Utilities face challenging environment as winds change

16 July 2019 Consulting.us 4 min. read
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Utilities in the US will see considerable market changes in the coming decades, with stagnating load growth, increased impact from environmental conditions on their infrastructure, and a need to shift to different forms of production and distribution. Investors remain positive, however, with growth expected at around 6% in the near term. Future proofing the industry could require diversification in core competencies to broaden revenue streams.

The utilities industry has for decades offered relatively stable returns at relatively low risk. Yet growth in the demand for electricity is expected to remain relatively flat over the coming decade as energy efficiency improves while demand from electric vehicles expands. New analysis from Bain & Company explores the industry and what change will mean for investors in a report titled "New Strategies for Utility Growth."Most investors consider EPS growth of 6% or greater attractive

Investors surveyed remain relatively positive about the prospect of the utilities industry. The model used by utilities is unlikely to be disrupted in the coming years, with 70% of respondents saying that they believe the integrated utility model will continue for the next five years, while 11% somewhat believe so. This optimism arrives in the face of various wider changes, such as a transition to sustainable energy, increased regulatory scrutiny, and decentralisation.Growth in the core regulated utility business

In terms of what are seen as important factors for decision making in electric utilities, good regulated earnings growth potential was seen as "very important" by 90% of respondents. Good total shareholder return came in second at approximately 85%, while management credibility is noted as very important by 80% of respondents.

Overall, investors remain keen on regulated investments – yet the firm notes that challenges for the industry are on the horizon. The challenges stem from a combination of new technologies, changes in priorities, and risks from natural disasters.

One substantial change is that load-growth is unlikely to be significant over the coming decade, with increased demand on the one side reduced by increased efficiency on the other. Meanwhile, kWh rates increases will face strong downward pressure from competition, self-sufficiency, and regulators – struggling to even to meet inflation and creating uncertain choices for some operators.

Finally, regulators are becoming increasingly sharp around planning, with lowest cost models no longer seen as sufficient in many instances. 22 major utilities and their long-term EPS projections

When it comes to projected growth for key US utilities, the report finds a relatively rosy picture – with five companies expecting growth of 6-8%. More than half expect the long-term EPS of companies to be relatively stable at between 5-7%, meanwhile. Two companies are projected to have EPS at 4-6%.

Investors are also relatively happy with earnings per share somewhat lower than the wider investment landscape. Around a third are happy with 6% CAGR, around a third at 0-6%, and around a third at between 6-9%.Building new growth core can be rewarding but time consuming

The firm notes that, given the current trends in the market, a number of strategies may need to be deployed to safeguard future sustainability in the sector. One such move is consolidation through M&A; another option cited by Bain is transitioning to a new core-business as demand, regulation, and global requirements shift towards more sustainable, decentralised, and localised energy production and distribution.

A number of global firms have managed to successfully transition from one core competence to another – although this takes time. IBM for instance, shifted from hardware to software and services, Netflix from DVDs to streaming and NextEra Energy from regulated utilities to the inclusion of a second core growth engine. The firm notes that though sticking close to core competencies reduces overall risk, keeping on core growth also remains important.