SECTOR VIEW

Switched on to change

Europe’s energy sector is being transformed. What business models are companies adopting to thrive in this new environment?

The energy sector in Europe has been transformed in recent decades by deregulation and the emergence of renewables. Historically, incumbent companies owned generation assets. Now there is a multiplicity of players, including former incumbents, private equity firms (which are consolidating assets, especially in sectors that continue to be regulated), municipality-owned generators, as well as enterprises playing an entirely new role in the energy market.

“This latter type of company operates in a very different way to traditional energy players,” says Eva Parro de la Paz, director, sustainable project finance at ING. “They are essentially matchmaking and focus on connecting buyers of renewable energy with renewable projects. As recently created companies they are often good at IT, marketing and leveraging the green angle: it makes them stand out from their competitors in the energy sector.”

As the energy market evolves, former incumbents are also adapting and implementing new business strategies.  “The electricity supply business has low margins so incumbents are looking for new opportunities. To retain customers and strengthen the bond with them, many are providing advice, offering smart metering apps, insulating their homes or supplying solar panels,” explains Parro de la Paz.

Parro de la Paz likens developments in the energy market to the telecoms market 20 years ago. “Delivery of a service, which is a volume business with heavy capex and thin margins, became the foundation of a business model that involved hardware sales, insurance and business services,” she notes. “Today’s energy companies want to sell or lease solar panels to a customer, for example, because it creates a relationship that lasts up to 15 years (depending on the subsidy regime) rather than a short-term one where a customer might move supplier every year to get the best prices.”

While encouraging customers to generate their own power might seem to be against the interest of energy companies, Armand Ferreira, director, sustainable finance at ING, says that companies know that “if they don’t do it, someone else will.” Perhaps most importantly, former incumbents are recognising the value of the information their customers generate. “Retaining customers through initiatives like solar panels gives companies access to more data,” he notes. Parro de la Paz adds: “Data is valuable. It can show, for example, the efficiency of a customer’s dishwasher so the company can then advise on more efficient alternatives.”

Energy companies are also taking an open-minded approach to how they drive the uptake of solar panels. “Solar energy is being marketed in new ways, for instance, with some energy companies emphasising the potential returns available at a time when low interest rates mean returns on savings are poor,” explains Ferreira. “At the same time, companies are exploring new financing models with banks. These include lending to enable more people to purchase or lease solar panels; deals to supply solar energy to bank customers; or support to help communities to crowdsource funding for solar fields that generate power for their area.”

A cautious approach in oil and gas

While business models in the energy supply business are evolving rapidly due to regulatory changes and new entrants, change in the oil and gas sector is notably slower, according to Mark Sisouw de Zilwa, technical director, oil and gas at ING. “Certainly all the majors are thinking about what the industry will look like in the future,” he says. “However, there is no consensus on how fast oil and gas will be phased out in order to enable the world to achieve its 2100 neutral greenhouse gas target. But there is widespread agreement that it won’t be soon.”

A recent report by Sisouw de Zilwa and his team noted that cutting the use of oil for transport will be critical to achieving the 2° target set down in the Paris agreement. “Drastic measures will be necessary, such as the switching of light vehicles (which account for 31% of oil use) to electric power,” he says. “However, while our visibility of the timetable for such changes is increasing – with the announcement of a 2040 target for elimination of combustion engines in the UK, France and, most likely, China – there are still many uncertainties.”

The majors don’t see a significant impact on their business from electric vehicles until 2030, according to Sisouw de Zilwa. “That’s a long time away, so while there is a broad long-term move by many companies to increase their emphasis on gas – demand for which is likely to continue to rise for the foreseeable future – there are no plans to split companies or divest oil assets.”

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The View is the online magazine of ING Wholesale Banking