinking abouthow their adherence to new regulationson their use of fuel and emissions levelscan be quantified, and especially theextent to which this can be audited andpresented objectively. We can already

sense concerns brewing about utilitiesmaking inaccurate claims and statements– of ‘greenwashing’. There is a feelingthat reputations could be at stake. But if they get it right, the achievement oftarget emission levels and other measurescould be used as a positive brandpromotion strategy – a tangible measureof corporate social responsibility.

Challenge 4:EnvironmentalChange – Stay Agile and Anticipate LikelyConsequences Environmental concerns are one oftoday’s principal driving forces for AE:they directly affect policy decisions andmarket demand. Public consciousnesshas embraced the concept of protectingthe environment. Individuals andcorporations alike know it is important to be seen to be green.

However, acceptance of thisenvironmental imperative isgeographically varied, and the potentialenvironmental impact of variousalternative fuel sources is being verycarefully weighed. In addition, the sheerunpredictability of our physicalenvironment – droughts and floods canhit anywhere, for example – can itselfstand directly in the way of using AE.There also remains the question ofglobal stewardship of our remainingfossil resources, which – despite the raftof environmental concerns we face – we are continuing to burn up faster than ever before.4

The wide variety of environmentalconcerns and proposed future scenariospresents utilities with a world of differentrisks and opportunities. Environmental

It’s quite possible for the supply chain to simply soakup any incentives, way before they reach the utilitycompanies… there’s a need to get actively involved inthe regulatory and legislative debate to avert this. Ben van Gils

3www.world-nuclear.org/info/inf22.html4Global coal consumption in 2006 was up 4.5% on 2005, and has risen from 1,120 million tons of oil equivalent (Mtoe) in 1996 to 1,800Mtoe by 2006: figures from BP World Energy review published June 2007

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MAIN FEATURE


regulations are different and changing in every market. Where they exist, theyare almost always time-limited to aperiod shorter than the payback time forany investment. Where they do not exist,the type, the extent and the timescale ofany future regulations present majoruncertainties.

Utility businesses need to develop theorganizational agility to allow them toreact quickly in response to thesemoving targets.

Challenge 5:The Effect ofMarket ForcesMarket forces are increasingly drivingdemand for alternative energies andgreen electricity. The question is, whencustomers demand ‘low carbon’, whatare they asking for – and why? Who reallyknows what we are buying? Is anyonemonitoring whether utilities are actuallyselling more ‘green power’ than theyproduce or source?

Big businesses may want to create agreen front to make their products moresaleable, but are they distinguishingbetween the types of low- or no-carbonenergy they buy? Do they count cleancoal or new nuclear as acceptable?Where is the scrutineer who will judgewhether the ‘We’re green’ claims on theproduct label are true?

Ideally, it should be possible to buy acertain level of emissions – on a slidingscale from dirty coal to nuclear andrenewable, depending on what isaffordable and how much carbon onewants to avoid. This may be the futurestructure of the whole carbon market. In the meantime, the concept of definingwhat you are buying (or claiming to buy)is a potential minefield.

Utilities will need a higherproportion of AE in theportfolioWhat is clear is that AE will have asubstantial effect on the market and willprogressively reshape the industry towardsmore decentralized systems, which couldhave a major impact on the way businessesare run in future. One way or another,utilities have to anticipate the need toacquire higher AE shares in their portfolio.As they do this, they may be in competitionwith new players who can potentially paymuch more. How many utility managementteams feel confident competing againstPrivate Equity (PE) houses andinfrastructure funds to win assets?

Dealing with societal impactsUtilities also have to consider the widersocial, economic, and environmentalimpacts of their fuel-sourcing decisions.The mass move to farming biofuel crops,for example, has resulted in huge pricerises for wheat, impacting the price ofmany food staples; and we are alsoseeing problems of deforestation or lossof habitat associated with growing palmfor palm oil. Public concerns on suchissues as the acceptability of newnuclear and wind farm developmentsneed advanced PR handling.

Go with the flow – or lead the pack?One final big question for utilitybusinesses to debate in all this is: What do they believe to be their role in theprocess – to lead, or to follow? Are theycontent for the legislative process, theregulatory environment, technologyproviders and customers to set theagenda, and then merely deliver what isdemanded of them – as long as itbenefits shareholders? Or do they want amore active leadership role in decidingwhat regulatory, legislative, market, andsupply chain structures will deliver thepower we need, from the sources theybelieve to be the right ones?

Massive Change inJust One GenerationFossil fuels will certainly continue tohave a role in the energy mix up to 2050.However, traditional fuel sources areobviously under serious pressure – both in terms of the environment andsupply security.

If we accept the view that access toeconomically attractive global oil and gasresources is finite, we have relativelylittle time – a generation or so – to developthe new AE technologies, establish thevolume of new generating assets andinfrastructure we need, and commercializethem to get costs to a competitive, if notcompelling, level. There’s no gettingaway from the fact that, for utilities, this means big expenditure, not least interms of the new breed of infrastructurewhich AE demands.

Utilities also face the conundrum ofchoice. There is an abundance oftechnologies out there, each withdifferent limits on usage – and each ofwhich will impact the overall energy mixin a different way. Policy-makers have akey role in paving the way for a transitionto AE use, but they cannot predict whichfuel sources will ultimately provesuccessful. No-one knows yet which of the available technologies will be the ultimate winners.

This is a time of major transition and, as is often the case, there is hugepotential for the utilities who get it right– and a heavy price to pay for those whoget it wrong.

Do utility businesses see an active role forthemselves in setting theAE agenda and deliveringwhat they believe to be theright kind of fuel mix? Tony Ward

Big businesses may want to create a green front to make their products more saleable, but what doesgreen mean? Do they discriminate between the typesof low- or no-carbon energy they buy?Michael Cupit

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REGIONAL REPORT

Q: Australia is suffering its worstdrought for 100 years. What issues is this raising - or emphasizing - for the country’s water utilities andgovernment?A: Australia’s prolonged susceptibility todrought has made it a leading exponentof water resource management. Byfocusing on enhancing demandmanagement, and securing a level ofwater security and supply throughstrategic investment in new waterinfrastructure, Australia’s water usageper capita now approaches world bestpractice levels. There is also a growingrecognition of the need for improvedcoordination of water resource activitiesacross state and federal governmentsthrough, for example, the ongoingNational Water Initiative – the country’skey cross-jurisdictional water policy.

At one time, building more dams mighthave seemed an obvious answer. But it’s becoming harder in Australia – as throughout the world – to findgeologically and politically acceptablesites close enough to cities. There is alsothe problem that it doesn’t always rain in the right place to fill the reservoirs. So in places like South East Queensland,where storage levels are at 20%capacity1, a concerted effort is beingmade to move away from traditional damand storage systems and increase use oftreated recycled water and desalination.

Q: Is desalination seen as the keysolution?A: There is exploding interest indesalination with Perth, Brisbane,Melbourne, Adelaide and Sydney allbuilding, planning or evaluating newplants. But it’s not an easy answer by any means: as with dams, there aredifficult political planning and sitingissues around desalination plants, aswell as environmental and economic

concerns. Desalination uses a lot ofenergy which, unless sourced fromrenewables, is likely to create moregreenhouse gas and add to the possiblestress on the climate. We don’t want tocreate a vicious circle, so plants such asthat in Perth are powered fromrenewable sources.

Emphasis is also being placed on the role of recycled water: it’s particularly attractive for industrial and agricultural usage, but is alsoplanned for potable substitution inQueensland through the WesternCorridor Recycled Water Project – the largest scheme of its type in theSouthern Hemisphere.

Q: Does Australia share the growingappetite in many countries around theworld for private involvement in waterinfrastructure?A: The private sector does have a role,primarily in technology development,construction, operating waterinfrastructure under PPP typearrangements and, as is the case insome jurisdictions, isolated BOOT (Build Own Operate Transfer) contracts.

There are also growing opportunities forinvestment in the creation of new sourcesof water, although this is currently quiteconfined in its application, due to theownership and control of water rightsresting with the government.

There is arguably a growing impetustoward water privatization amongst keyindustry and government stakeholders,particularly with regard to wastewaterwhere there is often less sensitivity aboutthe role of the private sector. We believethat water assets will eventually beprivatized, but this opinion does notappear to be shared by our stategovernments at present. It remains to be seen how long it might take toreach the shift in state political will to make it happen.

You Never Miss Your Water…

…’til Your Well Runs Dry

Australia’s short- to medium-term investment indesalination is likely to be US$7-9 billion

1September 2007 figures

Australia’s drought concerns are reaching the high water mark. Interview with Tony Martin and Adam Bond.

13

14

REGIONAL REPORT


Saudi Arabia’s water – the need for reformWater demand has reached anunprecedented level in Saudi Arabia,driven by a fast-growing population andrapid economic growth. Massiveinvestment is needed to expand andreplace water, desalination andwastewater plants. The country’sMinistry of Water and Electricity wants tobring its industrial and domestic supplyup to international standards andestablish a more transparent and better-run operation. Sharing capitalinvestment with the private sector isseen as the best way forward.

The call for private sector participationfalls in a period of challenges for theindustry. Amongst the issues that needto be tackled are the extremely low levelof water and wastewater tariffs, coupled with high production andtransportation costs. Operationalperformance, productivity and efficiencyin the sector cannot yet compare withinternational best practice. The country’swater losses are significant, currentlyrunning at around 30%-40%: reducingthese losses is vital, both to save scarceresources and to underpin the futurefinancial health of the water utilities.

What is happening?Until recently, most water andwastewater operations in the regionhave been government-owned. The firstto break this mold was the desalinatedsector in Abu Dhabi, which has broughtin over US$7 billion of private investment

The Saudi government plans to transformits water sector with a multi-billion dollarrestructuring and privatization program.Report by Diana DePinto and Sari Serhan.

Water PrivatizationHeating up for Saudi Arabia

15

REGIONAL REPORT

Key Challenges to Transform Water in Saudi ArabiaSaudi Arabia wants to create, conserve and distribute water on a more commercial, efficientbasis. Challenges include:

n moving to cost-reflective tariffs and removing sovereign guarantees

n enhancing the legal framework to make it more attractive to strategic investors

n establishing a water regulator.

Water Privatization in the Middle EastSaudi Arabia is the Middle East’s largest economy: its MARAFIQ project is the firstprivately owned water utility in the country. Qatar and Oman have also started limitedprograms. In the Levant, Lebanon and Jordan are moving toward privatization; Egypt issticking with a state-owned industry for the present.

SYRIA

SAUDI ARABIA

YEMEN

OMAN

UAE

QATAR

BAHRAIN

KUWAIT

EGYPT

LEBANON

JORDAN

PALESTINE

IWPP - Independent Water & Power PlantsBOT - Build, Operate, TransferDBO - Design, Build & OperatePPPO&M - Operation & Maintenance

- Public Private Partnership

Gulf Cooperation Council countries

The Levant

SYRIA

SAUDI ARABIA

YEMEN

OMAN

UAE

QATAR

BAHRAIN

KUWAIT

EGYPT

LEBANON

JORDAN

PALESTINE

IWPP - Independent Water & Power PlantsBOT - Build, Operate, TransferDBO - Design, Build & OperatePPPO&M - Operation & Maintenance

- Public Private Partnership

Gulf Cooperation Council countries

The Levant

145

673

4

1

2

8 9

10

1112

13

Kingdom of SaudiArabia• Ministry of Water

& Electricityprivatizationprojects

• Saline waterconversioncorporationprivatizationprojects

• IWPPs include:1 Shoaiba2 Shuqaiq3 Ras Al-Zour4 Marafiq

United ArabEmirates (Abu Dhabi)• PPP (BOT) –

wastewatercollection andtreatment

• IWPPs include:5 Taweelah(4)6 Shuweihat (4)7 Um Al Nar (1)

BahrainIWPPs include:

8 Hidd (3)9 Al Ezzel

Qatar• PPP (DBO) water

production project• IWPPs include:

10 Ras Laffan (2)

Oman• PPP (O&M)

Operation &Maintenance –wastewatercollection andtreatment

• IWPPs include: 11 Barka (2)12 Sur13 Salalah14 Sohar

Levant and othersRecent privatizationstudies and projects for water andwastewater in:• Lebanon• Jordan• Egypt• Yemen

over the past eight years. The Kingdomof Saudi Arabia has now taken up thechallenge and intends to seek privatesector participation in the full value streamof production and distribution across thewhole country – a much more aggressiveand ambitious program than anythingever attempted in the region. Theultimate vision is a fully commercialized,unbundled sector overseen by a waterregulator, with concessions or jointventures for all major service areas.

Involving private operators should helpintroduce the necessary performanceimprovements and bring in investmentmoney to build new plants andrehabilitate existing assets – including13 existing desalination and waterplants, and plans for an additional 13greenfield water locations. An estimatedUS$80 billion investment is expected inthe sector through to 2020.

Recent proposal processes in Riyadhand Jeddah have proved that there areplenty of potential investors keen tocome into the country. Learning frompast experience of privatization in otherindustries, the Saudi government haschosen a phased approach to reform. Itwill continue to underwrite the changeprogram – for example, using sovereignguarantees and take-or-pay contracts –moving towards more commercially-based contracts as the sector istransformed.

Ambitious visionRestructuring and privatization on thisscale presents immense challenges.Tackling these challenges will be key toproviding the infrastructure the countryneeds to fuel its future economicexpansion. The political will to change isclear from the reforms that have alreadybeen undertaken – and the Kingdom isclearly thoroughly committed tosustaining that reform over the nextdecade and beyond.

For more detail on how the waterindustry is changing in SaudiArabia, see Diana DePinto’srecent Euromoney article,

available [email protected]

16

INDUSTRY TRENDS


Clean technology encompassestechnologies, products, and serviceswhich optimize the use of naturalresources, while reducing ecologicalimpact and adding economic value bysignificantly lowering cost or improvingprofitability. It can include anything fromsolar or wind power, through biofuels,green buildings, personal transportation,smart grid, mobile applications, waterfiltration, waste, and more.

Clean technology has moved from visionto reality, and it’s now a priority on theCEO agenda of every company – fromemerging growth companies to themultinational market leaders. We arecontributing to the growing dialogbetween large corporations and

innovative emerging clean technologygrowth companies as they seek toidentify the most productive ways ofworking together. Our latest report,Partnership: Clean Technology – GlobalTrends and Insights Report 2007-8,documents these efforts, capturing forexample:

n Insights from our round-tablediscussion on clean technology withmajor players in the consumerproducts industry

n Perspectives from the venturecommunity and corporatestakeholders on opportunities forclean technology investment,innovation, partnerships, and exits thatwere shared in our Ignition Sessionsin Palo Alto and Munich this year

n A capital markets view of possibleexits, including IPOs

n Thoughts on business modelfinancing and the role of projectfinance in clean technology.

The report also features a series of in-depth interviews with utilities and cleantechnology leaders, in which they sharetheir vision of the future for the sector.

A clean technology collaboration andpartnership map documents therelationships that exist between largemultinationals and the emerging cleantechnology growth companies, which will be highly influential to the future of the sector.

Copies of ‘Partnership: Clean Technology –Global Trends and Insights Report 2007-8’will be available in mid-November atwww.eyonline.com/growth

With the worldeconomy facingchallenges fromhigh energy prices,resource scarcityand global climatechange, cleantechnology ismoving up the CEOagenda. Gil Foreroutlines some of the latestdevelopmentscaptured in our‘Partnership: CleanTechnology – GlobalTrends and InsightsReport 2007-8’.

Clean TechnologyPowering Ahead

Partnership and collaboration between multinationalcorporations and emerging clean technology growth companies could help resolve some of our most complex global economic challenges… clean technology could become a primary engine of global economic growth.

INDUSTRY TRENDS

E.ON: Growth throughrenewable technologies

By 2030, E.ON expects to have reducedthe carbon intensity of its generationportfolio by 50%1, says Michael Lewis,E.ON Managing Director, Renewables.“This reflects our view that the Kyotoprotocol – or something similar – willcontinue into the future beyond 2012.”

Hence the business is focusing onrenewable technologies and highlyefficient coal-powered stations. As thepolitical climate changes (particularly inthe US) and support for green solutionscontinues to build, Lewis believes it isincreasingly important to focusinvestment in those renewabletechnologies where carbon emissionscan be achieved most effectively.

E.ON is investing heavily in renewabletechnologies – both in commerciallyproven and scalable technologies likewind, and in longer term solutions likephotovoltaic cells where E.ON hasformed a JV with Schueco, a photovoltaiccompany.

“The EU is trying to give us a very clearsteer for the future … which means thatover the next 12-18 months theinvestment framework should continueto be attractive for clean tech,” Lewisconcludes.

Suzlon: going for growth

Growth in renewables is propelled bytwo factors, according to Tulsi Tanti,Chairman, Suzlon India: “Firstly, allcountries are making ‘energy security’a priority to secure a stable future forthemselves; secondly, the ideal way tomitigate the adverse effects of globalwarming and tackle rising climatechange issues is through renewables.”

Tanti has been impressed by the“remarkable increase” in the level ofawareness of renewables amonggovernments, agencies, and the financialand industrial community. “There isconsequently a marked increase in theinvestments required to develop suchtechnologies,” he says, adding: “It is estimated that the financialcommitment in this direction hasreached the mind-boggling figure ofUS$3 trillion.”

For Suzlon, a focus of investmentrecently has been vertical integration andin particular, component and materialsmanufacturing. “Customers today areplacing orders with deliveries going into2009. We in Suzlon have made majorinvestments… aimed at securing oursupply chain and increasing deliveries.”

Longer term, Suzlon will continue to focus on the growing wind energymarkets of the US, Europe, India, andChina that will generate high growth and good margins. Australia, Brazil, and South Korea are also on the map and the company plans to expand itsR&D footprint by establishing innovationcenters across the world.

17

1Using 1990 as its base level.

Clean Technology in Action

18

INDUSTRY TRENDS


Green Taxation: is US Energy LegislationInevitable?

Bills proposed in the Senate and Houseof Representatives in mid-2007 do notrepresent a major shift in US policy. They provide some welcome extensionsto existing provisions, but ignore a keyissue – comprehensive carbon capturelegislation.

What’s proposed?Under the current section 45 renewableelectricity production tax credit, wind,closed-loop biomass and geothermalenergy facilities will earn credits fromproduction for a 10 year period providedthey come into service before 1 January2009. The bill passed by the House, H.R.3221, would extend this tax creditprogram until 31 December 2012, givingutilities welcome time to put buildprograms in motion. Marine andhydrokinetic (tidal) sources would bemade eligible to receive one-half thecredit rate. The Senate version of thislegislation provides for a two cent perkilowatt hour income tax credit throughto the end of 2013.

Both the House and Senate bills wouldextend the section 48 business energyinvestment tax credit for business solarand fuel cell property for eight years (to 2016), and allow utilities to claim the credit. The House bill would raise thecap for fuel cells from US$500 per half

kilowatt of capacity to US$1,500. TheSenate bill would eliminate the cap forfuel cell property. The Senate versionalso covers CHP – combined heat andpower properties – for the first time.

Both the House and Senate propose to enhance and expand the CREB (clean renewable energy bonds) programas a means of providing tax-subsidizedfinancing for renewable energy projects.They would also extend the tax deferralfor qualifying transmission asset salespursuant to FERC (Federal EnergyRegulatory Commission) or state market restructuring policy between now and 2009.

Positive changes are likewise proposedwith a bonus depreciation allowance forcertain transmission assets (supportingrenewable energy production), theadvanced coal and gasification investmentscredit and qualified energy managementdevices – also known as smart metering.

What’s missing?Notable by its absence is any provisionregarding carbon emissions. The Houseenergy tax bill merely suggests that theNational Academy of Sciences studiesthe tax law to identify provisions thathave the largest impact on greenhousegas emissions. The Senate is more

focused, proposing a new tax credit ofUS$20 per ton of qualified carbon dioxidecaptured and sequestered by thetaxpayer and a US$10 per tonne taxcredit for carbon dioxide used as atertiary injectant in an enhanced oilrecovery project. Either way, morethought and legislation is anticipated,although nothing substantial is expectedto materialize this year at least.

What’s next?Informal deliberations to begin ironingout differences between the House andSenate bills have already begun.Congress faces a difficult challenge inreconciling the differences between thetwo bills. The Senate energy policy billcontains both stricter CAFE1 standardsand an increase in the RenewableFuel Standard,while the Housebill omitted theseprovisions due to a lack ofconsensus.Likewise, theSenate bill doesnot include arenewableportfolio standardfor electricutilities, while theHouse bill does.

However, even if Congress fails to enactan energy package, or the legislation is vetoed by the President this year, we believe that renewables are likely to play a bigger role within utilities in the future. In our view, broad,comprehensive energy legislation in the US is now inevitable.

An extended version of this article isavailable from www.ey.com/utilities

Congress is considering legislation toaddress energy independence andclimate change issues, but Andy Millerquestions whether it will give utilities the confidence they need to invigoraterenewables investments.

1The Corporate Average Fuel Economy Program

INDUSTRY TRENDS

January this year saw the publication ofthe European Commission’s inquiry intothe state of competition in EU energymarkets. The Commission concludedthat competition was not functioningproperly in the Member States, and itsuggested a variety of remedies. Amongst the measures proposed inJanuary was the introduction ofownership unbundling – imposingindependent ownership of grids andtransmission systems. This concept hasbeen strongly resisted by some EUmembers, and has already been thesource of considerable tension (see box).

The Commission believes that currentunbundling legislation is inadequate andhas now adopted a new proposal toimprove the competitive landscape. Thenew draft Directive1 gives Member Statesthe option of either unbundling fully, ormaintaining ownership provided thattransmission system operating powersare signed over to an IndependentSystem Operator (ISO)2. The ISO would beresponsible for all operations, includingmaintenance and investments. TheDirective also proposes creation of apan-European energy regulator tooversee the national regulators.

Impacts on companies: bigtransactions, new compliancechallengesIf ownership unbundling is implemented,any vertically integrated energy businessin EU member states will either have tosell their grid or split their shares –resulting in some sizeable transactions.

Potential buyers would be private equityfunds, grid companies from other EUMember States or other investors likeglobal energy companies or state funds.

Given the strategic value of energy andthe networks, the Commission has decidedto protect the utilities of Member Statesagainst investors from outside the EU.

Whatever the final outcome of thelegislation process to come, the thirdround of legislation in the EU willcertainly increase pressures forcompliance (and demonstration ofcompliance) for European utilities. Evenin the case of ownership unbundling, the regulator will have to monitor thefulfilment of legal requirements.

The European Regulators’ Group forElectricity and Gas (ERGEG) points outthat “Regulatory oversight will still benecessary for an independent networkoperator, as it remains a monopoly.”

Compliance with the requirement wouldbe a wise strategy for European utilities.This might best be achieved throughappointing a neutral, external auditor,whose assessment might be morecredible to any third parties. An externalassessment could also minimizepersonal risks for the people responsiblefor implementing an unbundlingcompliance program, since they wouldnot be forced into potential conflict withtheir co-workers.

What next?Several factors will determine theultimate level of competition and pricesfor customers. The level of unbundling isjust one of them: to achieve non-discriminatory, functioning networks forelectricity and gas means that unbundling,regulation and cooperation have to be inbalance. As the EU legislators continueto hammer out the region’s future energypolicy, critical next steps to achieve thisbalance include:

n Regional initiatives for network cooperation

n Harmonized implementation of the 2nd EU Directive in memberstates to achieve a level playing field in Europe

n Common rules for monitoring current unbundling requirementsacross Europe.

And with renewables and CO2

burden-sharing proposals scheduled to come through at the end of the year,there promises to be no let-up in thetension for Europe’s energy sector.

Controversial new European Commissionproposals on energy market liberalizationwill send ripples through the energycommunity. What are the impacts forcompanies? Report by Helmut Edelmann.

Finding the Right Balancefor Europe’s Energy?

Unbundling: a Historyof Resistance The European Commission has repeatedlycalled for ownership unbundling to break up the‘monopoly position’ of big energy companies,which results from their ownership of both gridsand power generation facilities.

French and German energy companies havebeen under close Commission scrutiny foralleged anti-competitive behavior, and there iscontinued strong resistance to unbundling fromcountries including Austria, Bulgaria, Cyprus,Greece, Latvia, Luxembourg and Slovakia,together with many major energy companies.Pro-unbundling countries include Belgium,Finland, The Netherlands, Romania, Spain,Sweden, and the UK.

1Published 19 September 20072An ISO is an operator of the grid, who is independent of the grid owner. ISOs of this kind are up and running in the US and Scotland.

19

COMMENT

Energy utility companies exist to achieveone simple objective – to provide secure,affordable energy in a commerciallyprofitable way for their stakeholders.However, the whole subject of energycan rapidly become entangled in politics- national concerns about security ofsupply, and international concern aboutglobal poverty and the environment.

At a high level, there are three sides toenergy provision: supply security,affordability and environmental impact –generally prioritized in that order bygovernments. No democratically electedgovernment will survive if it allowsenergy supplies to fail, or energy pricesto rise unreasonably – even for altruisticreasons like environmental protection.

Governments and international bodiesfrequently commit to targets to reduceemissions and to increase global accessto energy, but in general it is companiesin the utilities energy value chain thathave to deliver these results. Ascommercial organizations, they will onlydo this where legislative and regulatoryframeworks are set to make itcommercially sensible and attractive.Utilities are not here to save theworld, and any that tried unilaterallyto do so would soon go out ofbusiness.

Invest now – benefit much laterAt the European Union’s March 2007 summit, Europe’s leaderscommitted to ambitious goals,

including cutting greenhouse gasemissions by 20% by 2020. Their

commitments were praised by the

Not Here to Save the World?


Governments set targets for emissionsand renewables, but it’s the job of utilities to deliver on them. And they’ll do it, saysJames Turley – given the right regulatoryand legislative framework, and as long asit makes commercial sense.

20

21

COMMENT

press and environmental groups. Buteven if huge investments are madeimmediately, emissions won’t actuallystart to fall until after the 2020 deadline.

The energy industry has to invest on too long a timescale to be able to makerapid changes. Most of the capital-intensive commitment for clean energytechnologies that will have an impact by2015 has already been made. If reversingemissions is the goal, new investmentsmust be made now, to effect change 20 years on. However, the legislative and regulatory frameworks are not yet inplace to allow us to assess the businessrisk of such long-term commitments.Initiatives like the European EmissionsTrading Scheme and the recentlyannounced California greenhouse gas

market have to be expanded andcommitted to over a timescale that issufficient to assess commercialinvestment.

Massive shortfall in fundingelectricity for developingcountriesThe central issue is that there is ashortfall in the amount of capitalnecessary to achieve these high-levelaims. This is particularly true in thedeveloping world, from where the largestcontribution to the growth in energydemand and emissions will come. `A quarter of the world’s population

(some 1.6 billion people) lacks access tothe energy they need to live and workhealthily. Access to energy is central tothe achievement of many of the UN’sMillennium Goals and, unless investmentis increased, the number without access toenergy is unlikely to change much by 2030.

The International Energy Agencyestimates that developing countries needan annual investment of approximatelyUS$160 billion per year through to 2010,increasing by approximately threepercent per year through to 2030 to meetelectricity supply needs. World Bankanalysis states that only half of thisfunding is readily identifiable. This leavesa financing gap of about US$80 billionper year. Where will the missing fundscome from?

Choosing between clean airand TVFor developing countries, supply and costof supply is the crucial issue – withenvironmental concerns running wellbehind. Cheap diesel generators havealways been a favored way to provideelectricity, and there has been a massiveincrease in their numbers. They powereverything from irrigation pumps totelevision sets, allowing growingnumbers of rural villages in poorcountries to grow more crops andconnect to the wider world. NanditaMongia, the chief of the United NationsDevelopment Program’s regional energy

program for Asiaand the Pacific,was quoted in theNew York Times as saying that in many Indianvillages, “Youeither want cleanair or television. In nearly all cases,television wins.”

Rising prices for diesel fuelhave improved the commercialpotential ofalternatives, but renewable energysources have been in an often losing raceagainst diesel generators to become theenergy source of choice in outlying areas.Renewable sources have made someinroads, including tiny hydroelectricdams for Himalayan streams, biomassgenerators for India and Southeast Asia,solar-powered lanterns for India andAfrica and rooftop water tanks insouthern China.

Utilities capable of majorcontributionEnormous advances are being made in alternative ways to create, distributeand use energy. Companies in theutilities value chain have all of the skills in technology development andimplementation to deliver energy in a cleaner, more accessible way.

So utilities may not be here to save theworld – but given the right regulatory andlegislative framework, they can certainlymake an enormous contribution.

Utilities are not here to save the world, and any that tried unilaterally to do so would soon go out of business.

Sudipta DasRisk Advisory Services, India

Direct tel: +91 33 2281 1224

E-mail:[email protected]

Sudipta has worked extensively with both state-owned andprivate businesses in India’s power sector, and is well versedin energy and environment-related issues in generation,transmission, and distribution. His experience includesadvising organizations on carbon credit and Kyoto Protocolbased solutions and strategies, corporate sustainabilityreporting, and life cycle analysis.

Diana DePintoPrivatization &Restructuring,Middle East

Direct tel: +966 3 882 0596


Diana leads the Ernst & Young Middle East Privatization andRestructuring Group. She has over 28 years’ experienceproviding strategic, policy, financial, industry and corporaterestructuring, privatization, valuations and regulatoryconsulting services to both governments and privatecompanies. Her team is currently acting as the financialadvisor in the privatization and restructuring of thedesalinated water sector and the municipal water distributionutilities in Saudi Arabia.

Helmut EdelmannEnergy, Chemicals andUtilities

Direct tel: +49 211 9352 11476


Helmut has 19 years’ experience in utilities, working firstwithin the industry for companies like RWE and latterly as a professional advisor. He advises companies on the effects of liberalization and regulation in Germany, and is currentlyfocusing on the impacts of the new German energy law ongas and electricity companies.

Ben van GilsGlobal Utilities LeaderGlobal Utilities Center,Germany

Direct tel: +49 211 935221557

E-mail: [email protected] works with utility and energy companies all over theworld. He advises the European and Dutch parliaments onenergy matters, writes on energy for the Financial Times andthe Wall Street Journal, and has appeared regularly on CNN,the BBC, and Dutch TV.

James S. TurleyChairman and ChiefExecutive Officer, Ernst &Young

Direct tel: +1 212 773 4300


Jim joined the Houston office of Ernst & Young in 1977. Overthe last 30 years, he has held a series of leadership positionsand in July 2001, he became Chairman and CEO. Based inNew York and London, Jim serves as senior advisory partnerfor many of our largest global clients.

Adam BondInfrastructure Advisory, UKTransaction AdvisoryServices

Direct tel: +44 20 7951 9728

E-mail: [email protected]

Adam has nine years’ experience of advising clients in theAustralian and international water sectors, particularly withregard to policy design and implementation, wastewater re-use, desalination, and regulatory reform. Focusing on thewater, energy and waste sectors, Adam is currently advisinga range of public and private sector stakeholders on projectfinance and infrastructure procurement, policy and marketreform, regulation, and commercial matters.

Michael CupitTransaction AdvisoryServices Energy, Chemicalsand Utilities

Direct tel: +44 20 7951 0127


Michael advises clients on transactions in both therenewables and the conventional power sectors. Beforejoining Ernst & Young in 2004, he led the energy practice atERM Energy. A regulatory economist by background, he has10 years’ experience on projects in Europe, the Middle Eastand Central and Southeast Asia.

22

CONTACTS


If you would like to discuss any of theissues presented in Utilities Unbundled,please feel free to call or e-mail ourcontributors.

Ernst & Young’s global network ofutilities professionals numbers 2,500worldwide in 600 locations. Our memberfirms work with almost every utility inthe world. Our range of servicesincludes accounting and auditing; taxreporting, operations and advisory;business risk services; technology andsecurity risk services; transactionadvisory and human capital services.

Ernst & Young Contacts

Joseph FontanaGlobal Utilities & PowerIndustry Leader TransactionAdvisory Services, US

Direct tel: +1 212 773 3382


Joseph has over 20 years’ corporate finance and transactionexperience, and 15 years’ experience with power generationand utilities. He has led numerous transactions for strategicbuyers and private equity investors in this industry, includingelectric and gas utilities, independent power producers,electric and gas marketing companies, gas pipelines, LNGplant construction projects, gas storage and T&Doutsourcing.

John HopeTransaction AdvisoryServices Leader of UilitiesGroup, Australia

Direct tel: +613 9288 8659


John has worked for Ernst & Young for over 20 years, and has focused on the utilities, mining and energy industriesfor 15 years. He has advised private sector companies and governments on numerous transactions, both on the buy and sell sides.

Gil ForerGlobal Strategic GrowthMarkets, Ernst & Young

Direct tel: +44 20 7980 0170


Based in London, Gil is responsible for the strategicdevelopment, implementation and management of Ernst & Young’s Venture Capital Advisory Group, and for IPO strategic initiatives around the world. He works withventure capital firms worldwide and is also responsible for the global relationships with VentureOne/Dow Jones and Cleantech Group.

Tony MartinRisk Advisory ServicesLeader, Utilities Group,Australia

Direct tel: +613 9288 8684


Tony specializes in providing Risk Advisory Services to theutilities sector. He has worked with almost all participants inAustralian utilities, with experience including financialassurance and attest services, regulatory reviews,operational audits, and accounting and commercial advice.

Sari SerhanBusiness ManagementAdvisory Services,Kingdom of Saudi Arabia

Direct tel: +9661 211 0200


Sari has worked for Ernst & Young for over 14 years and hasadvised utilities sector clients in Saudi Arabia since 2002. Heis currently advising the Saudi Ministry of Water & Electricityon its multi-billion dollar restructuring and privatizationprogram for the water sector.

Jens GrabowAnalyst,Global Utilities Center

Direct tel: +49 211 9352 10170


Jens has worked with Ernst & Young as an analyst in theGlobal Utilities Center for one year, focusing on alternativeenergies and energy market reforms. He graduated fromFlensburg University as an Industrial Engineer of Energy andEnvironmental Management. He also holds a B.Eng in ExportEngineering from the University of Southern Denmark.

J. Andrew MillerAmericas Tax Leader,Utilities Sector

Direct tel: +1 314 290 1205


Andy is responsible for coordinating Ernst & Young’s taxresources for utility and power businesses in the Americas.He has over 25 years’ experience in corporate taxation anddue diligence teams for mergers and acquisitions. His clientsinclude several large multinational energy businesses.

Tony Ward Transaction Support, UK

Direct tel: +44 121 535 2921


Tony has worked in the power generation and wider utilitiessector since 1994. He spent two years on secondment to theUK’s main nuclear generator, and has also been responsiblefor providing market-wide assurance on the UK’s electricitywholesale and retail markets. He has recently been advisingthe UK government on its Review of Energy Policy, primarilywith regard to nuclear generation.

23

CONTACTS

!@#

About Ernst & Young

Ernst & Young, a global leader in professional services, is committed to restoring the public's trust inprofessional services firms and in the quality of financial reporting. Its 114,000 people in 140 countriespursue the highest levels of integrity, quality, and professionalism in providing a range of sophisticated services centered on our core competencies of auditing, accounting, tax, and transactions. Further information about Ernst & Young and its approach to a variety of business issues can be found atwww.ey.com/perspectives. Ernst & Young refers to the global organization of member firms of Ernst &Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited does notprovide services to clients.

ER N S T & YO U N G www.ey.com

© 2007 EYGM Limited.

All Rights Reserved.

EYG No. DX0019

This publication contains information in summary form and is therefore intended for general guidance only.It is not intended to be a substitute for detailed research or the exercise of professional judgment. NeitherEYGM Limited nor any other member of the global Ernst & Young organization can accept anyresponsibility for loss occasioned to any person acting or refraining from action as a result of any materialin this publication. On any specific matter, reference should be made to the appropriate advisor.

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