February 5, 2018 Read More →

Amazon, Apple, Google, Facebook and Netflix Stand to Undermine Utilities’ Growth Assumptions

Lucas Bifera for S&P Global Market Intelligence:

Consumer-facing tech giants, namely Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc. and Google-parent Alphabet Inc., known together as the “FAANG” firms, could eventually look to supplant traditional utilities’ incumbent position in the retail energy space. Some experts and investors see the existing household presence and customer relationships being reinforced by home “smart” devices such as Amazon’s Alexa, as having the potential to organically expand to include home energy services.

“The sector is not going to be isolated from the amazing growth of the FAANGS and the things that go with it,” said Jeff Holzchuch, the chairman of Morgan Stanley’s institutional securities group and global head of the firm’s power and utility group. “More and more of it is going to be driven by customer hand-held devices, efficiency, peak-shaving and things that are not necessarily capital-intensive. So there is more to wring out of the system here, without just building things.”

Rather than framing end-users as simply a “ratepayer,” electric utilities stand to benefit from viewing customers as “prosumers,” who actively choose among retail providers, rather than accepting the incumbent choice. It is a trend competitive power and retail management teams have long been grappling with, and one that presents potential threats to the traditional electric utility business model predicated on rate base growth.

“The story of the utility sector, and what it will look like over the next 10 or 20 years, I’m not sure it’s a rate-base story,” Barclays Investment Bank Managing Director Jay Hawthorn said, pointing to Google’s Nest Thermostat system. “We’re starting to see a lot of that in our discussions on the unregulated side. I would not be surprised if in the course of the next 12-to-24 months we start seeing a lot more of that dialogue on the regulated side.”

At present, more of this focus may be felt among utilities serving load into large coastal cities, a group that includes Exelon Corp., PG&E Corp., Consolidated Edison Inc. and Sempra Energy.

Shareholders of major U.S. regulated utilities have come to expect steady dividends and predictable earnings, which can constrain efforts to accommodate customers’ digital preferences and investments in platforms similar to those offered by the FAANGs. The market for these platforms, however, has been actively targeted by foreign utilities, oil majors and industrial companies, including Enel SpA, Statoil ASA and Siemens AG, which have established venture capital-like investment units tasked with snapping up promising digital technologies.

“A company like Amazon, with a simple software patch, could piggyback on existing infrastructure,” Jon Creyts, Rocky Mountain Institute managing director, said, pointing to the linkage of household appliances to govern efficiency. “You can immediately envision a case where that decision can save money for that household, regardless of the rate structure.”

More ($): Utilities may need to look more like tech giants to grow 

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