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Power plays: How utilities can face the future

The utility industry is facing many disruptions at once. Here is how they can respond.

Focuses on the impact of energy transition along the entire value chain—looking in depth at the implications of business model innovations, challenges, and opportunities for customer-facing utility businesses—and drives McKinsey’s long-term perspective for the Electric Power & Natural Gas Practice

David Frankel

Advises electric power and industrial companies on strategy and operations, with a focus on new downstream business models and technologies

Sebastien Leger

Specializes in the long-term evolution of the energy markets and technologies as the head of our integrated power markets modeling, leads the firm's Sustainability Practice in France, and coleads the regulatory strategy and water and waste work within our European Electric Power & Natural Gas Practice

The world needs more power, and demand is growing; electricity is growing faster than any other kind of energy, with value pools growing a brisk 4 percent a year in the decade to 2025, or €235 billion. Utilities make and sell power. The International Energy Agency estimates that $7.2 trillion will be invested in the sector in the decade to 2025. Therefore, utilities should be in good financial shape and brimming with confidence in the future.

In fact, they are not. According to a McKinsey analysis of 50 global utilities, they delivered an average total cumulative return to shareholders of just 1 percent from July 2007 to July 2017. Many have lost value. What is going on here? And what, if anything, can be done about it?

Utilities are in trouble for several reasons. There is the overcapacity and low wholesale prices in mature markets. There is the rise of renewables, which have introduced stability challenges on existing networks. There are operational efficiency opportunities in transmission and distribution (T&D); even in Western Europe, which has efficient players, the gap between the best and the average performers is almost 100 percent. There is the rise of new competition from other sectors, such as the oil and gas industry. There is the fact that barriers to entry are lower than ever, given digitization, market liberalization and interest from new entrants.

To convert demand growth into profitability, utilities should consider three directions. First, go for scale, whether in geographic terms, or in specific areas such as T&D and retail. Second, embrace new technologies, for example the application of advanced analytics to asset management. Third, launch new business models, such as partnering with financial players who can offer cheap capital.

The utility industry is facing many big disruptions all at the same time. For the future to be different, and better than the recent past, utilities must be ready and willing to change. If they do not act decisively, they will face big—and maybe existential—risks.