New utility

business models

Humayun Tai
Principal, McKinsey & Company
HEPG session,
December 12, 2013
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited

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Are these headlines alarmist or in-the-money?

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Views on change

When you see a

disruptive technology
come into your space,
if you dont embrace
it the people who try
and cling to the past
get rolled over
David Crane,
CEO NRG

Disruptive challenges
are not currently being
discussed by the
investment community
and factored into the
valuation

Edison Electric Institute

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Drivers + Trends = Fundamental questions

Drivers

Trends

Unconventional
gas and oil
Centralized
renewables
Distributed
generation
Energy
efficiency

Retail deregulation

Big Data

ROE downward trend

How concerned
should utilities be?

Increasing system
costs

What should they

do about it?

Customer
interest

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Where do utilities stand on these?

What is the threat to the

How concerned
should utilities
be?

business model?

How real, impactful,

and immediate is it?

Is there a viable
What should
utilities do?

defensive play
(preserve loss)?

Is there an offensive

opportunity (generate
growth)?

Growing consensus
yes threat to 4-6%
EPS growth but
expected timing differs

Huge variation
spanning disaster to
source of renergizing
the utility
Glass is half
emptyor half
full?
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In Europe, value is moving to renewables and downstream

European industry EBIT, EUR billions

144
Downstream1
T&D2
Centralized
renewables
Merchant
generation

123
14

14

16

17
6

31

25
13

30

71

2011

28

55

Decline in
merchant
generation

Growth in
traditional
T&D

Centralized
renewables

Downstream

2020E

1 Includes power sales and new downstream (distributed generation and storage, EV infrastructure, new downstream products and services,
power flow optimization)
2 Includes smart grids
SOURCE: Industry vision McKinsey team analysis

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In the US, macro trends will also re-shuffle value pools along
the value chain
New downstream

Generation

Wholesale/
trading

Regulated
utilities/ T&D

Retail

Services

105
EBITDA
today
($ Billion)

18
5

Project
CAGR 5
year (%)

2%

1%

5%

8%

14%

So far utilities have had to adapt not transform but

future is going require transformation
SOURCE: FERC, EIA Energy Velocity, EEI, McKinsey analysis

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What does this future state imply?

Advanced

Relocation of generation from HV to LV

Customers become part of supply curve (demand

variability)

Grid management complexity increasesdata

needs, physics, unpredictability (T and D lines blur)

Grid is increasingly a back-up machine (storage

will accelerate this)

Lumpy to modular shape of investments

Proliferation of new products/ services (new value

pools DG, EE, DR, MicroEMS, retail, EV, etc)

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Guess whos coming to eat dinner..

Data/ OT/IT
New grid technology

Integrators

Retailers

Demand
management

SOURCE: McKinsey Electric Power Practice

DG players

Virtual managers
BEMS

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Current business model roles/capabilities

Customer
Customer experience
and back office

Distribution
System investment
and planning

System investment
and planning

Field operations

Field operations

System operations

System operations

Security

SOURCE: McKinsey Energy Practice

Transmission

Security

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Emerging business model roles/capabilities

3rd party owns

Outsourced
Vendor heavy

Customer

Distribution

Transmission

Customer experience
and back office

System investment
and planning

System investment
and planning

Utility interface

Field operations

Field operations

On premises products
and services

System operations

System operations

Multi-premise
management

Intermittency planning
and balancing

Coordinated
balancing

Advanced security

Advanced security
OT/IT

SOURCE: McKinsey Energy Practice

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