Utilities Consider Unbundling to Increase Efficiency

A. T. Kearney reviews sector opportunities

Dubai (17 August 2009) — A.T. Kearney, one of the world’s leading management consulting firms recently reviewed electricity regulation in the Middle East and North Africa (MENA) and the discussions concerning unbundling, separating electricity supply from networks. Unbundling is expected to be a key facilitator for competition through discriminatory-free network access for third parties, and thus lead to efficiency gains. The A.T. Kearney review however, showed that in most cases the expectations towards unbundling are unrealistic and requirements of the regulators are not defined.

Electricity across the MENA region is highly subsidized by the various governments at 30 to 50 percent. In recent years however, these governments have looked for ways to lower those subsidies. Utilities companies have added surcharges to customer bills to manage the extra costs, as there were no other means of compensation or ways for improving efficiency.

“The defining element of an ownership unbundling model is that the network of electricity transmission is operated and owned by one independent company, which clarifies the incentives, responsibilities and liabilities for the network, but unbundling does not necessarily mean lower tariffs”, said Dr. Dirk Buchta, Managing Director of A.T. Kearney Middle East.

National strategies on development of electricity markets in MENA vary considerably from country to country due to different national constraints. However, unbundling is seen as one way of improving efficiencies without tariffs becoming so unrealistic that they might threaten the sustainability of the power grid.

“Unbundling the right way can provide significant opportunities for MENA countries”, said Dr. Goetz Wehberg, Leader of A.T. Kearney`s Utilities Practice in the Middle East.

Many regulators think of the United Kingdom as a role model for unbundling. Due to the ownership unbundling and demand regulation the electricity market in the UK is highly sophisticated in terms of pricing and customer fluctuation, with churn rates up to 15 percent per year. However having the strongest competition does not necessarily mean a positive economic impact.

“The UK has suffered from its tough regulation. Shortages in generation capacity have led to an increasing number of outages in the past years. The fierce competition has reduced the capitalization of the utility companies. As a consequence, international companies were invited to take over. Last year for example, Electricité De France (EDF) acquired British Energy to help invest in generation capacity such as new nuclear power plants,” commented Dr. Wehberg.

Examples from Europe and the US show that an appropriate regulation is of utmost importance when it comes to developing the utilities sector and creating regional champions. Electricité De France (EDF) for example, has become a leader in nuclear energy in Europe over the past years. The company is sufficiently capitalized to finance more than USD 60 billion for new nuclear plants over the next years and maintain safety standards at the highest level. EDF has gone through a moderate unbundling process, consolidating its transmission network through its subsidiary Réseau de Transport d’Electricité (RTE).

“For MENA countries, we recommend a step by step unbundling process, because of the strong growth of electricity demand of 3 to 6 percent annually. Regulators in MENA have to make sure that clear responsibilities for balancing supply and demand are maintained within the incumbent companies, despite of unbundling,” concluded Dr. Wehberg.

A.T. Kearney, one of the world’s leading management consulting firms says most electricity regulators in the MENA are discussing or implementing unbundling requirements in order to separate electricity supply and network. Unbundling is expected to be a key facilitator for competition through discriminatory-free network access for third parties, and thus for efficiency gains. But in many cases the expectations towards unbundling are unrealistic and the requirements of the regulators are fuzzy, according to leading consulting firm A.T. Kearney.

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About A.T. Kearney

A.T. Kearney is a global strategic management consulting firm known for helping clients gain lasting results through a unique combination of strategic insight and collaborative working style. The firm was established in 1926 to provide management advice concerning issues on the CEO’s agenda. Today, we serve the largest global clients in all major industries. A.T. Kearney’s offices are located in major business centers in 33 countries. During our 80 year history, we have provided management consulting services to most major corporations and governments around the world. From our fast growing Middle East offices in Abu Dhabi, Bahrain, Dubai and Riyadh, A.T. Kearney actively contributes to the operational excellence and profitable growth of industries and services in the region. For more information, visit www.atkearney.com.