Utilities in the Downturn: Strategic Responses in B2B Energy Markets

Table of Contents

DATAMONITOR VIEW

• CATALYST
• SUMMARY

ANALYSIS

• B2B demand for gas and power is contracting across Europe
  • The global economy is contracting; for the first time in decades we are witnessing a reduction in global trade
  • The European economy is in recession but the contraction is expected to ease from 2010
  • Analysis of energy consumption by sector against GDP composition by country can add additional insight into energy consumption outlook
  • Utilities will not be immune to the recession; energy consumption does respond to contractions and expansions in the economy
• Utilities operating in B2B markets are likely to find the recession more difficult to manage than those focused on B2C
  • Liquidity contraction will present M&A opportunities for the more creditworthy market players
  • Utilities have employed different tactics for raising funds as a means to finance debt
  • Utilities must augment their view of market segmentation to tailor their response according to specific risks
  • Utilities essentially face four potential demand-side risks resulting from the economic downturn
  • Utilities can assess clients according to volume risk and credit risk
  • According to these risk metrics, Datamonitor scores the economic sectors on vulnerability in a downturn
• Most sectors in the European economy will contract in 2009 but rebound in 2010
  • Analysis of energy consumption by sector reveals that several of the largest consumers carry a high degree of volume risk
  • Europe' s steel sector is set to contract sharply through 2009, with some signs of possible recovery in early 2010
  • The struggling construction sector serves as a useful bell-weather for related industries and concurrently for energy demand
  • Europe' s automotive industry is struggling with the credit crunch, but remains fundamentally viable, unlike manufacturers in the US
  • The retail sector is struggling with reduced credit availability and low consumer confidence
  • Over-capacity in the UK retail market means that the contraction will be even sharper, producing credit risk in this sector
  • Different sections of the retail sector will suffer, as over supply and falling demand force business out of the market
  • Manufacturing has suffered an extremely sharp downturn, but the rate of contraction is already slowing
• Utilities are not powerless to act; a range of weapons can be deployed to minimize the threats to revenue arising from B2B demand contraction
  • Utilities can deploy their response according to client-specific risks
  • Supply of credit insurance has tightened as firms have sought to protect themselves from bad debt by effectively out-sourcing risk management
  • Margining is appropriate in sectors with many small firms whose output does not determine energy demand, such as retail
  • Credit scoring is generally of limited value, but can help in targeting stable clients when margining revenues
• Although turbulent, the B2B market offers safe havens and opportunities
  • State institutions and regulated private industry represent a safe haven for utilities during the downturn, but account for little overall consumption
  • Remedies should be deployed according to the risks that a client entails under the current market conditions
  • Utilities should shape their portfolio according to market size, and the volume and credit risk that each sector represents
  • The nature of the credit crisis means that industrial output should not continue to suffer beyond 2010; energy demand will pick up albeit slowly
  • Large utilities are in a position to make the recession work for them through cheap acquisitions and investment in infrastructure

APPENDIX

• Further reading
• Ask the analyst
• Datamonitor consulting
• Disclaimer

FIGURES

• Figure: EU27 macroeconomic Indicators, 2005 - 10
• Figure: Eastern Europe will see a steep decline in energy demand
• Figure: There is a weak but positive correlation between energy consumption and economic growth
• Figure: B2B energy markets are more income elastic than B2C
• Figure: Utilities' Revenue Threats
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• Figure: UK energy consumption by economic sector
• Figure: EU steel output year-on-year percentage change, 2004 - 10
• Figure: EU construction output year-on-year percentage change, 2004 - 10
• Figure: EU automotive industry output year-on-year percentage change, 2004 - 10
• Figure: Consumer confidence index 2008 - 09
• Figure: Average annual growth rate in retail volumes across four decades
• Figure: Individual Retail Sub-Sector Outlooks
• Figure: The UK retail sector is set to shrink by £1.7 billion in 2009
• Figure: EU manufacturing contracted sharply in H2 2008
• Figure: Risk Solution Matrix
• Figure: Sector Profiles, Risks and Responses
• Figure: The traditional view of segmentation cannot respond effectively to recession
• Figure: Relative risk and size of sector by energy consumption
• Figure: Average EU carbon steel price indexed to February 2007