This is a good summary…but what’s described here is certainly not unique to Europe. Anderson leaves out the significance of technology as a competitive differentiator.

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Andersen Consulting Research Finds U.S. Utilities Investing in Europe Must Consider New Emerging Landscape

December 4, 1998

LONDON–(BUSINESS WIRE) via NewsEdge Corporation — European Utility Industry Faces Entirely New Market Structure

With the European Union’s Electricity Directive set to formally start opening Europe’s electricity markets on February 19, 1999, new research from Andersen Consulting suggests that American utilities investing in Europe will be faced with an entirely new market structure within a few years.

“Deregulation and privatization in the EU will unleash numerous economic, political and technological factors which will reshape the entire European utility landscape. The industry will be completely changed by 2015,” says Robert A. Anclien, utilities global managing partner for Andersen Consulting. “U.S. utilities investing into Europe must realize traditional assumptions will be meaningless as everything from the dominant forms of power generation to the transmission system will be altered by nimble competitors, new technology, and freely traded energy.”

The research, based on extensive interviews with industry executives, regulators and analysts across Europe, concludes that price pressures from electricity-supply competition, new gas-fired co-generation technologies and an improved trans-European gas-supply network will boost gas use and change the way electricity is produced in Europe.

The industry will be completely changed by 2015, according to the research. Large, remote power stations will increasingly be replaced by smaller, cleaner forms of generation located closer to demand, in cities or individual factories, for example. These “demand hubs” in turn will decrease the need for costly, long-distance transmission wires. Emerging will be a single European energy network where gas pipelines and reliability of gas supply actually become more important to providing electricity than high-voltage wires.

“By 2015, we see the gas and electricity industries in Europe converging into a single European energy network,” says Gill Rider, Andersen Consulting partner and head of the firm’s North Europe utilities practice. “Companies seeking success in this market will need new investment strategies, new skills like energy trading, improved regulatory management and a reliable supply of natural gas.”

Evidence for Growth of Gas

The studies point to a number of factors supporting the growth of gas in an open European electricity industry. First, more than 70 percent of the world’s supply of natural gas is deliverable into Europe from such gas-rich areas as the North Sea and Russia. Second, new co-generation technology makes some forms of gas-fired electricity generation capable of achieving 65-75% efficiency, compared with 30-40% efficiency with a traditional coal-fired plant. Third, co-generation plants can be built in as little as 18 months. Fourth, a shift toward natural gas is environmentally and aesthetically appealing because it is cleaner-burning and can be transported via underground pipelines instead of above-ground wires.

The research predicts that by 2015, 30-40 percent of European power is likely to be generated using gas, compared with 7.5 percent in 1992.

Utilities Must Rethink Business

To succeed in the emerging European energy market, Europe’s gas and electricity companies will have to rethink how they do business, how they are organized and where they invest. Winning companies will be those who define their space in the market early on, rather than wait to be led to it, and who possess the management skills to negotiate far-reaching change.

Flexibility will be key as winners create networked organizations to develop and/or acquire new capabilities through strategic alliances and acquisitions. Deep risk management skills will be necessary to navigate through the numerous political, economic, financial and regulatory uncertainties of a liberalizing industry. Complex energy trading capabilities will be essential because industry profitability increasingly will be determined by decisions made on the trading floor, not in the boardroom. Finally, winning companies will be organized around focused business units, a departure from current governance in the utility industry.

“Tremendous opportunities exist for companies that are willing to view the uncertainties of liberalization as a strategic advantage over the next 15 years,” Rider says. “Companies that understand the process of liberalization and are willing to take positions in numerous segments of the industry will be successful over the medium term.”

Nationalism Poses Risk to Liberalization

The research also contains a strong warning for Europe’s politicians and regulators: the biggest potential barriers to an open European electricity industry are politically motivated policies designed to protect some indigenous industries such as coal and oil in individual EU countries. Politicians and regulators throughout Europe eventually will be forced to resolve their countries’ national interests with the EU’s intent to create an open energy market.

“As consumers start to see lower energy prices in other countries, governments across Europe will be forced to examine the economic consequences of protectionism on both the country’s utilities and its manufacturers,” says Rider. “We believe that liberalization will create customer demands for cheaper power that even the most dedicated nationalists and protectionists will have to yield to.”

Additional Findings

Additional findings from the research include:

The growth of co-generation will change the structure of power generation. New technology will decrease the barriers to entering generation and enable large industry to partner with energy companies to generate its own power needs. Gas producers will respond to the increasing use of co-generation by moving into power generation.

Supply constraints posed by electricity transmission networks will ease as gas transportation networks grow. The use of gas-fired generation will significantly increase the importance of transporting gas to localized generating facilities, and decrease the need to transmit electricity long distances.

Failure to realize the increasingly important role gas will play in electricity generation leaves incumbent utilities vulnerable to significant loss of market share as their power costs are undercut by new competitors from other countries and industries.

Sophisticated energy trading will become an essential part of the European utility industry as increased competition creates multiple buyers and sellers needing to hedge against market price volatility.

Significant convergence will occur at all levels of the electric and gas industries as common skills such as energy trading, asset management, customer care and billing/metering develop across both industries. Oil companies pose a serious threat to traditional utilities as they are likely to leverage their vast experience in asset management to enter low-risk, asset intensive parts of the utility industry.

Electricity and gas suppliers will increasingly offer a bundle of additional products and services to offset falling margins, more discerning customer demands and low growth. Companies will seek to take integrated positions in fuel sourcing, power generation, trading and customer supply to hedge their risks in these related segments.

Intensive industry consolidation will continue across Europe, making borders less important and increasing difficulties for regulators monitoring the sector. Import dependence and market maturity (per capita gas consumption) will combine to dictate the way in which individual EU countries approach gas liberalization. Countries with high levels of indigenous gas production and/or high consumption are likely to open their markets to competition faster than those with low or no gas reserves and/or low levels of consumption.

The Andersen Consulting Utilities practice provides strategic management and technology consulting to many of the world’s largest and most innovative electric, gas and water utilities. Clients include 90 percent of the U.S. utilities listed in the Fortune 500 and two-thirds of the international utilities appearing in the Forbes list of the 500 largest international companies.

Andersen Consulting is a $6.6 billion global management and technology consulting organization whose mission is to help its clients change to be more successful. The organization works with clients from a wide range of industries to link their people, processes and technologies to their strategies. Andersen Consulting has more than 59,000 people in 46 countries. Its home page address is http://www.ac.com.

CONTACT: Douglas W. MacDonald | Andersen Consulting | +1 312 693 7463
| douglas.w.macdonald@ac.com | or | Julia J. Wright | +44 171 304 1812
| julia.j.wright@ac.com