Necessary changes of the core activities of power companies

Power companies must re-design their core activities in order to hedge future profits against the severity of climate risk that radically changes profit drivers. A fundamental change of core activities is required in order to create new perspectives for operating in transforming environments, and to survive in new market conditions. This applies to power companies as well that have to meet the expectations of customers and policy makers. Power companies need to develop expertise in reacting to climate risk, in order to identify necessary infrastructure and system upgrades, operational changes and adaptation options. The need to re-design business models in the power sector, shifting them towards green developments, also results from the attitude of financial institutions and investors. They have already identified long-term benefits of investing in accordance with Environmental, Social and Governance (ESG) principles, and require for entities requesting capital to act in a way that respects the environment and climate. Activities that reduce climate risk, change globally the power production structure that becomes greener – RES-based. The future shape of the power sector differs fundamentally from the pre-existing fossil-fuels based industry.

There are various perspectives that need to be considered when designing responses to climate risk – deep and urgent decarbonization of power production, based on the increasing competitiveness of RES, as opposed to fossil-based power plants, is the most visible now. RES have globally become the “target” power sources, but it also creates challenges concerning how to fund necessary investments in the environment (that is, for green finance). It is also essential to ensure the security and flexibility of power supply via, among others, large scale power storage, decentralized power supply, peer-to-peer power trading, and highly flexible power plants. As RES technology matures alongside market innovations, it shifts the operational activity of power companies towards carbon neutrality. Pre-existing business based on fossil fuels starts to disappear and new technology determines the decisions concerning the core activities of power companies.

The challenge here lies in the determination of an optimal technological mix of core activities, with regard not only to power production, but also to power grids, customer connectivity or the digitalization of operational activities. The technological context of defining future core activities influences the long-term sustainability of economic profits in a business environment moving towards hedging against climate risk. Technological developments eliminate pre-existing competitive advantages, making it necessary to implement new, innovative technical and trading solutions. Technology can give an advantage, but when a new solution appears and technological novelties quickly become the standard, power companies must develop too. Changes in the conditions of the power market encourage new no-asset entrants, from outside the power industry, to generate profits based solely on trading. The development of RES and power storage technologies, opened the power market to new companies, supplying photovoltaic installations and power storage batteries. These have created virtual power plants, taking advantages of power sales from thousands spread out installations, during periods of prices increase in intraday (buying and selling power at a power exchange on the same day as its delivery) and balancing markets. RES gathered in such virtual power plants replaces production once limited to traditional power plants. The abovementioned trends force power companies to decommission coal power plants. Incidentally, disinvestment of assets that don’t secure future profitability helps collect funds necessary for the transition of the core activities of power companies[1].

Climate risk forces customers to minimize their carbon footprint and de-carbonize industrial processes in order to fight climate change. It creates a significant challenge for power companies to respond to such needs, which make financial institutions commit to fund only green investments reflecting the process of significant capital reallocation – away from assets characterized by GHG emissions and towards carbon-neutral projects. It is the confirmation of the global trend of integrating finance and environmental protection, as the after-effect of the Paris Agreement and the definition of global climate targets. This issue was confirmed during the COP-26 in Glasgow. Power companies shall respond to the needs of societies and the industry by changing their operational activities towards climate neutrality, which will be an important determinant of future competitiveness. The creation of a low-emission economy becomes a key element of staying competitive when customers leave oil and fossil fuels. Power companies cooperating with other business should create partnerships with their customers, for the de-carbonization of their operational activities, by switching to renewables, bio-fuels and the use of green hydrogen, power storage, demand flexibility and energy efficiency. This will speed up the transition into climate friendly manufacturing technologies. In fact, both industry and society perceive the acceleration of green transition and minimising carbon footprints as an additional impulse to future development and to value creation.

The change in the power production mix generates challenges for the stability of power grids that must become bi-directional. It creates a new approach to power supply management increasingly based on decentralised power production. Power grids need further digitalization and technological advancement. Customers, using digital solutions, can increase efficiency of power usage and reducing energy costs. Hence, power companies shall use technology and available know-how (existing technical expertise, deep knowledge of power networks, capital engineering capabilities) to operate in the new environment. Only a fundamental transformation of operational activities and breakthrough technologies will secure the future success of existing power companies.

[1] Ownership of coal power plant requires large capital expenditure, what is unjustified in the conditions of worsening competitiveness of coal-fired power plants.