When monopoly providers start getting concerned about their future financial performance, some interesting changes must be afoot. Yet this is the new cry of electricity generation providers in the US, and also in Europe. But just how concerned should their owners (investors and often public service pension funds) be about the risk of falling enterprise value, amongst what has historically been the most solid of investments?
Over the past decade power has been literally moving into the hands of the Buyer. This is already generating talk in the US of a possible ‘death spiral’ in performance. This vortex is steadily accelerating and powered by a combination of forces. The cost of power has been increasing nearly every year since the 1970s, eating into disposable incomes. Against this, the desire for independence, savings and the dramatic falls in the entry price to generate ones own energy through solar, wind, biogas etc. (known as distributive power) is attracting consumers and businesses alike.
Even though many Buyers will not fulfil all of their power needs, it is easy to see the ‘death spiral’ rationale. Large monopolies with, high fixed costs who have become accustomed to the luxury of passing on prices to Buyers, have built operating models that are very sensitive to any falls in the revenue. The response to a small fall in demand is therefore is to increase prices. In the scenario that is emerging, such a move would only serve to incentivise Buyers further and accelerate the move to distributive energy.
Much of the response from supplies so far has been predictable. Companies are lobbying both government and regulators as they seek ways to increase or re-distribute their fixed costs model. They are also making the case that the trend is unfair to their Buyers on low incomes who may need to bear a greater proportion of the fixed cost of operating the network but do not have the resources to opt-out.
But there is a strong case that they should not rely on such measures as a performance safety-net. Reviewing operating models and tuning in to the new opportunities brought by these changes may offer a better prospect for longer term performance and therefore a better solution for investors.
And there are plenty of new opportunities and options if some new eyes are applied, including the chance to become profitable players within expanding areas of the distributive power (as it is called) market itself. Some suppliers are already making forays into this area. There is also room for a re-view (as in look again) of assets to see how they might be leveraged in new ways. Given their monopoly positions one of the biggest assets should stem from their relationships with Buyers. Unfortunately their history and high level of complaints will create some major headwinds here. Before Buyers will be open (and even appreciative) to the purchase of new services sustained effort and investment will be required to re-engage and build real value back into the relationship.
And then there are the cultural hurdles. Moving from over a century of operating under a single business model such change is unlikely to come easily. New eyes and open minds are necessary catalysts.
John Greenhough
thegreenfieldorganisation 