Principal, McKinsey & Company

HEPG session, December 12, 2013

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

Humayun Tai

New utility business models

McKinsey & Company | 1

Are these headlines alarmist or “in-the-money”?MCKINSEY PROPRIETARY

McKinsey & Company | 2

Views on change

When you see a

disruptive technology

come into your space,

if you don’t embrace

it… the people who try

and cling to the past

get rolled over

David Crane,

CEO NRG

Disruptive challenges …

are not currently being

discussed by the

investment community

and factored into the

valuation

Edison Electric Institute

MCKINSEY PROPRIETARY

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Drivers + Trends = Fundamental questions

Centralized renewables

▪ Retail deregulation

▪ ROE downward trend

▪ Increasing system costs

▪ Big Data

Distributed generation

Energy efficiency

Unconventional gas and oil

Customer interest

▪ How concerned should utilities be?

▪ What should they do about it?

TrendsDrivers

+

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Where do utilities stand on these?

Growing consensus “yes” threat to 4-6% EPS growth but expected timing differs

Huge variation spanning “disaster” to source of “renergizingthe utility”

▪ What is the threat to the business model?

▪ How real, impactful, and immediate is it?

How concerned should utilities be?

▪ Is there a viable defensive play (preserve loss)?

▪ Is there an offensive opportunity (generate growth)?

What should utilities do?

Glass is half empty…or half

full?

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In Europe, value is moving to renewables and downstream

SOURCE: Industry vision McKinsey team analysis

European industry EBIT, EUR billions

1 Includes power sales and new downstream (distributed generation and storage, EV infrastructure, new downstream products and services, power flow optimization)

2 Includes smart grids

Centralized renewables

Down-stream

1428

14

Centralizedrenewables

Merchantgeneration

T&D2

Down-stream1

2020E

144

55

30

31

17

Growth in traditional T&D

6

Decline in merchant generation

16

2011

123

71

13

25

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EBITDAtoday($ Billion)

Project CAGR 5 year (%)

SOURCE: FERC, EIA Energy Velocity, EEI, McKinsey analysis

In the US, macro trends will also re-shuffle value pools along the value chain

5%2% 1% 8% 14%

GenerationWholesale/ trading

Regulated utilities/ T&D ServicesRetail

New downstream

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153

18

105

So far utilities have had to adapt – not transform – but future is going require transformation

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What does this future state imply?

Advanced

▪ Relocation of generation from HV to LV

▪ Customers become part of supply curve (demand variability)

▪ Grid management complexity increases—data needs, physics, unpredictability (T and D lines blur)

▪ Grid is increasingly a back-up machine (storage will accelerate this)

▪ Lumpy to modular shape of investments

▪ Proliferation of new products/ services (new value pools DG, EE, DR, MicroEMS, retail, EV, etc)

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Data/ OT/IT

Virtual managersDemand management

Retailers

New grid technology

BEMS

DG players

SOURCE: McKinsey Electric Power Practice

Guess who’s coming to eat dinner…..

Integrators

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Current business model roles/capabilities

SOURCE: McKinsey Energy Practice

MCKINSEY PROPRIETARY

SecuritySecurity

DistributionCustomer Transmission

Customer experience and back office

System investment and planning

Field operations

System investment and planning

Field operations

System operationsSystem operations

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Emerging business model roles/capabilities

SOURCE: McKinsey Energy Practice

MCKINSEY PROPRIETARY

DistributionCustomer Transmission

Customer experience and back office

System investment and planning

Field operations

System investment and planning

Field operations

System operationsSystem operations

Utility interface

On premises products and services

Multi-premise management

Advanced security

Intermittency planning and balancing

Advanced security

Coordinated balancing

3rd party owns

Outsourced

“Vendor heavy”

OT/IT