With the E.On and Endesa deal turning out to be the second largest cash deal on record across all the sectors, the European utilties inudstry is already in the spotlight and the spotlight will intensify further. Right now Europe is spawning a strong sentiment of changes through technology, regulations, customer relations and investment. At the backdrop of these changes are the ever growing concerns of supply crisis, evidence of infrastructure vulnerability and the concerns about environmental issues.
Like bird flu, the industry is worried that a full appreciation of the preparation needed won't happen until the worst symptoms occur. And according to IEA's 2005 estimates, power generation, transmission and distribution will require more than $10 trillion by 2030 and the gas sector a further $3 trillion. And environment costs, for example, carbon prices, have played more significant roles than they were before as a component of operating costs.
These factors push companies to seek technology changes that respond to the princer of future demand challenges and environment concerns. And at the same time regulatory certainties are highly needed for issues of pricing, market liberalization, environment protection and investment planning, key elements to company strategic making. While direction of technology changes is quite clear- coal regasification, carbon sequestration, technology for renewable energy and energy efficiency are likely to be the pursuit going forward, regulatory uncertainty has posed barriers to changes and the inability of politician and regulators to develop long-term plans has presented utility companies with both short-term and long-term difficulties. When the pace of regulatory changes needs to be stepped up with progress to date falling behind what they would like to achieve, shock factors may finally intervene ahead of the regulatory reform and push the pace of such reform.
Though the biggest force of change remain to be politician and regulators, with customer choice becoming a reality in an increasing number of national and regional markets, customers are also a key driver to the change. When streched supply lines and investment in expanded and diversified infrastructure are putting significant additional cost into the value chain, customer choices further increases utilities companies' costs as greater resistance to cost is experienced when cost is passed on to end-users. And these in turn pushes the industry to look to technology to be the lead source of efficiency gains.
To adapt to the changing environment, companies are pursuing M&A strategies to become both 'super regional' players and in pursuit of non-organic growth. In 2005, the total value of M&A deals in the utilities sector in Europe has incrased by 53% from its previous year, driving up the value of European power assets significantly. In search of acquisition candidates, companies also look for fuel and power convergence, new skills and capabilities in renewable energy and vertical integration to achieve an optimal balance between fuel supply, generation and the customer base. When companies are building regional footprints in its own markets or in adjacent markets, they also pose threats to the existing players and therefore resistence of competition from them as well. And these are already seen from the E.On and Endesa deal.
