Executive summary
This report aims to assess utilities industry in United Kingdom and RWE npower strategy as one of the key players on the market. Introduction part includes general information about the company following by industry analysis. I chose Porter’s 5 forces method for better understanding of external environment in UK and performed SWOT analysis to identify pros and cons of npower. Tables and figures have been placed in this part to display my findings and to shape the structure of the theory we have learned from the class. At the final part you will find answers on four questions of the case study, condensed summary and recommendations for the company.
Introduction
RWE npower is one of the leaders in UK energy sector. The company was found in 2000 as Innogy plc and acquired by German-based RWE in 2002 adopting npower brand. It is providing electricity and gas services to customer and business markets. In 2006, RWE npower acquired 19% of stakes of Telecom Plus which provides management, consulting, billing and customer services. In 2010, the company acquired SPI Group with the purpose of contribution to social housing market. SPI serves public buildings such as hospitals, schools and government institutions. In 2013, Npower sold its subsidiary Telecom Plus back to Utilities Warehouse for £218 million. RWE npower operates through the following businesses: retail, power generation, npower cogen, new power stations, renewable energy and nuclear power.
The company became is a one of the Big Six Energy Suppliers in United Kingdom. According to corporate web-site it serves around 6 million residential and 400,000 business accounts with electricity and gas including Ford and Wembley Stadium. RWE npower has 11,000 employees around 60 sites in England and Wales. RWE Innogy UK is a renewable energy company with a portfolio of on-shore and off-shore wind farms and hydroelectric power projects capable of generating around 550MW. It develops industrial combined heat and power (CHP) in the UK and Ireland. Its portfolio covers a range of industries including chemicals, pulp and paper, refining and the food and drink sector. The company is also involved in investing in new gas power stations, biomass stations, new energy stations, and new coal power stations (Market Line, 2016).
Industry analysis
External environment was assessed using Porter’s five forces model. Table 1 demonstrate the overall picture of utilities industry in UK providing clear understanding of rivalry, the power of customers and suppliers, threats of new entrants and threats of substitutes.
Figure 1. Porter’s 5 forces overview utilities market in UK
Power of suppliers. If a market player operates solely as an electricity retailer it buys electricity in a wholesale market and sells it on to end-users. Some players are able to own and operate power generation facilities as well. Wholesale prices have been blamed by downstream operators for continuing price rises in the UK. Suppliers are under continues pressure of the Ofgen-regulator body which look after fair competition fair price policy and customers treatment. Overall supplier power for the utilities industry is seen as moderate.
Power of buyers. In United Kingdom, the use of key utilities such as electricity, gas and water is a necessity for major of population. Thus, the buyer power is limited because these utilities are viewed as vital commodities, so buyers cannot avoid purchasing from the providers. In addition, individuals do not usually make up the large portion of revenues while big corporations make large purchases in order to continue operate the business. Such customers have a greater degree of power. Still, some buyers have an opportunity to integrate backwards using solar panels to generate energy.
Barriers to new entrants. High fix costs in the industry may deter new entrants. By the same talking it is easily to get customers on the market with undifferentiated product or services. Therefore, this allows a new entrant use undercutting price strategy. The barriers for new entrants assessed as moderate.
Threat of the substitutes. It is hard to find substitutes in the utilities industry market. Two major threats for market player are gas and solar panels. However, both of them may have a high switching costs for the customers. The environmental concerns also need to be considered because they are driving switching tendency as well. Despite this fact, the threat of substitutes is still weak on utilities market.
Rivalry. The gas and electricity sector tends to have an intense competition. UK market is control by six large companies. The liberalization of gas utilities has reduced the number of state-run or licensed monopolies, resulting in market fragmentation and the emergence of many retailers. The lack of product differentiation in the utilities industry as a whole, along with the ease of end-consumer switching, intensifies rivalry.
Figure 2. Forces 5 model summary
INTERNAL ENVIRONMENT
The resource capabilities of NPower lies in its generation of energy and gas supply in UK. The core competency is providing electricity and gas services to business-to-customers and business-to-business by maintaining operation excellence. The retail business has been fully aligned with 4 core customers segments:
1. Domestic markets
2. SME markets
3. I&C markets
4. Energy services
Figure 3. RWE AG SWOT Analysis.
STRENGTHS
Strong market position in UK market, RWE npower is the fourth largest electricity and fifth largest gas supplier. In addition, RWE AG group has a solid influence in Central and South European countries and supply utilities to Germany, Poland, Czech Republic, Hungary, Slovakia and Netherlands. This translates into volume and cost benefits, enabling the group to enhance its value even in a competitive environment. RWE in FY2013 introduced a new segment named conventional power generation to manage a balanced power generation capacity. The company pooled in all its fossil-fuelled and nuclear electricity generation capacity in this segment. This segment operates through RWE Generation, which in turn consists of the electricity generation activities of RWE Power, Essent, and RWE npower. It also includes RWE’s new gas-fired power plant near the Turkish town of Denizli and RWE Technology, which specializes in project management and engineering. The segment had 43,716 MW of installed capacity at its disposal. Gas-fired plants accounted for the maximum generation capacity of 15,955 MW, followed by lignite-powered plants (10,291 MW). The rest of the capacity was filled by hard coal (9,152 MW), hydro (4,031 MW), and nuclear (3,901 MW) stations. Renewables (386 MW) formed a very small chunk. A balanced generation mix helps the group withstand problems related to raw materials, while the usage of renewable and clean fuel sources decreases its environmental liability.
WEAKNESSES
Overdependence on Germany. The group earned over half of its revenues from Germany in FY2013. The other regions contributed the remaining of its revenues. Although it is a major player in Europe, lack of geographical spread exposes the group to regional economic factors and operating environment. Overexposure to certain geographies increases its business risks and makes it more susceptible to the fluctuations in Germany.
Divestment of RWE Dea due to declining oil production. Oil production from RWE Dea has been declining for the past few years. From FY2006 to FY2013, it has recorded a production decline from approximately 3,800 thousand cubic meters to 2,300 thousand cubic meters, respectively. In FY2006, the decline was mainly because shares in oil production from the Snorre oilfield in Norway held by the consortium partners were re-determined in accordance with the contract. As a result, the amounts allocated to the company were reduced. In FY2007, the decline was primarily due to the fact that RWE sold its stake i
n Kazgermunai in Kazakhstan in 2006 and its concession in Dubai in 2007. Another reason was that production from RWE’s oil fields has declined as reserves were being exhausted. This happened primarily in RWE’s fields in Germany. The continuity of the depletion of existing reserves as well as the declining profit margin resulted in further plans to sell the RWE Dea segment in FY2013.Divestment of the asset has a negative impact on the portfolio of RWE, thus affecting the overall revenue growth of the company.
OPPORTUNITIES
Expansion of the renewable energy business. RWE Innogy is looking forward to enlarge its renewable electricity generation base substantially. In 2012, RWE Innogy planned to build a fourth wind farm in Poland, consisting of 19 wind turbines with an overall installed capacity of 39 MW. In mid-2012, Green GECCO, a joint venture of 29 municipal utilities, and RWE Innogy acquired onshore wind farms at Titz (20 MW) in North Rhine-Westphalia, Horup (eight MW) in Schleswig-Holstein, and in Dushorner Heide (26 MW) in Lower-Saxony, in Germany. These wind turbines are expected to be installed and connected to the grid by FY2014. With a total output of 576 MW, the company is currently building one of Europe’s largest offshore wind farms. Further in the same month, RWE Innogy received consent to build the Galloper offshore wind farm off the south-east coast of England. In 2013, RWE npower started the construction phase of a modern biogas plant which would have a capacity of 7.4 MW. RWE’s developments in the renewable power energy sector can help in increasing its clean energy portfolio, thereby enhancing its environment-friendly image and meeting regulatory obligations.
Strategic divestiture. RWE is realigning its assets for optimum utilization of its resources. In March 2013, RWE signed an agreement for the sale of 100% of its shares in NET4GAS to a consortium of Allianz and Borealis Infrastructure. In the same month, RWE sold off 24.95% stake in the Rhyl Flats Wind Farm to UK Green Investment Bank (GIB) for $73.94 million. In August 2013, RWE sold off 50% share in the US LNG company Excelerate Energy. By these strategic divestments, RWE will raise new capital which may be invested in other energy projects. Thus, the above divestitures will enable the company to build a strong business and help increase its profit margin.
THREATS
German regulatory changes. The group derives over half of its revenues from Germany. The group plans its capital expenditure according to the prevalent political framework. However, RWE is recently witnessing an increasing trend towards regulatory intervention in the energy market. Due to the budgetary difficulties of numerous European countries, there is now an increased risk of governments imposing new burdens on the economy. This could particularly affect companies that are bound to certain locations, such as utilities. For example, the German nuclear fuel tax curtails RWE’s earnings considerably. The sudden change of course in German energy policy following the reactor catastrophe at Fukushima also proves that the political risks in the utility sector have risen. In general, there is a risk that RWE’s network companies may be subjected to revenue caps that are too low and that these may actually be reduced further on grounds of alleged inefficiencies. Regulatory changes in Germany, RWE’s largest geographical market, may affect the group’s profit margins in the future.
Competition. Following liberalization, significant consolidation has taken place in the German market, resulting in four major interregional utilities: E.ON; RWE; Vattenfall; and EnBW. In addition, the market for electricity trading has become more liquid and competitive. Higher wholesale prices are also expected to lead to the construction of new generation facilities, thereby increasing competition and the pressure on margins when such facilities come into operation. Outside Germany, the electricity markets in which RWE operates is also subject to strong competition. RWE’s success, therefore, depends on how it is able to compete with other players on all the fronts.
Environmental regulations. Health, safety, and environmental laws all regulate the operations of RWE. With rising awareness of the effect, the environment has on human health, regulatory standards have been continuously improved in recent years. The Western European electricity sector will hardly be allocated any free certificates in the third emissions trading period, which runs from 2013 to 2020. Therefore, the number of emission allowances which the company purchases on the market will be much higher than before. RWE is one of the largest emitters of CO2 in Europe, with a significant part of its generation portfolio comprising coal-fired plants. To comply with environmental regulations, the group is building a coal-fired power plant with almost no CO2 emissions at a cost of roughly $1,286 million.
Table 1 indicates non-domestic market share in gas and electricity industry. Npower has a weak seven percent market share in the segment of customers with annual consumption up to 73.2MWh. in the gas section. On the other hand, the company took one of the largest pieces of pie in electricity supplement segment holding thirteen and eighteen percent accordingly.
TABLE 1: Non-domestic market for different segments, March 2016
Annual consumption <73.2 MWh
%
Annual consumption >73.2 MWh
%
Annual consumption with NHH meters Profile classes 3 and 4
%
Annual consumption with NHH meters Profile classes 5-8
%
British Gas
32
Total Gas & power
19
SSE
17
EDF
19
E.ON
15
Gazprom
16
E.ON
17
npower
18
Total gas & power
10
Corona
13
British Gas
17
E.ON
11
Opus Energy
7
DONG Energy
11
npower
13
SSE
11
npower
7
E.ON
8
EDF
12
Haven Power
7
CNS Ltd
7
British Gas
7
Opus Energy
8
Smartest Energy
7
Corona
6
Engie
6
Scottish Power
8
Engie
6
Others
17
Other
20
Other
8
Other
21
On the Figure 1 below we can see that npower takes ten percent of the domestic market of electricity supply and nine percent in the gas segment. Both industry is dominated by British Gas, one of the Big six monopolies in the UK market with twenty-three and thirty six percent respectively.
FIGURE 4: Share of GB domestic meter points served by different types of supplier – 2006 to 2016, and snapshot for March 2016
Source: Ofgem analysis of data provided by DNOs, iDNOs and Xoserve.
Concepts and Theories
Companies use corporate governance to establish and manage relationships between stakeholders and determine strategic control on performance of the organization. Npower has shareholders in Germany (Innology plc as a mother company). Thus, an appropriate top-level management are decision makers, those who act on shareholders’ behavior to achieve the above average returns.
When this happens, according to agency theory we have learned from the class, firm’s owners or principle hire top management team or agent to perform a service.
Figure 5. Agency theory.
Thus, agency relationships have started. But when the agent acts in a way that prevents the owner from maximization of profits- managerial opportunism occurs as one of the problems of agency relationships theory. This lead to increase in management compensation irrelevant with company’s performance. As an example, we can take Goldman Sachs
when at the end of 2007 while financial markets collapsed, top 5 executive of the company split $320 million in bonuses while the firm experiences $1 billion in losses (Cohan, W., 2011). Another issue in this theory is the verification of the agent’s behavior, especially in large public companies.
Questions and Answers
1. What are the skills and abilities that assist in the decision-making processes within npower?
The culture of trust in its people allows empower to encourage young and talented specialists to perform business-focused activities through all levels of the organization. The company provides all the necessary resources to support this growth and performance. The proper HR policy allows the company to select the best suitable candidate for a particular task. This policy based on core competences of the employees and utilization of their skills and expertise in a specific field for on behalf of the organization. As a result, employee satisfaction increases making RWE npower friendly and desired place to work at.
2. What are the major differences between strategic decisions and other kinds of decisions in npower?
Figure 6. Decision –making Matrix
Strategic decisions are taking at the highest levels of the organization in the long run perspective. They are carrying high level of responsibility or risk in the case of loss, as well as the higher level of reward in the case of success. Usually, such decisions as: which project the company should undertake, allocation resources between divisions, contracts with key suppliers, merges and acquisitions are the examples of strategic decisions making by the top management of the organization or the agent. Implementation time is five, ten, fifteen or twenty years. These decisions determine the direction of the entire business.
Tactical decisions are more adjustable and have limited impact on the organization. For Jay, in order to present the project to the board of directors, it was necessary to identify the structure, the scope, communication channels, to find reliable data, to handle the time, to find the expertise and provide recommendations on how to improve reliability of the supply chain process in his “Spare Parts” project. This is an example of tactical decision-making process.
Operational administrative decisions happen on daily basis carrying very little risks. Employees are participating in daily routine activities which should support the organizational strategy. This level of the decision is the most constrained due to authority, economic, political and sometimes legal restrictions. The company empowered employees to take responsibility and critical thinking because that increases the speed of operational administrative decisions. In other words, less supervising needed. This approach allows workers to become a problem-solver minded instead of seeking for help every time they are facing challenges.
3. Analyses the benefits for npower in appointing a young graduate engineer to take charge of an important project such as the ‘Strategic Spare Parts Project’.
Appointing of the young graduate engineer like Jay for a strategic project is rather rewarding than risky decision. Npower uses delegation approach based on skills and expertise of the employees. In order to finish the “Strategic Spare Parts” project, Jay has to work with different departments inside the company meeting people he has never met before, gathering data, talking with workers and managers, evaluate equipment reliability and provide his recommendations for improvement process. This is how he gets experience and gaining his intangible knowledge becoming a more valuable asset for the company. By the time of his presentation, his understanding of internal capabilities and problems of npower improved tremendously.
4. In your view, what are the advantages and potential problems in adopting a policy of delegation and empowerment of staff at all levels within npower?
The diversification of the job is a good method to keep employees interested. However, the risky part is a possibility that at some point of his career Jay will resign and go to a competitor like British Gas, causing the leakage of knowledge and expertise for npower and taking away the competitive advantage from the company. So, empowering strategy is a good tool only if a strong corporation culture is in place. Another important part of the puzzle here is an appropriate HR strategy. The company needs to invest in the brightest and promising employees as future managers. So, the balance has to be maintained between the numbers of administrative operational staff, middle and upper management within the company.
Conclusion
All in all, the utilities industry in UK is an intense competitive market where German-owned RWE npower competes using empowerment of the employees to gain a competitive advantage and therefore, the above average returns. The company has a strong focus on gas and power supply as a core competence, making talented employees to take responsibility and get a feeling of satisfaction by influencing strategic decisions through operational activities.
Recommendations
Based on my findings I come up with following recommendations for RWE npower:
1. Continuous empowerment of employees
2. Expansion to emerging markets
3. Strategic innovation partnership for developing affordable energy alternatives
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