From the top of Arthur’s Seat, the extinct volcano in Edinburgh that rises more than 250 metres above sea level, the view out east towards the North Sea will forever be altered.
For nearly five decades, the two 149m-tall chimney stacks of the coal-fired Cockenzie power station dominated the skyline until 2015, when they were blown up by the site’s former owner, ScottishPower, the UK arm of Spanish utility giant Iberdrola.
The deal was just one of many transactions by the traditional European utility companies in recent years.
More deals and strategy overhauls are to come, according to company executives and analysts, as the traditional power companies find themselves in a battle for survival.
The threats to their traditional business models are multiple and will test almost every part of the chain in which utilities traditionally operated, from electricity generation, to networks and supply to customers.
“The search for value is going to be on the agenda for every board of every utility,” said Steve Jennings, head of energy, utilities and resources at PwC in London.
At the generation end, continued pressure in Europe to decarbonise the energy sector is driving the further uptake of renewable technologies, which are largely subsidised by taxpayers but are cheap to run once built and flood the system when wind or sunshine is plentiful. The economics of traditional power plants such as gas or coal, which still accounted for 43 per cent of generation in Europe in 2016, have become challenging as a result.
Power generation is also becoming more “decentralised” or local. No longer are energy systems reliant alone on a series of large, central power stations, whose output flows via the transmission and distribution networks to households and businesses.
More generation, such as wind turbines or solar farms, bypass the transmission system and are connected to the distribution networks — in other words closer to where it will be used. More homeowners, businesses and communities are also choosing to generate their own electricity.
Companies that own networks are increasingly dealing with two-way flows of electricity. This is because electricity flows back into the grid from local projects as well as down from central power plants, rendering their job of managing the system more complex. This problem is only expected to grow as more drivers buy electric vehicles and will be able to use their car batteries as a way of storing electricity and then discharging it when demand is high.
Trials are also running in the UK this year of “peer to peer” trading — where homeowners could trade electricity directly with their neighbours or local businesses with solar panels, cutting out the traditional utility altogether.
Added to these dramatic changes is the emergence of new competition. Big oil companies, under pressure to map out their own futures in a low carbon world, are encroaching on the utilities’ turf, investing in renewable generation, electric vehicle technology and even buying up utility companies.
Royal Dutch Shell, which in 2018 bought the “challenger” UK energy supplier First Utility, recently declared it was examining a potential joint bid for Eneco, the Dutch energy heavyweight.
“Competition in the market will change beyond all recognition,” acknowledged Keith Anderson, chief executive of ScottishPower.
At the same time, there is also pressure in many countries to lower prices for businesses and consumers. Governments are looking to reduce or scrap altogether subsidies that have been used to stimulate low carbon generation and are ultimately paid for via energy bills. In markets such as the UK, politicians have also been keen to crack down on what they saw as the profiteering of big energy companies.
The traditional utilities are thinking again. For many, the answer is to specialise and build scale in one or two parts of the chain, such as renewables and networks or customer supply, ending the traditional “vertically integrated” model, where utilities traditionally owned power plants, networks and supplied to the customer as well.
For example, the UK’s SSE is trying to offload its household supply business, although a deal to demerge and combine it with that of rival Npower fell apart in December.
As well as picking their battles, utilities are also branching out into new technologies and services.
For Iain Conn, the chief executive of British Gas-owner Centrica, the future is in services, whether that is fixing boilers or supplying smart thermostats that can be controlled remotely via an app, or even motion sensors installed in the homes of the elderly to alert carers if something is awry. Such services could also include helping companies install their own solar array and managing those assets for them.
“We would assert to you, over time, energy supply is simply going to be one of the services we provide,” said Mr Conn. “Energy on its own is a very important proposition but people don’t care about it so much on its own, they want other things with it.”
Not everyone is convinced those utility companies making a hefty bet on services will succeed. Jenny Ping, an analyst at Citi, wrote in a note this month that Centrica is “struggling to demonstrate tangible success of its current strategy”, although Mr Conn contends that the margins it is making on home devices and services are “20-40 per cent” and 2017 would turn out to be the “low point” for its “connected home” unit behind products such as its smart thermostat and security cameras.
For others, it is still too early in the dramatic evolution of Europe’s energy market to place too big a bet on one or two parts of the market.
The only solution, according to chief executive of Enel, Francesco Starace, is to understand that each part of the energy market is “in movement” and remain nimble. “We just need to be prepared and very flexible and manage this,” he says.