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Facing up to uncertainty in the energy sector

Winning in an uncertain world means looking beyond traditional risk management

The current economic climate presents business leaders with new challenges. PA’s Managing Uncertainty survey suggests that that those who are well-prepared, bold and decisive can move ahead of the competition, increase market share and even acquire struggling competitors. In the energy sector, this means utilities, generators, network operators and associated technology providers making high-value investment decisions and acting on them now.

As business leaders, however, we are not used to managing uncertainty. We are more used to managing risk: important business factors may move in unpredictable ways, but their variation can be captured by statistics or a distribution curve. Major structural changes to the business environment, on the other hand, cannot be predicted by analysing a few numbers. Hedging against movements in the sterling/euro rate may be familiar, but planning to win after a disorderly fragmentation of the Eurozone is not.

In the UK, uncertainty about the country’s need for new generating capability is compounded by a lack of clear governmental policy on how this will be attained. At the same time, the Department of Energy and Climate Change has announced that gas will play a prominent role in the energy mix and that subsidies for renewables will be rebalanced. This suggests to us that investment in the green agenda is being brought into question by the financial crisis and raises concerns about long-term energy security.

In this uncertain environment, scenario planning can help your business decide on the bold, strategic moves that are needed to achieve long-term success.

Effective scenario planning follows three key steps:

1. Understanding different scenarios’ specific impact on your business

The view of our energy experts is that future generation in the UK will be shaped by two key factors: 1) the extent to which the government decides to prioritise economic growth over the low-carbon agenda and 2) the rate of development of new energy technologies. In combination, these two factors generate four scenarios, each with different dynamics. For example, the combination of a relaxation of the low-carbon agenda with rapid development of new technologies could  lead to the building of new fossil-based plants and the importation of  energy from greener sources, all justified by economic recovery. In such a scenario, the UK’s energy supply will fragment and become dependent on technology and energy from multiple sources and from many countries. A winning strategy in this scenario could include investment in selected fossil technologies as well as in technologies that make consumption more efficient.

In contrast, the combination of a maintained low-carbon agenda with slow development of new technologies would lead to the freezing of new fossil-based plants and greater emphasis on energy efficiency, coupled with importing from greener sources. In this scenario, the UK’s energy supply will tend to become more expensive and dependent on proximate leaders in renewable generation (eg Denmark and Norway). A winning strategy in this scenario could include major investment in technologies that make energy consumption more efficient.

2. Identifying strategic relationships for long-term success

Each scenario you identify will require you to start building strategic relationships that give your organisation the options necessary for long-term success. If you need access to investment funding but have identified a scenario in which UK government funding will be minimal, for example, you might develop relationships with sovereign wealth funds immediately so as to gain access to liquid capital if this scenario becomes a reality. Similarly, if you are a utility committed to ensuring supplies for customers but have identified a scenario where the UK depends on supplies from other countries, you should start building alliances with generators beyond the UK now.

3. Taking bold strategic moves and take them now

As the examples above show, many strategies will be successful under one scenario but lose money under another. Some, however – such as investment in technologies that make consumption more efficient – will be successful under all scenarios. The winning businesses move fast on those strategies which are robust under all scenarios, and take steps to keep the option to act quickly on the scenario-specific strategies. 

The energy sector already boasts good examples of companies that have made important moves in response to changing markets. For example, this year BP announced it was winding down its solar division saying it can no longer make a profit following the commoditisation of solar energy. The company has taken this bold move while steadily increasing its investment in alternative energies such as biofuels and wind, in which they invested $ 1.6 billion in 2011. 

We have worked closely with leading energy organisations to understand the future of the industry. Most recently we held a seminar with a number of key players in the UK energy sector including the Crown Estates, Drax, Elexon, ESB Energy International, International Power, Ofgem, RWE and the UK Atomic Energy Authority at which they were able to explore the key scenarios and the impact on their own businesses. We found that many companies do carry out a limited form of scenario planning – for example looking at different price scenarios – but do not necessarily map out the radical scenarios which would follow, for example, from the fragmentation of the Eurozone in order to determine how they might mitigate the problems and emerge as a winner from the resulting turbulence.

We are also working closely with a range of other organisations – including global leaders in consumer goods, business and financial services, energy, manufacturing and professional services – to make them more agile and responsive as they meet the challenges of tomorrow. We have taken many of these companies through scenario planning exercises, looking at impacts of a Eurozone fragmentation, a hard landing in China or a global double-dip and working out how they could benefit from the shifts in market share that will follow. 

For a copy of our report on managing uncertainty in the energy sector or to find out how PA can help you use scenario planning to prepare a strategic response, contact us now.

Contact the energy and utilities team

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