Realizing greater value in Canada's power and utility sector
A Canadian perspective on a Deloitte energy study, Which way to value?
Executives in the power and utility sector often share certain assumptions about what drives value in their industries. To better understand their views, Deloitte Research interviewed senior industry executives from U.S. power and utility companies about their immediate challenges over the next five years. These range from forecasting energy demand and regulating the market, to capital availability and reliability of infrastructure.
Canadian power and utility companies share many of these challenges — but under a different regulatory regime. "Canada has a complex multi-jurisdictional regulatory environment," says Jane Allen, leader of Deloitte's Utilities practice. "This has made it difficult for coherent and consistent policy to be developed. In the past, we have not had a positive experience with a national energy policy." In contrast, the study found that U.S. respondents were generally optimistic about their national energy policy.
Canada's power and utility sector has its own set of concerns
There is a long history of large, government-owned electricity monopolies in Canada, whereas south of the border, the power and utility sector contains many smaller, investor-owned entities. There was a great deal of consolidation activity in the 1990s in the U.S., but Allen doesn't expect to see that kind of M&A activity in Canada. "Rather than a consolidation of the existing power companies, we foresee some new power generators entering the marketplace."
Allen does anticipate, however, that Ontario's energy sector will undergo consolidation — of local distributors. "We expect to see further consolidation of the 90 or more local distribution companies operating in Ontario." Forecasts also indicate that Canadian coal and gas-fired generation is likely to increase by 2010, while nuclear power will decrease as a proportion of electricity generation.
The obligation of Canadian energy companies to ensure reliability and safety is a concern for all executives, especially after the August 2003 blackout — the largest in North American history. The outage demonstrated the fragility of the power grid and raised the issue of reliability of supply. In this environment, Allen sees accountability returning to the government and its agencies. "Government-owned power companies will focus on execution and leave policy-setting to the owners," says Allen. At the same time, private power generators will increasingly enter the markets.
What keeps Canadian power and utility executives up at night
Differences aside, Allen says that Canadian power and utility executives share some of the key challenges identified by their U.S. counterparts. And as a partner with over 20 years' experience in advising companies that generate, transmit and distribute electricity, she has her finger on the pulse of the power and utilities industry. She identifies the key issues as:
Developing new growth and revenue sources while managing risk
Maintaining market and investor confidence in a climate of regulatory uncertainty
Effectively managing the capital requirements of aging assets
Managing environmental expectations from the pubic and government
Assuring the security and integrity of infrastructure and technology
Developing cost-effective conservation and demand management programs
Dealing with the impact of shifting workforce demographics
Deloitte makes sense of these marketplace challenges
Among the executives who participated in the study, Which way to value? The U.S. Power and Utility Sector 2005-2010, most expect that the same trends and conditions that drive value creation today will remain over the next five years. However, the survey also revealed some opposing minority viewpoints ranging from those who predict tough times ahead, to those who foresee rising energy markets. The study outlines how power and utility companies should approach and prepare for asset optimization and M&A transactions under these three different scenarios.
The report's recommendations can also help Canadian power and utility companies plan their business strategies. "The study helps readers understand what issues are weighing on U.S. energy and utility companies," says Allen. "In doing so, they will find similar issues that are relevant to them in Canada."
Read the study, Which way to value? The U.S. Power and Utility Sector 2005-2010.