Power and utilities sector – Emerging Issues – Deloitte Report

Posted on August 17, 2011 by

Deloitte recently published the report “Empowering ideas 2011: A  look at then of the emerging issues in the power and utilities sector”. A set of significant factors including huge demand growth from countries such as India, China and supply side dependencies on  fossil fuels,  growth of renewables, climate change negotiation difficulties and the realization of risks associated with nuclear energy has created the ten issues for power and utility companies as summarized in the report as under

1.  Impact of Fukushima disaster on Nuclear Energy worldwide
Nuclear energy is a significant component of energy mix of countries such as France, Japan, Korea and US. The future energy  plans of countries such as India, China and Vietnam feature nuclear energy through large-scale nuclear build up programs. While  there has been great caution in the go-ahead plans of nuclear energy, Germany’s reaction has been strongest with enforcement of temporary downtime of three months for the oldest nuclear plants. One of the oldest plants has been shut down temporarily and many more are likely to be shut down too. The most significant impact the Fukushima tragedy will have on the nuclear power would be in the form of enhanced safety standards, protection against terrorist attacks and airplane crashes. This would get reflected in the greater disclosure of information to the regulators and the public, increasing the role and jurisdiction of the regulators, especially in the developed markets. In Indian context, the Nuclear Power Corporation of India has been ordered to review the safety systems and designs of all the nuclear power reactors. The Indian government would also put in place additional environmental safeguards for ensuring safety of newly proposed nuclear reactors.(Is nuclear power safe?)

2. Criticality of risk management
Power and Energy industry is one of the most regulated industries in many countries and faces scrutiny from all stakeholders. The Electric power systems are complex to create, manage and operate. The range of risks faced by investors therefore is huge – right from energy policy change as experienced in Spain to Fukushima type event in Japan to transmission losses in the Indian electricity grid. It is even more imperative for investors to create quality data management systems and analyze the project level risks at individual projects keeping in mind the broad energy policy.

3. Merger and Acquisition actitivities
Countries such as China and India are seeing large inward flow of capital in the renewable energy space. In the developed markets, the utility companies are looking at finding growth opportunities in weak markets through gaining scale. Renewable Energy continues to find interest from Private Equity and Venture Capitalist, the subsidy cuts in financially weak countries such Spain pose a threat.

4. Natural Gas in the list of energy resources
There are a number of sources available to produce electricity from – each with it’s set of pros and cons. Nuclear, virtually carbon  free and practically unlimited has safety issues and public acceptance barrier. Renewable Energies need subsidies, preferrential tariff and other incentives to be cost competitive with other sources. Coal, though not clean, will continue to be dominant source of electricity for next few decades to come. It is easy to access, though at the cost of GHG emissions as the clean coal technologies would take some time before they can be widely deployed. Natural Gas presents an interesting option being half carbon intensive as compared to coal on energy. As on June 30, 2011, and as per the Central Electricity Authority the total installed capacity of Gas based power plants in india is 17,706.35 MW. This accounts for 10% of the total installed capacity.GAIL is the main source of fuel for most of these plants. GAIL India is setting up a Natural Gas based power plant at Uran in Maharashtra with an investment of around Rs 800 crore. The plant will have a 250-megawatt (Mw) capacity.Today, India’s total gas demand is about 30 bcm, which is relatively small (about half the size of  the entire California market.)  In total, this market could grow 4-5 times in size over the next 20  years, depending on the policy variables and other factors. (Fuel Switch CDM projects based on Natural Gas)

According to BP- Statistical review of World Energy pubished in 2011. Natural gas accounts for around 10% of total primary energy consumption in India for year 2010. This number stands at 23.81% for the world. The reasons for lower natural gas consumption are less availability of natural gas, slow adoption of gas by consumers, inadequate natural gas related infrastructure in the country. The natural gas transportation infrastructure will get a boost with nine new pipelines authorized by MoPNG. India is expected to add an additional pipeline infrastructure of about 14,500 km length with design capacity to carry around 425.55 mmscmd by end of financial year 2015-16 .

5. Data Analytics for performance monitoring
Smart grids and smart meterting are becoming reality across the globe. US is expected to spend more than 60 billion dollars on  smart grid infrastructure creation in coming 20 years. India ranks third in the list of countries for smart grid investment.  The functions expected to be implemented by smart grid include Revenue management, fraud and loss prevention, demand forecasting and management and asset management. Large-scale deployment of smart grids may not be an easy path for India where power is a political issue.

6. Clean Tech
The developed markets such as US, Germany are expected to continue to lead the investments in clean tech – with a major  activity in solar, wind, energy efficiency in the form of research and development activity and Intellectual property protection.

7. LNG – Asia leads in consumption
Global LNG trade is shifting from west to east. Since 1990, world gas usage has increased by 50% and the consumption in Asia has
tripled in the same time frame. This is driven by demand from China/India and growing gas supplies in US and Australia.

8. Carbon – Future?
The economic recession has weakened the demand for carbon assets. Large scale utility/power companies in the developed  countries however need to manage their carbon exposure to be compliant to their domestic regulations. This trend may not be applicable directly to Indian companies/utilities as the global carbon markets do not impact them directly. The Indian version of the carbon trading can be seen here.

9. RE – Key trends
Driven by the growth that has been witnessed in last couple of years and the incessant growth in demand and RE commissioning plan, the RE contribution at the global level is expected to increase from 5% to 18% between 2010 and 2030.

10. Demand side management
Reducing the large scale capital investment is the driver of demand side management activities. The key elements of demand side management include enabling technology, dynamic pricing and load control. Demand side management may not be possible at a real time level given the Indian context, though it is practised through peak and off-peak tariff in case of certain consumers.

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“Empowering ideas 2011: A look at then of the emerging issues in the power and utilities sector” by Deloitte Touche Tomahatsu

The Future of Natural Gas in India: A Study of  Major Consuming Sectors. AUTHOR: Mike Jackson. PUBLISHED BY Program on Energy and Sustainable Development Working Paper #65, October 2007

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