CERAWeek 2015: Power plenary: evolving power business models: a global perspective

IHS Vice President Tim Gardner chaired the Power Plenary session "Evolving Power Business Models: A Global Perspective." Joining him were Robert Flexon, President and CEO of Dynegy; Jean-Pascal Tricoire, Chairman and CEO of Schneider Electric; and James A. Hughes, CEO of First Solar. The session focused on how power company business models have changed, specifically addressing changes in the value chain, products, customers, capabilities, and in how firms capture value. The panelists addressed the issues from the perspectives of a merchant generating company, a solar technology company, and a power management company.

When asked what is needed to make the merchant generation business model work, Mr. Flexon reviewed a number of pressures on the industry, including natural gas prices and environmental regulation. The biggest challenge, he stated, is the tendency for stakeholders to push toward piecemeal regulations. He said he sees two business models that work in wholesale power generation: that of an integrated utility and that of a merchant generating company. The unintentional hybrid of the two creates problems.

Mr. Hughes was asked how to introduce solar energy into new markets. He stated that one of his firm's biggest challenges is the different market structures worldwide. First Solar is vertically integrated to have the scale necessary to survive in the commoditized solar market, which also enables the firm to identify and profit from constraints at different parts of the value chain. As an example, Mr. Hughes explained that while the US solar market is constrained by price, the market in India is constrained more by access to capital. In pursuing different markets, it is important to manage complexity and to have a low-cost, lean organization, he said.

Mr. Tricoire was asked about the technological narratives shaping future business model choices. He identified three trends for the industry: the continued importance of central station power; improvements in efficiency, safety and environmental impact through digitization; and the continued growth of the "Internet of Things." Mr. Tricoire focused on the third point, stating that within the next five years, there will be 20 times more machines connected to the internet than people. Mr. Tricoire stated that the "plant connected to the plug" will drive changes, mostly through the convergence of power systems, automation, and software. He said that the two most significant changes are the education of customers through access to data and the increasing importance of cybersecurity.

The next question focused on who would win as a result of new technology. Mr. Flexon stated that at least until the end of this decade, supply-side investments will still be more important in the power business and that the issues of both flat demand and shrinking supply are the most important challenges to address. Mr. Hughes agreed, citing what he called the broken relationship between power demand growth and GDP. Mr. Tricoire added that outside North America, power demand is still growing and there is opportunity. Mr. Hughes stated that his firm is interested in any market where it can add fundamental economic value through solar. Mr. Flexon said that international operations are not prudent for his firm, considering the increased risk and complexity.

When asked about future opportunities, Mr. Tricoire singled out the industrial sector as good customers aware of how efficiency and environmental issues affect their bottom line. He also cited the construction industry as one that could see improvements from better power management technology that it had not yet adopted. Mr. Hughes was asked about distributed generation (DG) as an opportunity, and stated that with such low penetration of solar worldwide, DG is not needed for the company's expansion. He said that solar could, with grid support, reach 30-35% penetration before having integration issues, and that total worldwide penetration was currently between 2% and 3%. Therefore, although First Solar would look at DG opportunities tactically, the utility-scale opportunity is large enough that the DG business is not required for success.

The final question was on evolving human resources needs. Mr. Tricoire said that businesses need to get closer to customers and that connectivity software is supporting this trend. He also stated that there are people within power companies who can already rethink the business model. Mr. Flexon spoke to the issue of an aging workforce and also noted that bringing in better people is a way to improve the company's portfolio. Mr. Hughes stated that understanding of the new technology needs to flow into existing processes, and people who can understand new technology are needed to enable this transition.

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By Aaron Marks April 23, 2015

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.