Utilities Global Survey 2009

8/14/2019 Utilities Global Survey 2009

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IndustriesEnergy, Utilities & Mining

*connectedthinking

Utilities global survey 2009

A world beyond recession*


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A world beyond recession*

credit crisis financial crisis

economic growth widespread

receding recession

being readyworld insecurity future energy

climate change debate

sustainable


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In the space of the past 12 months, utility companies have found themselvesin a very different world with a series of momentous events the collapse ofgiants of the banking system, the credit and wider financial crisis, the reversalin demand and price growth, and outright recession in many major markets.But the time horizons required for planning in the energy sector requirecompanies to plan and think a long way ahead.A world beyond recessionlooks at the impact of the events of the past year, through the views of seniorutility company executives, and ahead at the world that lies beyond thedownturn.

recession

to power the upturnsecurity

cleaner power


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4 Global 26 The Americas2 Report highlights


We are experiencing atransformational economiccrisis one that is on courseto fundamentally changeglobalization well beyond

the domain of internationalfinanceKlaus Schwab, founder and executive chairman of the World Economic Forum


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The AmericasArgentina

Canada

Chile

Ecuador

Mexico

Peru

United States

EuropeAustria

Czech Republic

France

Germany

Hungary

Poland

Portugal

Russia

Spain

Sweden

United Kingdom

Asia PacificAustralia

India

Korea

Malaysia

New Zealand

Philippines

SingaporeThailand

Middle East & AfricaBotswana

Ghana

Israel

Jordan

Kenya

Mauritius

Namibia

Nigeria

QatarSouth Africa

Tanzania

United Arab Emirates

Zambia

This years surveyinterviewed 69 senior

power utility executivesfrom 65 utility companiesin 39 countries from 4major regions.


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Manfred Wiegand

Global Utilities Leader

Introduction 1

Each year PricewaterhouseCoopers goes to the heart

of boardroom thinking in power utility companies with

a survey of senior executives across the globe. In

2008, our World of difference report mapped the

enormity of the changes witnessed in the last 10

years and those lying ahead in future decades. Our

2009 report,A world beyond recession, looks at theimpact of the economic downturn and financial crisis

on the sector but, also, beyond to the time horizons

that are important for long-term energy planning.

We interviewed about 70 executives from leading

power utility companies in major markets around the

world to gain their perspective on the implications of

this very different world environment. We also include

the viewpoints of CEOs from a number of leading

utility companies in different parts of the world.

Power utility companies find themselves operating in

a very different world from just a year before. It is a

world shell-shocked by the rapidity of the financial

and economic collapse, where previous certainties

have been replaced by uncertainty, where faith in

markets and regulation has been shaken and where

recession has taken the place of growth.

For utility companies, however, the timescales

required for imperatives such as infrastructure

renewal, new generation and greener energy reach

beyond the recession. The very business of power

requires them to stretch their horizons further.

The investment required in the sector is considerable.

Yet the financial crisis has tightened the availability of

capital. Governments are debt-laden, clouding the

outlook for future subsidy for greener energy, and the

downturn has dampened demand, particularly from

big industrial consumers.

Companies face a delicate balancing act. They need

to make the adjustments necessary to steer through

the changed economic and financial environment but

also maintain a long-term horizon. Fewer investments

will surely mean reduced reserve margins in the

future with the danger of higher price spikes and

greater competition for limited supplies when the

evolving global recession recedes.


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Credit crunch clouds outlook forfuture targets

Utility companies have to judge the pace andlevel of investment programmes to respond toa complex mix of future demand, energysecurity and climate change drivers. Oneresult of the current market environment hasbeen to cast considerable doubt on whetherinvestment will come forward in a timelymanner to keep pace with future demand forpower and climate change targets. Two-thirds(67%) of our survey respondents report that ashortage of capital is having a high or veryhigh impact on their activities.

Investment barriers heighten

The development of new generation capacityand the renewal of existing generation plantsare priority areas for most companies; 83%are seeking to make medium to largeinvestment in new generation and three-quarters are seeking to do likewise intransmission and distribution. However, thesenior utility company executives in oursurvey are worried about the high costs andhigh levels of cost uncertainty associated withprojects. Two-thirds cite problems in securingfinance as a medium or high barrier to projectdevelopment. Skill shortages and access togood procurement capability also continue topose challenges for many companies.

Risk controls set to red alert

The current environment is heighteningenergy trading risk. Liquidity in the market is amajor concern. Eighty-six per cent of

respondents indicated that reduced liquidityin energy trading markets was having animpact on their companies, with 60% of allrespondents rating this impact as high or veryhigh. Customer credit risk is also identified asan area of major concern and 90% ofrespondents reported a high or very highimpact of increased sales and retail creditrisk. Companies are mindful of the risks ofcustomers going into liquidation, defaulting

on payments, bargaining over delivery orsimply shutting down plants and requiringless supply.

Maintaining a focus on climatechange

2009 will be a watershed year for climatechange regulation with world leaders seekingto agree a successor to the Kyoto Protocol.Utility companies in our survey emphasise theimportance of greater clarity of climatechange policy but express concern that theeconomic recession is undermining thechances of an effective response to climatechange. Asked if the economic recessionwould slow down responses to climatechange, 79% felt it would with two thirds ofthe 79% saying it would have a high or veryhigh slowdown impact. Many of those

surveyed also thought that a return to highenergy prices would dilute commitment toenvironmentalism.

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Economic incentives needed toboost renewables in the mix

Nearly three-fifths of respondents (59%) feel

that their renewable energy investmentprogrammes are being affected by the lack ofclarity from governments on renewable energytargets and financial support for renewableenergy. The importance of greater certainty onboth targets and economic mechanisms tosupport renewable energy is highlighted by thefact that, even coming off the back of a periodof record high power prices, only 28% ofrespondents believe that unsubsidisedrenewable power can compete commercially

against fossil fuel generation.

Technology holds the key

Technology will be central to future growth andcompetitive advantage. The importance oftechnology for key developments, such asenergy efficiency and the expansion of nuclearpower, has led many survey respondents to

pinpoint power equipment and technologycompanies as a more significant competitivethreat than even direct competition in the retailmarket by other utility company home marketrivals. Technological innovation is seen ascentral to a range of key developments in thesector. In the coming decade, technologicalinnovation is seen as having most new impacton energy efficiency, solar power, combinedheat and power, distributed generation and

combustible renewable generation. Lookingfurther afield, carbon capture and storage willbe essential for the sectors contribution to themitigation of climate change.

Report highlights 3


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An estimated cumulative investment of US$13.6 trillion isneeded by the power industry in the period to 2030according the reference scenario model used by theInternational Energy Agency. Although this outlook

predated the intensification of the economic downturn inlate 2008 and early 2009, the timeframe for the modeland, indeed, the timescales required to develop newgeneration capacity, particularly in nuclear, take theindustrys horizons beyond even a deep recession.Moreover, much of the projected electricity demandgrowth occurs outside of the OECD and this rebalancingof world demand is likely to remain a key trend evenduring recession.

4 Inside the boardroom: Global

The investment challenges for the sector flow from threeprincipal imperatives renewal, diversification andgrowth. The need for renewal of ageing infrastructuremay be alleviated by falling demand but the underlyingrequirement to replace or upgrade plants and networkswill not go away. Similarly, the need for diversification,

driven by the twin imperatives of greater energy securityand responding to climate change, remains in place.Energy security concerns have again been highlightedwith interruptions to Russian gas supply to Europe inearly 2009. On the climate change front, the latestscientific consensus on climate change indicates thatthe timetable for effective responses is more urgent thanever.

These concerns are reflected in the industrysassessment of the most important developments in theirpower market in the coming decade (see Figure 1) andthe most pressing investment priorities (see Figure 2).

The need to respond to the encouragement of renewableenergy and to reduce emissions is emphasised by themajority of survey respondents. Concerns over securityof supply also remain strong with over half ofrespondents stating that this would remain a key issue intheir market in the coming decade. The transmissioninfrastructure challenge is reflected in its reappearancein the top six chart in 2009 after dropping out in the pastfew years. Significant proportions of respondentshighlight the need for investment to respond to worriesabout transmission congestion, capacity margins andsecuring upstream gas supply.

RiskEconomic recession and the financial crisishave heightened the risks that utilitycompanies must manage. A major area of riskfor utility companies comes from balancingboth short-term and long-term supply anddemand. In turn, that means judging the paceof investment programmes to respond to acomplex mix of future demand, energysecurity and climate change drivers.


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The current economic downturn has dampened energydemand, particularly from big industrial consumers, but

the long-term imperatives highlighted by respondentsremain in place. One result of the current marketenvironment has been to cast considerable doubt onwhether investment will come forward in a timely mannerto keep pace with future demand for power and climatechange targets. Two thirds (67%) of respondents reportthat a shortage of capital is having a high or very highimpact on their activities (see Figure 3).

Uniformly high responses were recorded to this questionacross all regions in the world and this is being reflectedin cutback announcements. In the US, for example,almost half of the top ten utilities have announced

reductions to planned 2009 capital expenditure. In sucha bearish climate, utilities are more than ever mindfulthat the cost and availability of capital is a key risk whendetermining a projects financial viability.

Global 5

Figure 1: Top six ranking of the most important developments

in your power market over the next 10 years?

Source: PricewaterhouseCoopers, Utilities global survey 2009

High or very high impact

Medium impact

Low or very low impact

71%

22%

7%

Encouragement of renewable energy


Medium impact


66%

22%

12%

Regulation of emissions


Medium impact


64%

32%

4%

Increasing efficiency


Medium impact


56%

28%

15%

Increasing regulation and obligation


Medium impact


55%

26%

19%

Increasing transmission capacity


Medium impact


52%

26%

21%

Concerns over security of supply

Figure 2: The most pressing investment drivers


Very pressing

Medium importance

Least pressing

61%

28%

12%

Renewable energy targets

Very pressing

Medium importance

Least pressing

58%

25%

17%

Meeting carbon emission targets

Very pressing

Medium importance

Least pressing

47%

33%

20%

Transmission congestion

Very pressing

Medium importance

Least pressing

46%

26%

28%

Smart metering regulation

Very pressing

Medium importance

Least pressing

45%

29%

26%

Securing gas supplies

Very pressing

Medium importance

Least pressing

35%

36%

29%

A low capacity margin

Figure 3: The impact of a shortage of capital for

infrastructure projects



Medium impact

Small or very small impact

67%

20%

13%


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Figure 5: Increased credit risk in the sales and retail business


High / very high

impact 55%

Small / very smallimpact 10%

Medium

impact 35%

6

The cost of capital

The debt markets remain open to most utility companiesbut at higher cost. For example, the spreads (tobenchmark curve) on utility corporate bonds issued byEuropean utility companies in late 2008 and early 2009increased more than twofold from 2007. Similarly, themargins on loans have risen dramatically in the last 12months and tenors are substantially shorter than seen inrecent years with seven years now being considered long.

When it comes to raising funds through equity, theheightened risk perceived in capital markets has alsobeen reflected in higher estimates for the equity marketrisk premium (EMRP). The cost of equity has risen for

utility companies relative to previous years. In particularthere has been a significant increase in financing costs forany short-term capital requirements. It is possible forutility companies to raise equity capital through rightsissues, but the timing and perception of the issue canaffect cost and success.

In such an environment, investments in energy efficiencyand renewable energy may be lower than previously

expected, investments with low upfront costs will bepreferred to highly capital-intensive ones and plantretirements may be delayed. Retirements will reduce theshort-term need for new capacity but reduced capitalproject construction levels and a slowing of renewableenergy development could have a significant long-termimpact when energy demand picks up.

Trading and credit risk

The current environment is also heightening energytrading risk. Liquidity in the market is a major concern,

especially with the withdrawal from energy trading ofsome banks and other financial players. Eighty-six percent of respondents indicated that reduced liquidity inenergy trading markets was having an impact on theircompanies with 60% of all respondents rating this impactas high or very high (see Figure 4).

Figure 4: The impact of reduced liquidity in energy trading


High / very high

impact 60%

Small / very small

impact 14%

Medium

impact 26%


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Global 7

Liquidity is especially critical because companies areincreasingly dealing on a cleared exchange basis. If they

are in the over-the-counter market, there are collaterals tobe made. Large amounts of funds need to be available forcollateral or as a variation margin. As a result, credit riskmanagement is a very important area for companies.Customer credit risk is also identified as an area of majorconcern and 90% of respondents reported a high or veryhigh impact of increased sales and retail credit risk (seeFigure 5). Companies are clearly mindful of the risks ofcustomers going into liquidation, defaulting on payments,bargaining over delivery or simply shutting down plantsand requiring less supply.

1 2 30

Figure 6: The impact of market volatility

4 5

Note: Rate where 4-5 = agree/strongly agree; 3 = neither agree or disagree; 1-2 = disagree/strongly disagree


Tightened counterparty credit

monitoring in response to

market price volatility

Manage risk exposures through

the use of a structural hedge as a

result of market price volatility

Reduced/deferred investments/capital

expenditure in response tomarket price volatility

Current trading activities pose an

increasing reputational risk

to the business

Market events have caused mycompany to be concerned about

the efficacy of the firms trading

risk management and governance

control frameworks

Strongly agree/agree

Strongly disagree/disagree

Neither agree or disagree

74%

63%

45%

39%

33%

13%

16%

24%

31%

22%

13%

20%

30%

30%

45%

Agree orstrongly agree

disagree orstrongly disagree

neither agree

or disagree

Price volatility

Companies are having to manage the latest turn of eventsagainst a background of continuing energy price volatility.They are responding in a range of ways. A significantmajority of respondents have taken measures to offset theimpact of volatile energy prices through structural hedgingand tighter counterparty monitoring (see Figure 6).Uncertainty and instability in wholesale energy markets isalso having an effect in terms of reductions or delays incapital expenditure. Respondents are mindful of thepotential for trading activities to cause reputational risk totheir companies and, indeed, 39% see such potentialincreasing. However, only a third go so far as to expressconcern about the efficacy of their firms trading risk

management and governance control frameworks.


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Inorganic growth

However, some players will be less constrained thanothers by the financial markets. Transformational largetransactions cannot be ruled out but the main activity islikely to be at lower value levels and with an emphasis onindividual assets as well as corporate assets. Certainly theunderlying drivers of consolidation, supply security andcapitalisation remain in place and will create increasingpent-up deal demand. M&A remains a key route foracquiring new customers, securing supply and demandbalance in power, the acquisition of new capabilities anddelivering scale (see Figure 7).

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GrowthThe power utilities industry has come off theback of a series of record-breaking years formergers and acquisitions activity. Inorganicgrowth has been the order of the day for manycompanies, particularly in Europe, ascompanies sought to acquire scale andpresence across territories. Now, many of thebusiest M&A players are concentrating onbedding down their acquisitions and deliveringthe synergies they are seeking. The constrained

availability of finance will also inhibit dealactivity and, until that situation is eased, thereis unlikely to be a revival in deal values.

Figure 7: Inorganic growth: what is the driver of M&A within your business?


Strong or very strong driver

Medium driver

Weak or very weak driver

Acquisition of skills or knowledge


Medium driver


Geographic expansion outside home territory


Medium driver


Creating an inherent hedge in portfolio supply & demand balance in power

47%

33%

20%


Medium driver


Regulatory pressure

49%

25%

26%


Medium driver


Acquiring new customers

55%

33%

12%


Medium driver


Broadening product portfolios to existing customer

34%

30%

36%

46%

35%

19%


Medium driver


Scale for competitive advantage

40%

33%

27%

26%

39%

35%


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Global 9

Organic growth

In a constrained M&A environment, organic growth assumeseven more importance. The development of new generationcapacity and the renewal of existing generation plants arepriority areas for most companies with over half reporting thatthey are seeking major investment in generation (see Figure8). Investment in transmission and distribution is a similarlypressing issue with many companies seeking to make largeinvestments in network infrastructure. Companies are alsoplacing a strong emphasis on more effective IT infrastructureand the introduction of smart metering. These results werefairly uniform across different parts of the world although ITwas given less emphasis by European respondents. Only23% of European respondents are looking to make major IT

investment, perhaps a reflection that European marketliberalisation has already spurred investment in moresophisticated platforms.

Regulatory pressure was also identified as a strong driverfor M&A, especially by European and Asia Pacificrespondents. A significant proportion of companies arecontinuing to prioritise international expansion and, again,this is particularly the case among European and AsiaPacific respondents. A quarter of all respondents reportedthat growth outside home territories was a strong or verystrong M&A driver. This rose to a third in the case ofEuropean respondents and slightly more still for those inAsia Pacific.

Figure 8: Organic growth: where are you looking to make new investments?


Large or very large investment

Medium investment

Relatively small or no investment

New generation capacity


Medium investment


Distribution infrastructure


Medium investment


Network infrastructure / transmission capacity


Medium investment


Smart metering


Medium investment


Replacing / upgrading existing generation capacity


Medium investment


IT infrastructure

58%

25%

17%

55%

22%

23%

51%

25%

24%

49%

29%

22%

49%

26%

25%

41%

39%

20%


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The UK is an example of the trend to establish long-termcontracts from foreign sources to replace a declining North

Sea gas supply. UK utility companies have put in placelong-term contracts for gas from Statoil in Norway(through the Langeled pipeline); from Gazprom in Russiapiped through Europe and the Bacton-Zeebruggeinterconnector; and for LNG shipments from sources suchas Qatar. The latter has necessitated considerableinvestment in LNG offload, regasification and pipelineinfrastructure. The BG Group has embarked on a majorinternational acquisition spree to gain access to Australiancoal methane gas for LNG shipping to internationalmarkets in Asia Pacific and further afield.

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Upstream supply

Securing upstream supply, particularly of gas, remainsessential for most utility companies and our survey showsa progressive ramping-up over recent years ofprocurement strategies and moves to secure access toresources. More companies are placing long-termcontracts or sourcing supply from new regions in order tosecure their energy supply; 70% and 55% of respondentsrespectively cited these two moves compared with only49% and 26% just two years ago (see Figure 6). There isalso a notable increase in the proportion of respondentsreconsidering their fuel mix in both new and existingplants.

Source: PricewaterhouseCoopers,Utilities global survey 2009

Figure 9: How are you responding to upstream fuel challenges now and in the next 5 years?

2007 2008 2009

Improve your company procurement 39% 64% 77%

Secure current fuel mix by entering into long-term contracts 49% 54% 70%

Secure current fuel mix by sourcing fuel from new regions 26% 38% 55%

Change fuel mix in new & planned plants 29% 38% 55%

Upstream integration via direct investments 33% 51% 52%

Upstream integration via joint venture or alliance 27% 53% 46%

Change fuel mix in existing plants 27% 28% 39%

Upstream integration via acquisitions 16% 37% 35%


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Global 11

Technology-driven competition and growth

Technology will be key to future growth and competitiveadvantage. The importance of technology for keydevelopments, such as energy efficiency and theexpansion of nuclear power, has led many surveyrespondents to pinpoint power equipment and technologycompanies as a more significant competitive threat thaneven direct competition in the retail market by other utilitycompany home market rivals. Only 14% of surveyrespondents viewed equipment and technologycompanies as no threat and 35% identified them as astrong or very strong threat.

1 2 30

Figure 10: Over the next 10 years, how would you rate the competitive threat

posed to companies in your sector in your home territory by the following?

4 5

Note: Rate where 5 = greatest threat; 1 = no threat


Financial institutions and investment banks

New entrants from the power equipment

and technology sector

Utility companies based in your home territory

New entrants from energy-intensive users

New entrants from the construction sector

Companies from upstream oil & gas sector

New entrant technologies, being invested in bycompanies with strong balance sheets, are a threat to

companies with older and less efficient coal and gasgeneration. Among the important technologies currentlybeing introduced, for example, are very efficient combinedcycle gas turbines (CCGTs) that have a thermal efficiencyof well over 50%. Super-critical coal technology uses highpressures and high temperatures to achieve thermalefficiency of above 40% (compared to mid-30s for mostexisting coal fired generation). These are cleaner, as wellas more efficient, power generation technologies. EarlyCCGTs sometimes had an efficiency of only 40% withlimits on their flexibility. Looking ahead, the potential forstand-alone or distributed local off-grid generation mayalso provide opportunities for power equipment and

technology companies to play a more visible role with end-customers in the future power landscape.


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The downturn may ease some of these constraints butfinance could continue to be a problem for many projects,

particularly in the renewable energy field whereuncertainties about market competiveness are cloudingmany investments. Falling carbon prices have exacerbatedthe difficulties faced by renewable energy projects. Sector-wide, companies are expected to adjust their strategies byreducing costs and evaluating risks versus returns on newand existing projects. Postponement or cancellation,however, can increase costs and leave companiesexposed to market share losses in an upturn.

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Barriers to growth

The importance of capital projects is reflected in thechallenges that companies identify in delivering theirgrowth strategy. Respondents are worried about the highcosts and high levels of cost uncertainty associated withprojects. Over a third cite problems in securing finance asa major barrier to growth. Skill shortages and access togood procurement capability also continue to posechallenges for many companies.

Figure 11: What difficulties/constraints do you anticipate in realising your growth strategy?


Major or significant difficulty/constraint

Medium difficulty/constraint

Little or no difficulty/constraint

52%

33%

15%

Higher levels of project cost




41%

36%

23%

Uncertainties in project cost




36%

32%

32%

Difficulty in securing finance




39%

25%

36%

Lack of skilled labour




32%

32%

36%

Engineering procurement and construction (EPC) shortages




31%

41%

29%

Uncertainty in ability to pass costs on down value-chain


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Global 13

RegulationFrom market structure and rules, pricing andcompetition requirements through toemissions frameworks and theencouragement of renewable energy,regulation plays a vital role at the heart of theutilities sector. As we saw in Figure 1, 84% ofrespondents to our survey expect regulation toplay an increasing role in the next 10 yearsand two-thirds of the 84% say it will have alarge or very large impact on their market.

Market change

Regulation is already making itself more strongly felt. Forexample, structural change within energy markets is a keyregulatory challenge faced by major utilities today.Initiatives such as the Energy Third Package in Europehave been designed to facilitate a more transparent andcompetitive landscape. This is raising issues such as assetunbundling and cost reduction. In Europe, the past 12months have seen anti-trust investigations and court

rulings on power market competition and market access.The exact shape of European market reform will not beclear until summer 2009 and there are signs ofcompromise on network unbundling (see Europe section).In the UK, the energy regulator Ofgem is seeking newpowers to investigate and fine electricity companies formarket abuse amid concerns that generators are exploitingweaknesses in the system to push up prices.

In turn, we see utility companies stepping up theirresponses to regulatory change. Ninety three per cent of

survey respondents said their company was implementingoperational measures to respond to regulatory moves upsharply from 76% of respondents two years ago(see Figure 12). A significant proportion of respondents arealso repositioning within the value chain (43%) or by country(41%) again up from just two years ago. In some cases,such as E.ONs earlier proposed sale of its networks,companies are seeking to be proactive in anticipation ofregulatory moves. Repositioning, while most evident inEurope with 83% of respondents saying their company isrepositioning by country and 50% within the value chain, isnot confined to that continent. Half of Asia Pacificrespondents and a third of American respondents report

that their company is repositioning along the value chain inresponse to regulatory initiatives.

Attitudes towards the regulator

Despite the challenges that can come from regulation, mostsurvey respondents are appreciative of the regulatory roleand many more disagreed than agreed with a set ofstatements critical of regulation. Only 32%, for example, feltthat their market had an unclear or non-transparentregulatory process and only 30% complained that theretended to be frequent changes to regulatory decisions and

outcomes. These minority criticisms were slightly more feltby respondents in countries in Asia Pacific, the Middle Eastand Africa.

The less mature evolution of regulation in some of thesecountries was also reflected in a greater lack of support forregulation and lack of personnel with experience ofregulation within utility companies. For example, 44% ofMiddle East and African respondents felt that they lacked anexperienced regulatory resource in their company comparedwith only 14% of American respondents. The stepping up ofregulatory initiatives in Europe also appeared to be causingconcern among European respondents about their

companies regulatory capacity as many (41%) felt theylacked resource as felt their internal set-up was adequate.


Figure 12: How are you responding to regulatory challenges?

2007 2008 2009

Operational initiatives to respond to regulatory framework & execution(eg unbundling, cost cutting, performance improvement etc) 76% 81% 93%

Industry-wide initiatives, aiming to improve regulatory framework & execution 76% 75% 81%

Reposition in the value chain, ie reducing or increasing presence inindividual countries, following regulatory terms & conditions 32% 28% 43%

Reposition by country, ie reducing or increasing presence in individualcountries, following regulatory terms & conditions 31% 38% 41%


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We also tested respondent views about the political willbehind climate change action by asking whether high

energy prices would deter governments from increasingutility company environmental obligations. Morerespondents (40%) felt that high energy prices would diluteenvironmentalism than disagreed with this view (30%). Theremainder were undecided. Respondents from AsiaPacific, Middle East and African countries were most likelyto see a direct trade-off between energy prices andenvironmentalism 50% of Asia Pacific respondents and54% of Middle East and African respondents believe thathigher prices would soften policy requirements.

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Climate change

2009 will be a watershed year for climate changeregulation. Falling energy and carbon prices are castingdoubt on the viability of some renewable energy schemesand the economic downturn is testing commitment toclimate change mitigation. Governments have a chance toset a more certain framework for the industry. The firstyear of the Obama presidency, the direction of travel in therun-up to the December 2009 UN Climate Summit inCopenhagen and the outcome of those talks will all have avital bearing on the outlook for the power utilities industry.The political will of heads of government for a new climatetreaty and the extent of their ambition for clean energy willset the context for the sector for many years.

Whether governments have the political will to drivethrough measures to combat climate change is in somedoubt in the minds of our survey respondents. Asked if theeconomic recession would slow down responses toclimate change, 51% felt that it would have a high or veryhigh impact on a likely slowing of responses and 28% feltthat it would have a medium impact (see Figure 13). Only21% thought it unlikely that the recession would slowclimate change responses.

Figure 13: Will the economic downturn slow down responses to climate change?



Medium impact

Small or very small impact

51%

28%

21%

A watershed year for climatechange policy


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Global 15

Call for clarity

The importance of governments delivering greater clarityand developing an effective framework for thedevelopment of cleaner energy is highlighted by surveyresponses to a series of statements about renewableenergy and cleaner energy investment decisions (seeFigure 14). Nearly three-fifths of respondents (59%) feelthat their renewable energy investment programmes arebeing affected by the lack of clarity from governments onrenewable energy targets and financial support forrenewable energy. There were, however, strong regionalvariations in responses with European respondents muchhappier with the renewables policy framework.

The EU has committed to a 20% target of renewableenergy by 2020. Negotiations are taking place to translatethat overall target into individual country targets. Suchnegotiations will prove the testing ground for how far theEU target can be realised.

The Obama administration in the US has placedconsiderable emphasis on building clean energy

measures into its economic stimulus package. TheObama-Biden New Energy for America plan has pledgedUS$150bn over 10 years to such measures and aims toproduce 10 per cent of the countrys electricity fromrenewable sources by 2012, and 25 per cent by 2025. Theplan was announced in late January 2009, part-waythrough our survey interviews, and may go some waytowards assuaging the 60% of American surveyrespondents who felt that lack of clarity was affecting theirinvestment decisions.

The more patchy approach to renewables targets in AsiaPacific, the Middle East and Africa, is reflected in largermajorities of survey respondents in these regions statingthat lack of policy clarity is holding them back. However,even in Europe, there is a need for greater certainty giventhe long-term timescales for investment. For example,58% of European respondents report that uncertainty overthe shape of phase 3 of the EU emissions trading schemepost-2012 is hampering their investment decisions.

Figure 14: Do you agree with the need for environmental regulatory clarity?

Agree 59%

Note: *European respondents only


58%Agree

47%Agree

28%Agree

Lack of clarity from government on targets for renewable energy and

long term financial support is impacting my investment decisions

Unsubsidised renewable generation is now commercially competitive

against fossil fuel generation in my market

Uncertainty around phase 3 of ETS is impacting on my investment decisions *

Government policy is giving appropriate support to energy efficiency measures

Disagree

Disagree

Neither agree/disagree

Neither agree/disagree

25%Disagree

17%Neither agree/disagree

DisagreeNeither agree/disagree

23%

17%

51%

20%

28%25%


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Impact of climate change regulation

Utility executives in our survey also highlight the need formore effective specific policy mechanisms to restrictgreenhouse gas emissions (GHG). Even in Europe, wherethe EU emissions trading scheme has been in operationsince 2005, a third of respondents felt that GHGregulations had had no impact on their capital projectinvestment decisions (see Figure 15), although the impactof emissions trading was more tangible in Europeanresponses to a separate question on the scheme (seeEurope section). Around half of the respondents from AsiaPacific, the Middle East and Africa reported that suchregulation had no impact on them. Everywhere, fewrespondents said that GHG regulation had caused the

cancellation of projects.

16

The importance of greater certainty on both targets andeconomic mechanisms to support renewable energy is

highlighted by the fact that, even coming off the back of aperiod of record high power prices, only 28% ofrespondents believe that unsubsidised renewable powercan compete commercially against fossil fuel generation.American respondents are especially likely to seerenewable power as uncompetitive only 11% felt it couldcurrently compete without subsidy.

Moreover, the current financial crisis and constraints oncapital investment are exerting significant pressure oninvestment in renewable energy. Investments in wind, solar,and other evolving technologies have been among the firstto be cut. Alone out of the regions, respondents in Asia

Pacific were more optimistic about the ability of renewablepower to hold its own in the marketplace.

Figure 15: How have existing and proposed GHG regulations and the carbon

price affected major capital project investment decisions to date?

No impact 38%

Americas

Europe

Asia Pacific

MEA

Global

6%

3%

23%Revised project

specification

7%Delayed or

postponed project

23%Accelerated

the project

Cancelled project

Relocated project


20 40 600 80 100%


23/80

Global 17

Energy savings and efficiency

As the responses in Figure 14 show, utility companysurvey respondents are less critical of regulatory supportfor energy efficiency measures than on other regulatorymatters, with only 28% of all respondents disagreeing withthe proposition that government policy is givingappropriate support. Again there are strong regionaldifferences. European and American respondents aremuch more likely to feel that energy efficiency support hasnot been developed sufficiently.

Energy efficiency is a critically important element in theenergy equation. Energy saved through efficiency is theonly source of free energy that is available. However, if

significant reductions in per capita energy use are to occur,huge technological advancements will be required. As wedevelop more and better technologies, these efficiencieswill enable us to maximise precious energy resources,meet long-term energy challenges, and revolutioniseenergy usage in transportation and in industry.

Figure 16: Who should take the lead in achieving energy savings and efficiency?

End-users 46%

Americas

Europe

Asia Pacific

MEA

Global

3%

19%Utility companies

7%Oil & gas companies

23%Governments

Others


20 40 600 80 100%

But who is to take the lead? Despite continuing initiatives,there is the danger that energy saving is something that

falls between different stools and, indeed, only reallycomes to the fore when prices are high. Our surveyindicates the danger that this will continue to be the case.There is an increasing belief among respondents that it isnot for governments to take the lead (see Figure 16). Incontrast to last years survey, when 59% of all respondentsfelt that governments should take the lead, only 23% wereof this viewpoint in 2009. Instead, 46% felt the leadneeded to come from the end-users who would benefitfrom efficiency savings. However, unless prices are high, ithas to be questioned just how effective such an approachwill be.


24/80

18

Nuclear power expansion

Nuclear power is undergoing a renaissance as moregovernments change their policy stance on new nuclearexpansion. In February 2009, for example, Swedenannounced it will allow the construction of nuclear powerstations, ending a ban imposed after a 1980 referendum.Italy looks set to follow suit and the UK has alreadyannounced a programme of growth in its nuclear plants.This revival of nuclear power is reflected in 59% ofrespondents worldwide anticipating that nuclear powerwould have a significant impact in their market (see Figure17). More than half of these felt that it will have a high orvery high impact. Indeed, some respondents go further andbelieve that nuclear power should be given preference over

renewable energy in reducing CO2 emissions although theirviews are nearly balanced by those who would prioritiserenewable over nuclear power.

Figure 17: Nuclear maintains momentum


High impact

Medium impact

Low impact

34%

25%

41%

Renaissance of nuclear power

Agree

Neither agree or disagree

Disagree

40%

35%

25%

New nuclear should be given preference over renewable

energy as a means of reducing CO2

Nuclear power set to makea significant impact


25/80

Global 19

OperationsOur survey focused on three critical operationalareas for utility companies deliveringtechnological improvements, limiting the growthof greenhouse gases and achievingimprovements in operational and environmentalperformance. Effective responses on thesechallenges will be vital for many aspects ofindividual company success, requiringinnovation from power utility companies.


A focus on technology

Where will technological developments have most impactin the coming years? As Figure 18 shows, with regard togeneration and supply, respondents see technology havinga high but steady impact in areas such as wind andnuclear power. However, growing scores for energyefficiency, solar power, combined heat and power,distributed generation and combustible renewable andwaste generation indicate that these are seen as the likelyareas where technology will have the most new impact.All these developments will increase the likelihood oftechnology-driven competition highlighted earlier inFigure 10.

Figure 18: In which areas of generation and supply do you expect technological developmentsto have the greatest impact over the next 10 years in your market?

2007 2008 2009

Energy savings and efficiency 62% 79% 81%

Wind power plants 66% 62% 68%

Gas-fired plants 45% 69% 67%

Solar power plants 29% 54% 62%

Combined heat and power (CHP) plants 33% 52% 61%

Distributed generation 38% 49% 59%

Coal-fired plants 45% 49% 57%

Nuclear power plants 56% 57% 54%

Combustible renewable 33% 47% 54%

Waste incineration and landfill gas 26% 41% 51%

Micro-generation - - 45%

Geothermal 24% 40% 39%

Hydro power plants 31% 36% 36%

Oil-fired plants 11% 20% 35%


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20

The introduction of new energy efficient technology isseen as a key enabler to major improvements in energy

efficiency (see Figure 19). Subsidy of energy efficiencyequipment is also seen as important. The Obama-BidenNew Energy for America plan includes a US$1bn perannum federal grant programme to identify and supportlocal manufacturers with the most compelling plans formodernizing existing or closed manufacturing facilities toproduce new advanced clean technologies. However,unless prioritised by governments as part of stimulusprogrammes, the potential for substantial subsidyschemes is likely to be restricted because of the pressureson the public spending in many countries as a result of thecost of the various bail out and stimulus measures.

Figure 19: What are the key enablers for major energy efficiency improvements in your market?

New energy efficient

technology70%

Americas

Europe

Asia Pacific

MEA

Global

Subsidy of energy

efficient equipment 51%

The roll out of

smart metering48%

Regulating the energyperformance of buildings

46%

Distributed generation/virtualpower plants

36%

Professionally managed

energy contracting36%

No really strong enablers 16%


20 40 600 80 100%

Smart metering, which helps individual users to bettermonitor and control the way they use energy, is viewed as

playing a key role by American and Asia Pacific respondentsalthough, in Europe, despite the EU mandating an 80%roll-out of smart metering by 2020, only a minority ofrespondents saw it as important. European utilities appearsceptical about the ability of smart metering to deliver majorimprovements in energy efficiency. Smart metering in Europeis mainly predicated on other gains such as firm monthly bills,back and front office cost savings and improvements inoutage management. In contrast, smart metering in NorthAmerica and many Asia Pacific countries offers greaterdemand response advantages due to the very high summerair conditioning loads. Other measures that were identified asplaying a role in delivering efficiency gains included regulation

of the energy performance of buildings and distributedgeneration. By placing power generation close to the enduser, distributed generation could play a part in reducingenergy lost in transmission and distribution systems.


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Global 21

Limiting the growth of greenhouse gases

Expansion of renewable power sources and nuclear energyremain the principal routes by which respondents to oursurvey anticipate that GHG growth will be contained infuture decades (see Figure 20). Despite its potentialimportance in the generation mix, carbon capture andstorage (CCS) of emissions from coal-fired generationcomes lower down the list of expected technologicalimpacts over the next ten years. In the short-term,respondents are right to be cautious as, although thetechnology is available, it is expensive and is yet to beapplied to large-scale power plants. Current pilotdemonstration projects are still a few years away.Reference scenarios modelled by the IEA assume

commercialisation will not come until around 2020 (WorldEnergy Outlook 2008, International Energy Agency).


However, it is anticipated that CCS will have a significantlong-term impact. Even in its less ambitious 550ppm policy

scenario of stabilising GHGs, the IEA assumes that CCS willfeature in 101GW of the 323GW of additional coalgeneration capacity coming onstream between 2021 and2030, including 70% of additional capacity in OECD+countries. Thus, survey respondents expectation that thecoal carbon capture and storage picture in 2050 will be littledifferent from 2018 seems pessimistic and, indeed, slightlyalarming given the continuing importance of coal in thegeneration mix. The IEAs reference scenario projects coal-fired generation to grow at two percent per annum to 2030,maintaining a 47% share of the power generation fuel mix.In the 550ppm policy scenario there is a substantialreduction in the growth of coal-fired generation but, even in

this scenario, it would still play a major role and, indeed, isprojected to be 26% higher by 2030 compared to currentlevels.

Figure 20: In which areas of generation and supply do you expect technological developmentsto have the greatest impact over the next 10 years in your market?

Over the next 10 years By 2050

2007 2008 2009 2007 2008 2009

Renewable power generation 47% 50% 54% 43% 54% 54%

Nuclear 43% 53% 45% 59% 58% 54%

Energy efficiency improvements 42% 42% 48% 38% 35% 46%

Displacement of new and existing coal fired capacity with gas-fired generation 18% 16% 14% 7%

Coal-fired generation with carbon capture & long-term geologic storage 25% 20% 26% 26%

Gas-fired generation with carbon capture & long-term geologic storage 13% 17% 13% 13%

Carbon capture and storage 26% 26%

Coal gasification 19% 21%

Gas-fired generation 22% 14%


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22

Operational and environmental performance

Reduced demand for power in the economic downturnreinforces the importance of utility companies maximisingtheir operational performance. Our survey identified a rangeof opportunities for performance improvement (see Figure21). Better management of the supply chain, utilisation ofassets, billing operations and the delivery of large capitalprojects were seen as areas where high or very highperformance improvement could be achieved. Indeed, atleast half of survey respondents thought the scope forimprovement was high or very high in these areas.Relatively few felt there was little scope for performancegains. Supply chain management stood out with 62%identifying a high or very high potential for performance

improvement and only 10% seeing little potential.

A companys environmental performance is becomingincreasingly important from an investment point of view,particularly where carbon trading or other regulatorymechanisms impact investment feasibility and marketperformance. The senior utility company executives weinterviewed reported that communicating theirenvironmental performance was aiding their investorrelations (see Figure 22). Seventy per cent reported apositive impact, up from 57% last year, with very fewreporting a negative impact.

Figure 21: The scope for operational improvements


High potential

Medium potential

Small potential

62%

28%

10%

Supply chain and logistics

High potential

Medium potential

Small potential

59%

30%

10%

Asset management

High potential

Medium potential

Small potential

45%

35%

20%

Finance operations

High potential

Medium potential

Small potential

54%

23%

23%

Billing operations

High potential

Medium potential

Small potential

49%

28%

23%

Delivering large construction projects

PeopleHaving the right people skills in place andusing these flexibly is critical to sustainingbusiness strategy and responding to marketchanges, especially as companies facetougher market conditions. Utility companieshave diverse workforces, often workingremotely and geographically dispersed. Whilethe economic downturn has helped to pushthe people factor slightly lower down theboardroom agenda, the issue of a limited

supply of candidates with the right skillsremains a major challenge. In the long-term,companies are worried about decliningenrolment in university courses for thesciences and technologies, and expectdifficulties in recruiting and integratingyounger employees.


29/80


30/80

24

With survey respondents putting so muchemphasis on the need to balance short-term reaction to the financial crisis andeconomic downturn with a long-term focuson a world beyond recession, we decided

to hear the viewpoint of chief executivesand top leaders from power utilitycompanies in North America, Europe and

Asia.

Dr. Jrgen Gromann is president and CEO of RWE AG, oneof Europes leading energy companies. Reflecting on thechanges of the past year, he says: No one could havesuspected that we were about to face the biggest financialcrisis in the post-war era. Its extent and consequences stillcannot be predicted entirely. He points out that one impact

of the events of the past year has been that many peoplenow question the entire (banking) system and are secondguessing the fundamental principles of the market economy.State intervention in the economy has become the order ofthe day. Could we have imagined this a year ago? Certainlynot.

The need to look ahead decades not years

Among the short-term impacts Dr. Gromann observes thatindustrial energy consumption is on the decline, and

customers are experiencing difficulty in making payments.Financing costs are on the rise and politicians areincreasingly inclined to regulate functioning marketprocesses more intensely. However, notwithstanding thesefactors, and the profound nature of the changes wrought bythe financial and economic crisis, RWE emphasises theimportance of maintaining a long term perspective: Weshould think in terms of decades, not years. This is why, inaddition to the demands currently placed on us, we alwayskeep a watchful eye on the fundamental challenges facingthe energy industry that have lasting effects. Majorinvestments must be made in Europes energyinfrastructure, especially in new generation capacity,

electricity and gas grids, and gas storage facilities.

Sources: BC Hydro and CPI PwC interview. RWE Do It. The New RWE, Annual Report 2008. CPI quotes also published inRisk, Responsibility & Opportunity: The CEOs guide to climate action, PwC in conjunction with the Copenhagen Climate Council

Bob Elton, president & CEO of Canadas BC Hydro, thethird largest electric utility in Canada, emphasises thatpower utility companies are used to facing short-termsituations that are different from the long-term outlook. Theimportant thing is maintaining focus on the long-term whileoptimising, and indeed looking for opportunities, in theshort-term. The key objective of any leader must be to be

clear about where you intend to be when the recession isover. You do have to adjust the pace a bit but the importantthing is to make sure that youre facing in the right directionwhen it is over and it doesnt have an impact on your longterm course, says Elton.

Like RWE, BC Hydro has experienced reductions in demandfor power. There are pluses and minuses, Bob Elton pointsout. It can give you more time and reduce risks. Forexample, there are opportunities to step up maintenanceprogrammes and other capital asset improvements. It givesus a chance to drive down costs, particularly on the capital

side, to take advantage of the market being a bit softer.Skills shortages and an ageing workforce are among thekey challenges facing power utility companies in NorthAmerica and in many regions around the world. Again Eltonhighlights advantages that flow from the downturn:Responding to the talent shortage has probably been a biteasier this year because of reduced hiring in the generaleconomy. Were continuing to hire more young people toaddress demographic imbalances in the workforce.

Climate change policy

While utility companies are used to planning for the long-term, the stakeholder landscape is more complex and canbe more short-term. Our customers are less interested inthe long-term trends and, in some jurisdictions, governmentpolicy has a tendency to change pretty quickly towardsshort-term measures, observes Elton. A good example isenvironmental rules or legislation on climate change. It istempting for governments to lose focus on that which Ipersonally think would be a big mistake. I have seen that insome parts of the world, although not in our home market.Some form of carbon pricing is very important.


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maintaining a focus on long-term sustainabilityCEO viewpoint: 25

The importance of maintaining a focus on climate change isreiterated by Li Xiaolin, vice president of China PowerInvestment Corporation (CPI) and Executive Director,President of China Power International Holding Ltd. CPI wasestablished from part of the constituent businesses of theformer State Power Corporation of China and, by 2008, hadcontrollable installed generation capacity of 51990MW and

equity installed capacity of 40116MW. Li Xiaolin believesthat dealing with climate change now will hopefullysecure a happy and healthy future for our children andstresses that climate change needs to be a priority CEOissue as it benefits business operations by becomingcleaner and more efficient, companies should secureincreased profits over the long term.

In Europe, much of RWEs focus is on seeking a morecertain long-term policy context. Political decisions in thefield of energy policy have a significant impact on theoptions available to the RWE Group to reduce CO2

emissions sustainably, says RWE. As a utility with asignificant proportion of coal-burning generation, RWE islikely to be a key player in the development of carboncapture and storage (CCS) technology but stresses thatCCS needs more support from government: We welcomethe rules for the promotion of CCS power plants. However,the planned subsidy is unlikely to be sufficient to realize theten to twelve demonstration plants envisaged by the EU.This will require further subsidies from the member states.

In China, CPIs Li Xiaolin makes the point that: Stepping upscientific innovation and international cooperation will becrucial. Achieving development goals with minimum GHGemissions is a must-go direction for the future, which canonly be made possible through technological innovation andinternational cooperation. She stresses that efforts mustbe made to perfect the market mechanisms under theUnited Nations Framework Convention on Climate Change,with a focus on facilitating technological development andtransfer, and to ensure that consensus is reached quickly inthe international community. If these technologies can betransferred and deployed to developing countries atrelatively low cost, it may well help reduce large amounts ofGHG emissions.

RWE is seeking to more than triple generation from itsrenewable subsidiary, RWE Innogy, to 4.5 gigawatts by2012. However, renewable plant is not sufficiently certain tobe the mainstay for delivering base-load power.RWE observes that the most effective and affordable wayto avoid emissions is to extend the lifetimes of nuclearpower plants. Nuclear power generation emits practically no

carbon dioxide, and if nuclear power stations are shutdown, they will have to be replaced by higher-emissionfossil fuel-fired power plants. This is because renewables-based facilities are not capable of generating the sameamounts of base-load power. We could prevent up to anadditional 15 million metric tons of CO2 emissions per yearmerely by extending the lifetimes of our two Biblis units.This is a key focus of RWEs discussions with the Germangovernment.

A different kind of power sector

Looking further ahead, BC Hydros Bob Elton foresees aworld where the traditional model of large grid supply isturned on its head. He points to two key trends that willforce change. In developed countries, it is becomingincreasingly difficult to build large infrastructure projects,whether that is power plant or transmission lines. Each oneis getting more challenging and that will put a premium ondemand side management and distributed generation.Urbanisation is another key trend influencing a future wheredistributed energy plays more of a role. Elton points out: In1800 only 3% of the worlds population lived in urban areas,by 1950 it was 30% and by 2007 it was just short of 50%.By 2050 it is projected to be 67%. Cities will have tobecome increasingly self-sufficient.

Distributed power sources will mean the grid will be theback-up service and not the primary means of delivery inthe future predicts Elton. Distributed generation and arevolution in demand side management will, in turn, demanddifferent approaches by utility companies. If you are anintegrated company then youll need to decide early onwhat kind of role you want to take in this new energy world.It will require new relationships with customers. Individualcustomers and communities of customers will be much

more involved in developing their own solutions andcompanies will need to be very good at partnering andfacilitating that.


32/80

26 The Americas

United States

The drive to deliver shareholder value

Utility company managers are looking with renewedurgency at the best options to more effectively manageand maintain utility plant in service. In terms of plantmaintenance and operations, companies are increasingtraining, retaining skills, implementing more effectiveprocurement practices, deploying standardised supplychain processes and systems, embracing portfoliomaximisation modelling techniques and improving plantperformance information. Managers recognise the

exponential impact of an extra percentage point ofcapacity and are exploring all options to consistentlydeliver at higher levels. When asked about their strategyto enhance shareholder value, 67% of the USrespondents to our survey cited improving capacityfactors as receiving a high focus in their companies(see US Figure 1).

Utility managers are also focusing more on fuel diversitythan they did in the past. This is cited as an importantroute to more shareholder value. Fifty-seven per cent ofrespondents reported that this was being given a high orvery high focus. The importance of greater fuel diversityis partly driven by the need to secure supply and avoidoverdependence on a narrow range of fuel sources, but isalso influenced by climate change concerns.

Similarly, utility managers are seeking new ways toprovide better and more efficient customer service with

half of respondents giving this a high or very high focusas a means of delivering shareholder value. Investmentsare being made in new and information-rich customerbilling systems.

The United States moved into the downturn ahead of other world economies and

has seen some of the most dramatic events of the financial crisis. Historic US

federal government intervention, designed to prevent a more severe economiccrisis, has come from both the outgoing Bush administration and the new Obama

presidency. In this environment, fundamental operational matters have played a

prominent role in US utility company priorities. Companies continue to focus onplant capacity and maintenance, customer service, long-term capital projects,

rate case preparedness, and environmental/climate change readiness rather than

on mergers and acquisitions or other strategic restructuring moves.


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United States 27

1 2 30

United States Figure 1: What is the focus of your companys strategy for

enhancing shareholder value?

4 5

Note: Average response. Rate where: 5 = greatest focus; 1 = least focus


Improving capacity factors

Increasing fuel diversity

Focused customer service initiatives

Developing new products and services

Spinning off a portion of the

company to become a pure play

Outsourcing backoffice functions

Advanced metering infrastructure (AMI) and other smartmeter/grid technology is being either explored or

implemented by nearly every large-scale utility. Improvedcustomer cost and service information is being capturedand acted upon. Utility managers also appear more awareof additional costs that are often driven by a minority of thecustomer base, and they are more cognizant of theregulatory and customer care issues (and costs) that canarise when service levels do not achieve desired targets.

The ability to drive shareholder value is further complicatedby the difficulties in accessing the capital markets. High

performance in the areas of focus highlighted in Figure 1are an integral part of demonstrating the ability to be anoutstanding operator and thus not further limiting access tocapital markets. Survey respondents are focused onoptimising working capital and other cash managementpractices in order to respond to the increased tightening ofthe capital markets (see US Figure 2). In addition to theareas of focus above, working capital optimisationpractices include such strategies as expense control,collateral management, maintaining headroom on existingcredit facilities, and hedging interest rates and commodityprice risk.

1 2 30

United States Figure 2: How will your company respond to the increased

difficulties to access the capital markets?

4 5

Note: Average response. Rate where: 5 = greater focus; 1 = least focus


Optimise working capital and other cashmanagement practices and related information

Reduce the size of the current established

construction programme

More aggressively pursue

consolidation opportunities

Partner with utilities and others to reducethe size of your individual companys

construction capital requirements


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28

A focus on infrastructure and majorconstruction

Large-scale construction and other capital projects beganincreasing at a rapid pace from 2006 onward. This trendhas continued into 2009 with the announcement of manynew projects, including an unprecedented level of focus onnuclear generation. Investment in infrastructure andconstruction of new generation head the list of strategicgrowth priorities for survey respondents in the coming year(see US Figures 3 and 4). Transmission congestion, carbonand other government environmental initiatives, increaseddemand in certain markets and the need for greaterreliability are among the issues most often cited by utilitymanagers as drivers of this investment.

There is also new interest in nuclear construction asutilities, independent power producers, and other industry

participants develop generation to meet the demand fornew capacity. The sizable costs of such an environmentallydriven investment, allied with the related construction risk,mean companies and regulators will need to collaboratethoughtfully to ensure shareholder and ratepayer interestsare equitably maintained. There may be significant hurdlesto obtaining financing for new construction. In addition,even if financing is available, the resurgence ofconstruction has created a long lead time and increasingprices. These issues may further delay development.

1 2 30

United States Figure 3: What are your companys strategic growth opportunities?

4 5

Note: Average response. Rate where: 5 = most strategic; 1 = least strategic


Investment in infrastructure (wires)

Constructing new generation

Investment in renewables

Energy trading

Promoting new products

Investment in transmission


35/80

United States 29

1 2 30

United States Figure 4: Over the next year, what will your companys focus be on?

4 5

Note: Average response. Rate where: 5 = most focus; 1 = least focus

*Question not asked in 2008


Acquiring/constructing new generation

Rate cases

Acquiring/constructing distribution infrastructure

Acquiring/constructing new transmission

20082009

*Developing new products and services

Mergers/acquisitions

Rising costs and regulatory transition

have elevated rate cases to the topfocus of US survey respondents

Consistent with expectations and the focus on marketrecovery, regulators are continuing to allow lower returns

and rates than requested. The average return on equityreceived in 2008 rate cases was 10.28% versus an averagerequested rate of return of 11.13% (SNL Interactive).Mergers and acquisitions (M&A) are beginning to trendupward as compared with the prior year's responses. M&Ais likely to be an important part of many companystrategies as they respond to deregulated marketopportunities and the capital market environment.

Regulation and government the new administration

The beginning of 2009 ushered in a new politicaladministration focused on embracing economic recovery.Utilities continue to experience rising costs for power,materials, labour, and other costs to provide services. Inaddition, transition periods and rate freezes have ended orare ending in many states. Rate cases are now the numberone focus for utility companies in the coming 12 months.Many utilities are filing rate cases for the first time in yearsand are requesting significant rate increases to cover theserising costs and capital investment.


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1 2 30

United States Figure 5: What will be the biggest change in the

US utility industry over the next five years?

4 5

Note: Average response. Rate where: 5 = most change; 1 = least change


More environmental regulations

regarding GHG emissions

Greater share of non-US ownership

More merged companies

More pure-play companies (eg, generation only,transmission & distribution only)

20082009

More regulation

GHG emissions the big change issue

Looking ahead, US utility company senior executives areincreasingly aware that legislation limiting GHG emissionsis forthcoming with Congress seeking a cap-and-tradesystem and the administration supporting moreEnvironmental Protection Agency (EPA) regulations andoversight. The vast majority (91%) of survey respondentsexpect big or very big change with more carbonemission regulation and none gave a low change ratingto this aspect of regulation (see US Figure 5). In thisenvironment, power companies that own coal plants arereluctant to make investments in their existing or newassets as new regulations may significantly impact theirdecisions.

30

Further, US utility company senior executives see moremergers on the horizon exactly half see a big or very

big change with more merged companies and a further42% give medium change rating to more M&A. Mergersmay be necessary to raise capital to fund improvementsand new construction. Support for critical infrastructureand renewable energy may lead to less complicatedregulatory M&A approval. There is also a significantexpectation of more foreign ownership coming into thesector 84% gave this scenario a medium to highprobability and none gave it a little or no change rating.


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1 2 30

United States Figure 6: What is your companys strategy for dealing with

climate change, carbon credits and other environmental issues?

4 5

Note: Average response. Rate where: 5 = most important; 1 = least important


Energy efficiency (AMI, smart grids)

Renewables investment

Advanced coal generation investment

Nuclear investment

Carbon capture and sequestration

Purchase credits

To manage environmental demands, utility managers planto make a range of technological and generation

investments, headed by energy efficiency technologiessuch as AMI (see US Figure 6), which 83% ofrespondents viewed as very important or mostimportant with the remainder rating it as mediumimportance. Renewables investment is also important.An increasing number of power deals have been forrenewable assets or technology with wind energy leadingthe trend. Growth in renewables will be fuelled by taxincentives and public sentiment for clean energy.

United States 31

Nuclear license applications are on the riseand pro-nuclear sentiment is growing

The new administration has pledged to significantlyincrease the production of alternative energy in the next

few years to create a clean energy economy. A third ofUS survey respondents were attaching a mostimportant rating to renewable investment with a furtherthird rating of medium or high importance to theircompanies strategy for dealing with climate change.Significantly, half of survey respondents highlightednuclear investment as most important or veryimportant to their companies climate change response.


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United States Figure 7: Is your utility companys stock appropriately valued?


Yes 25%

Too low 67%

2009

Yes 76%

Too low 24%

2008

Dont know 8%

The impact of IFRS

Most of the world already talks to investors andstakeholders about corporate financial performance inthe language of International Financial ReportingStandards (IFRS). In addition, US investors buysecurities issued by foreign companies that report theirinformation using IFRS. The Securities and ExchangeCommission (SEC) continues to drive toward theadoption of IFRS to allow US companies to competefairly against foreign companies for capital, as theirfinancial information would be presented on aconsistent basis of accounting.

32

United States Figure 8: What movement do you expect in utility stocks over the next twelve months?


Higher 75%

2009

Same 25%

Lower 8%

Higher 76%

2008

Same 16%

Utility stock outlook

Each year we ask utility company senior executiveswhether their stock is appropriately valued and whatmovement they expect over the next 12 months.Respondents have been accurate in some of their pastprojections. Last year, respondents generally felt that themarkets were indicating the price was right (76%). Withthe significant fluctuations in the market during 2008,current year respondents have changed their views, with67% now believing their stock is undervalued. Theoutlook among respondents continues to be bullish, with75% expecting utility company stock prices to rise in thecoming 12 months.


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United States 33

In the second half of 2008, the SEC issued a roadmapfor the adoption of IFRS as the primary financial

reporting standard in the US for SEC registrants but hasindicated that it will evaluate certain milestones before itmandates use of IFRS by all US registrants. Our surveyindicates that the significance of IFRS is perhaps onlyjust beginning to be felt in the US power utilitiesindustry. Fewer than half of respondents believe achange to IFRS will be important to their companies,with 50% saying it will not be important (see US Figure9). As the SEC continues to drive toward allowing oreven mandating the use of IFRS by US registrants, thisarea will become worthy of careful observation.Increasing competition for capital and more commonacceptance of the IFRS standard domestically is likely

to make IFRS adoption a greater priority for US utilities.

United States Figure 9: How important will a change to International Financial Reporting Standards (IFRS) be to your business?


Moderately

important 42%

Not

important 50%

Dont know 8%

Moderately

important 32%

Not

important 56%

Very important 12%

2009 2008Very important 0% Dont know 0%

Awareness of IFRS significanceslow to take hold


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34

Regulation

Regulatory concerns tend to be regionally specific. InOntario, concerns about the size and scale of investmentrequired in generation and transmission dominate withregulatory delays adding to cost concerns. In Alberta,much of the focus is on delays in getting majortransmission projects moving, in particular a newtransmission line between Calgary and Edmonton.

CanadaIn common with many parts of the world, the challenge of responding toclimate change and other regulatory challenges are at the top of major

concerns facing the Canadian utilities sector. In addition, Canadian survey

respondents highlight the problems of an ageing workforce and physical

infrastructure as well as stretched transmission capacity (see Canada

Figure 1).

20 40 600

Canada Figure 1: What are the major issues facing the

utilities sector over the next 5 years?

80 100%


Regulatory changes and development

Ageing workforce

Pressure to replace ageing assets

Lack of transmission capacity

Competitive pressures

Access to capital / credit constraints

Greenhouse gas regulationsMajor issue

No issue

Major issueMedium issue



No issue

Major issue

No issue


No issue


No issue

Lack of regulatory changes / political commitmentMajor issue

Medium issueNo issue

75%

63%

25%

75%

13%

88%

75%

75%

In 2007, the Alberta Energy Minister stated thattransmission is Job 1. Two years later, the project is stillstalled and, in March 2009, the independent internationalresearch organisation, the Fraser Institute, called for acomplete rethink of the Alberta transmission policy. In otherWestern Provinces transmission is also an issue with plansin Manitoba to build additional transmission capacity fromthe north.


41/80

Canada 35

People

The recent economic slowdown and consequent spike inavailable staff does not appear to have had a significantimpact on concerns about the skills shortages associatedwith the imminent retrial of long term experiencedemployees. Recent increases in the availability of juniorand intermediate staff are unlikely to mitigate theseconcerns as it is not possible to rapidly replace the leveland quality of the skills associated with retirees with junioror recent staff. The one area where the recent economicslowdown may have a beneficial impact is in theavailability of skilled construction personnel andcontractors.

Climate change

Climate change regulation in Canada is in a state of flux.British Columbia and Alberta have implemented carbonpolicies that are explict or implicit taxes on carbonemissions and the federal government has alsoimplemented a regime. There is a strong commitment tothe concept of intensity based measures.

Such measures seek to restrict emissions to some pre-specified rate relative to input or output. However the

financial impact and key underlying concepts of thisregulation are being fundamentally affected by thecollapse in energy prices and the rapid development inUS policy.

Utility companies in our survey report that the issue ofmanaging greenhouse gases (GHGs) is already having aconsiderable impact on their operations, in particular oncapital construction plans and costs (see CanadaFigure 2). Most companies are reviewing their generationmix only a quarter say that GHGs are having littleimpact on the fuel mix.

There is significant investment by Canadian utilitycompanies in wind power and very significant new hydroinvestment planned in specific locations in Quebec,Alberta and British Columbia. Expansion of nuclear poweris also receiving strong backing. Alberta andSaskatchewan are two provinces that have previouslybeen largely reliant on fossil fuels but now both havenuclear power plant proposals. There is also renewedinvestment in nuclear technology in numerous Ontariolocations as well as refurbishment projects for reactors inQuebec and New Brunswick.

20 40 600

Canada Figure 2: What has been the impact of the greenhouse gas issue

on the following areas?

80 100%


Capital construction costs

Generation mix

Environmental IT systems requirements

Environmental reporting requirements

Re-configuration of transmission systems

Capital construction plans

Major impactMedium impact

No impact


No impact


No impact


No impact


No impact


No impact

38%

25%

25%

63%

38%

63%


42/80

36

1 2 30

Canada Figure 3: What is the likely impact of diminished access

to capital/credit constraints?

4 5

Note: Average response. Rate where: 5 = major impact; 1 = no impact


1 year time frame

3 year time frame

5 to 10 year time frame

Capital constraints

The credit crunch and ensuing financial crisis is having animpact on the availability of funding for utility companycapital projects and other purposes (see Canada Figure 3).Half of Canadian survey respondents report that diminishedaccess to capital is having a significant or major impact(scores of 4 or 5) on their planning over the coming 12months and another quarter report a medium impact (ascore of 3) over this time frame.

1 2 30

Canada Figure 4: What is the likelihood that jurisdictions in Canadacurrently primarily serviced by Crown Corporations (or similar publicly

owned entities) will seek to increase current level of public/private

partnerships or other sources of private sector investment?

4 5

Note: Average response. Rate where: 5 = very likely; 1 = not likely


Maritimes

Ontario

Newfoundland

British Columbia

Saskatchewan

Quebec

Manitoba

Alberta

Nearly two-thirds (63%) viewed credit constraints as asignificant issue for the sector (see Canada Figure 1).

However, Figure 3 indicates that utility company executivesexpect these constraints to improve over time as currentfinancial condi

Utilities Global Survey 2009

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