RI Interview: Former RWE executive Beckers on investing in the utilities transition

The ‘Wise Minds’ report outlines a sector in flux

A new report backed by former UK utility industry chiefs has warned that there is an urgent need for investors to engage with the sector on future-proofing their business models to avoid stranded assets.

The report, Wise Minds: The energy transition and large utilities, says the UK energy system is in flux, changing more quickly and more fundamentally than at any point since the Industrial Revolution.

It points to new players, new business models and technological advances highlighting four drivers of changes – decentralisation such as wind farms and rooftop solar, democratisation such as community energy, digitisation such as smart meters, and decarbonisation.

Investors are warned that the old-world business model of large power stations and passive consumers is being rapidly undermined by a decentralised, renewable, digitised and people-led approach.

Significantly, the report draws insight from recent CEOs of the “Big Six” UK energy suppliers. They are Volker Beckers (RWE npower), Steve Holliday (National Grid) and Ian Marchant (Scottish and Southern Energy) as well as Sir Ed Davey, former Secretary of State for Energy and Climate Change and Joan MacNaughton, former Director General of Energy at the now defunct Department of Trade and Industry.

Dubbed the ‘Wise Minds’ in the report, Marchant speaks of a ‘prosumer revolution”, where people and industries are producing more energy and Beckers says: “The future energy company will be a service company utilising the benefits of digitisation”.

Expanding on this with Responsible Investor, Beckers, who is currently a non-exec chair of renewables-focused Albion Community Power, says people power will drive this.

“I draw the distinction between a pure supply business and a service business where you simply deliver secure electricity and gas 24/7. What we have seen over the last two decades is that energy companies were mainly competing on price. One of the reasons that the market is changing so dramatically is the trend of democratisation.

“People feel they need to be the master of their own destiny. Maybe they can afford local generation and therefore it becomes the consumer generating electricity themselves and they only buy the residual power. Once you have your own generation you have more or less a predictable cost of energy supply.”One way this is manifesting in the UK is the growth of solar PV projects, mostly on rooftops. The report points out the government hugely underestimated its growth with a 2011 scenario predicting around 100,000 solar PV projects by 2016. The actual figure was 900,000 projects, mostly on rooftops.

Bloomberg New Energy Finance also sees a future where power storage grows exponentially. Davey says in the report that “solar plus storage could very well be a complete gamechanger”.

Beckers suggests energy companies could start to transition to complement these trends such as offering residual power services or entering the battery storage arena. He adds: “It is still embryonic, but there is the route of how billing and settlements is going to change with the use of blockchain technology.”

The report notes that blockchain proponents promise a world of peer-to-peer energy exchange. EDF Energy is already working with a community energy group and blockchain technology company to trial peer-to-peer trading.

Responsible Investor speaks to Beckers in the week that oil major Royal Dutch Shell announced its decision to sell electricity direct to industrial consumers. In an FT blog Nick Butler, Visiting Professor and Chair of the Kings Policy Institute at Kings College London and an ex-policy chief at BP and to the government, says for those already in the business of providing electricity it represents a dangerous competitive threat.

Beckers says the move represents a number of trends, one being that oil and gas majors will start to see diminishing returns and will want to hedge their exposure and have an additional income adjacent to their business model. “I read an article last week that going forward the expectation is that more people will suffer from lung cancer being non-smokers. So the proportion of people getting lung cancer from smoking will be much smaller that those who get it from air pollution. In other words, people will become more and more conscious of the environment we live in which will amplify that drive to further decarbonisation.”

But Beckers adds the same business model problems applies to Shell as the ‘Big Six’, “just doing central large scale business is not the future and it probably applies to many sectors not just the energy sector”.

Going back to the ‘Big Six’, Beckers says they are losing market value dramatically, “some of them have chosen to create what we have seen in the banking sector, of a bad and a good business – hoping that the good business will be successful going forward.

“But the good business, and that’s true for most low carbon generation, is very capital intensive. In other words, you will need to invest more that you would in a conventional coal or gas plant, basically more money for the same size of business. In the long-term it obviously pays off because you have lower cost for fuel but it means you need money in a period where your share and your profitability has gone down dramatically and you need new investors on board.”

Beckers says the ‘Wise Minds’ believe you can only attract the new investors if you are able to demonstrate how you are going to respond to the energy transformation. “Whilst we are urging it for ‘greater good’ reasons, I think there is a very financial hard-nosed reason to change your business model which is simply that, you need new models, you need new investors and you need to give robust answers to the questions of how you are going to change.

“That’s why we have issued the report now because we see people defending what they’ve got rather than investing in where they should be going.”The report was written by sustainability-focused NGO Forum for the Future and commissioned by the Friends Provident Foundation, a charity working to create a fairer economy and better world.

The foundation’s trustee board includes CDP co-founder Paul Dickinson, responsible investment consultant Rob Lake and Big Society Capital’s Stephen Muers.

Commenting on the report, Colin Baines, Investment Engagement Manager at Friends Provident Foundation, said: “We want to see a managed and just transition that reduces the risk of stranded assets and shocks to both the economy and communities.

“As responsible investors, we will be using this report to commence shareholder engagement with the energy utilities and intend to work with other like-minded shareholders to collectively put pressure on them to disclose how they intend to improve their resilience to this market disruption.”