January 22, 2020

The Digital Transformation of Small Utilities in Germany - Transmission & Distribution World

In December 2018, Hitachi Ltd. announced an agreement to buy ABB’s Power Grids business for US$6.4 billion. On the Hitachi side, the move was seen as a grid grab that would enable the Japanese conglomerate to compete head-to-head with the likes of General Electric and Siemens AG in the electric sector. Not more than a few months later, General Electric began selling off many of its power businesses, while Siemens spun its gas and power businesses off into a new company called Siemens Energy.

What might be behind some of these power play spin-offs? And, are there more to come?

Behind the Spin-Offs

The first factor seems to be activist investors pushing for simplified pure-play companies. For ABB, that meant dropping its lower-margins grid business to focus on robotics and factory automation. In addition to carrying ABB’s lowest return on assets in 2018, the company’s grids business saw its third consecutive quarterly slide in the third quarter of 2018.

On the other hand, Hitachi has almost 800 separate businesses, spanning from construction machinery to health care and nuclear power. The company has stated it wants to streamline and focus on four core areas going forward—one of which is power and energy, thus the reason for ABB’s Power Grids business.

Hitachi may have other things in mind, as well. For instance, by getting a piece of the power grid, the company may be able to help drive a global shift away from coal and toward renewable energy. The company also may be lining up grid services as a platform on which to deploy and connect its equipment to the massive internet of things (IoT) market, connecting sensors and devices through the internet for building controls in homes and businesses that can marry the opportunity of smart devices and smart buildings with the smart electric grid Hitachi will now help to build.

“We believe that both companies will complement each other,” said Anders Sjoelin, lead division manager, ABB Power Grids North America. “Together, they cover the global energy value chain from generation to transmission and distribution. In addition, Hitachi sees areas like the integration of renewables into the power grid, smart mobility and cities as strategic pillars where ABB Power Grids can contribute significantly with its leading technology solutions.”

The Siemens spin-off is of a slightly different nature, but perhaps has a similar goal. In May 2019, the German-based industrial giant announced the spin-off of its Gas & Power (GP) businesses as part of its Vision 2020+ strategy to focus its core competencies on digital industries and smart infrastructure. To be formed out of what was Siemens GP, the new company will be an independent one in which Siemens projects to have 30 billion Euros in orders and 80,000 employees — based on former GP staff and the transfer of the Siemens’ renewable energy business, Siemens Gamesa Renewable Energy (SGRE).

“With Vision 2020+, we’re further sharpening Siemens’ focus and making our businesses faster and more flexible,” said Joe Kaeser, president and CEO of Siemens, in a conference call with reporters announcing the move. “These changes are laying the foundation for sustainable economic success in growth markets that will be attractive over the long term. We’re also creating solid perspectives for those businesses that have to prove themselves in the structural transformation now underway and address new growth fields.”

Kaeser added the new company will be well-positioned to offer a wide range of services in the electric industry, from power generation through gas-fired turbines and wind turbines to oil and gas services and high-voltage transmission. “The success of Siemens’ businesses of the next generation will be determined by new factors,” said Kaeser. “Breadth, size and a one-size-fits-all approach will be replaced by focus, speed and adaptability.”

Meanwhile, Michael Sen, who was chairman of Siemens Healthineers, will take over the reins of Siemens Energy.. "I am now putting all my strength into the upcoming spin-off and the successful future of that exciting company," Sen said.

For Siemens, the company’s Digital Industries and Smart Infrastructure operating companies will comprise its future industrial core, to be supplemented by company-wide technology and service units such as Siemens Healthineers and Siemens Mobility. Plans call for Siemens Energy to be completely spun off with its own stock exchange listing in April 2020.

General Electric also is in the game of selling off power divisions. In March 2019, the company unveiled a $3.25 billion deal to sell its distributed power business, focused on the building of smaller gas-fired turbines used in backup, remote or cogeneration power opportunities. The sale to private equity firm Advent International includes the company’s Jenbacher and Waukesha brands as well as manufacturing plants in the U.S., Canada and Austria.

GE’s rationale apparently is different from that of ABB or Siemens, however. The company must shrink itself to pay down significant debt, a result of years of troubled acquisitions. Earlier this year, GE was kicked out of the Dow Industrial Average after more than a century on the prestigious company stock listing. For GE, the distributed power business is just the latest in a line of businesses being spun off, including both its fabled light bulb unit and GE Transportation, the company’s 111-year-old railroad division.

The power business was not helping GE, as the company saw declines in revenue in recent quarters as power plants started moving more toward renewable energy to replace fossil fuels, especially coal.

Underlying Currents

Though GE’s move differs from the moves of Hitachi-ABB and Siemens, all three signify changing times in the power and utilities sector, something that is more likely to continue than abate in the near term. “These are definitely changing times for utility and energy companies,” said Scott Smith, U.S. power utilities leader for Deloitte, before adding, “It is going to continue. Decarbonization of power, energy efficiency, renewables, the customer experience being different — [power companies and utilities] are going to have to adapt quickly, and I think they are.”

In his 2019 U.S. Power and Utilities Industry Outlook, Smith wrote about what he calls the new normal for the sector, which features a “period of transformation and profound change driven by technological and competitive forces, as well as changing customer expectations.”

“This is partly generational; younger users have become very comfortable with apps, social media, and always-on connectivity,” Smith stated. “And, it’s also partly a spin-off from the increasing ubiquity of e-commerce in all spheres, for products, services and entertainment. These developments are coming from all directions, not just the big-tech giants that are household names. We’re seeing evidence of this new normal in electricity customer preferences—the desire for choice, in rate plans, in sources of delivered electricity, and in options to tap into behind-the-meter or localized sources of generation, or to integrate electricity with other home services. Commercial and industrial customers are looking to combine more cost and utilization control with opportunities to self-generate and while setting themselves and their suppliers ambitious targets to reduce emissions from their energy use.”

On the generation side, Smith argued, three dominant trends have been in place for years and look to continue:

  • Displacement of coal-fired generation
  • Steady growth in natural gas
  • Rapid growth in wind and solar power.

Smith pointed to decarbonization as the driver but added these trends also have created opportunities for both new technologies and new business models in the sector.

On the new technologies side, Smith noted utilities are developing apps to give customers greater control over energy usage, even managing heating and cooling, lighting and window blinds from smartphones. Some utilities are entering the IoT market by offering smart appliances, such as washing machines, thermostats and hot water heaters. Wireless meters and sensors enable users to monitor energy use in real time, receive alerts if bills deviate too far from the norm, get outage alerts, and even get estimates of crew arrival times in the case of storms or widespread power failure.

“Customer retention is no longer just a question of reliability and cost,” Smith said of this new normal in the power and utilities sector. “It is now a question of providing options, being connected, and allowing customers more control over their energy use.”

When it comes to technology, utilities and power generators exist in an ecosystem ripe with opportunity, Smith contends. “We could point to sources of generation, with the cost performance and scalability of wind and solar continuing to improve year over year at a rapid pace; to grid operations, where smart-grid technologies provide real-time information into all aspects of grid status (not just electron flows) and where batteries are now able to provide multiple services, such as load shifting, frequency regulation and localized reserves; to distributed or localized sources of energy for which utilities can partner with customers or communities to install and operate power systems customized for specific needs,” Smith wrote in his report.

Smith summed it up that all this combined is opening the door for new business models for utilities as well as market structures allowing for the entry of new, nontraditional players. He specifically cited the rise of behind-the-meter generation, community energy projects and new options for households, such as rooftop solar coupled with battery storage. “Utilities have a tremendous opportunity to develop new profitable businesses around offering services related to these developments—from installation, maintenance, and reliability services to tracking and load balancing with on-grid resources,” Smith wrote.

Smith sees the sector evolving into an “entire energy tech ecosystem” that could include traditional utilities, large device makers, tech companies, infrastructure players, and small- to medium-sized venture-backed energy technology companies and a host of other business models.

Smith proclaims himself “not surprised at all” by news of power and utility sector spin-offs and realignments. In fact, he predicts that, too, is part of the new normal for the sector.

“By definition, the future is uncertain, so we know there will be surprises along the way,” Smith wrote in his market report. “The electric power business has proved increasingly resilient to some kinds of surprises, like hurricanes or snowstorms. Other kinds of surprises, from technology and new competition to customer expectations, may require more deep-seated cultural change. This promises to be an interesting year.”

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