MarketLine Blog

Electricity: change in the global industry

It’s an economic rule of thumb that the richer the country, the greater its demand for electricity. As the global economy grows, this correlation should be good news for the companies that generate and sell power.

GDP-power1

Things are actually a little more complicated than that. The power companies are operating in an industry that is changing in several ways.

Most governments are now committed to reducing their countries’ greenhouse gas emissions. Power generation is a significant contributor: in countries where thermal generation from fossil fuels is predominant, this industry can account for as much as 40% of total carbon dioxide emissions. Power companies are under pressure to reduce their use of the more polluting energy sources, particularly coal, which produces the largest amount of carbon dioxide per unit of electricity generated.

However, the transition from fossil fuels to solar and wind power is not straightforward. These renewables offer unpredictable output, depending on weather conditions, which makes it difficult to maintain a stable baseline output. Also, whereas conventional power stations are large, centralized, and few in number, it is common for renewables to be generated in a large number of much smaller facilities – perhaps as small as a few solar panels on a factory roof. This “distributed generation” brings its own engineering challenges, as smart grids are needed to connect the power sources to end-users effectively. Nuclear power is also low carbon, but the 2006 Fukushima disaster, among other things, has made it less attractive to governments.

While global demand for power is increasing, some developed economies are seeing stagnant or even declining electricity consumption despite continued economic growth. This is a consequence of greater energy efficiency in industrial processes and domestic appliances, and more widespread acknowledgment of the need to reduce carbon dioxide emissions. Power companies based in the developed economies often lack exposure to emerging electricity markets where demand is growing.

Finally, there is a long-term liberalization trend in electricity markets, a result of government policy. The separation of the natural-monopoly elements of the industry (transmission and distribution) from the contestable generation and retail elements, development of power wholesale markets, freedom for customers of all sizes to choose their electricity supplier, and the encouragement of competition for the incumbent utility companies is now virtually complete in Europe, and ongoing but less advanced in much of Asia-Pacific.

A recent MarketLine study revealed an acute awareness of these changes among the leading industry players. To find out more about the transformation that is occurring, and how these companies are dealing with them, read “Top 10 Electric Utilities: Industry Issues and Strategic Responses”.

 

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