The European utilities market is opening up to liberalisation. Ambrose McNevin looks at the ramifications for IT departments and profiles three major players.
On July 1 2007, the big news in England was the workplace smoking ban, but in the rest of Europe – bar the Nordics – it was the liberalisation of the energy markets. As we all know from the rise in cold callers asking us to switch suppliers – of which 4 million people did in 2006 – open competition in energy markets is something the UK has had for years.
So what do Europeans expect from the new energy market landscape? At an industry level, competition means consolidation and M&A activity leading to enterprise level IT modernisation. At a consumer level, competition means customer churn leading to investment in better technology driven customer interaction, using smart metering, text messaging and online technologies.
“Certainly, market liberalisation cannot be done without IT,” says Roberta Bigliani, EMEA research director at Energy Insights, an IDC company. “The UK liberalisation has on one hand driven desegregation, creating specialised companies in specific activities, while on the other it has pushed towards creating merged companies to gain competitive advantage.”
Wulf Bernotat, CEO of E.ON, forecasts a small group of large pan-European utilities will emerge in a unified European gas and electricity market. Shown by Iberdrola’s acquisition of Scottish Power and an agreement earlier this year in the bidding war between E.ON and Enel/Acciona for Spain’s Endesa.
According to IDC, the three main areas of IT focus among European utilities will be migration from older technologies to more modern hardware and software platforms (23.4 per cent of companies); development and implementation of new strategic applications to improve competitiveness (22.7 per cent); and controlling costs and improving the financial justification for continued IT investment (21.4 per cent).
M&A activity provides the motivation to improve business processes and customer service, affecting investments to update existing and fast-aging IT systems.
"Certainly, market liberalisation cannot be done without IT"
Roberta Bigliani, EMEA research director, Energy Insights
The green agenda
Utilities IT spending in UK will register a 4.2 per cent growth, according to Energy Insights’ estimates. The Kyoto Agreement and EU commitment for reductions in greenhouse gases will drive much of this investment.
Companies will need to invest in software applications for emissions inventory management; energy trading; risk management applications tailored for cap and trade emissions markets; and generation optimisation analytics. Market watchers expect additional investment for emission monitoring, data collection and retrieval, and data storage, as well as reporting, auditing, and management tools for environmental health and safety compliance.
Competition will lead to increased use of outsourced services, not only of IT but also of core business processes. Compliance with Basel II, Sarbanes-Oxley, data protection and commodity trading standards, will continue to require investments in security and financial controls. It will also drive investments in identity and access management, document and record management, auditing and reporting, data protection and recovery software. Utilities will look to work and asset management systems to address the issues around an ageing workforce and distributed energy. In advanced markets, such as the UK, customer churn is an issue. One way to secure customer loyalty is to expand the customer’s choice of channels for communicating with the energy supplier. Increased internet access, whether through the standard PC or mobile communication devices, has whetted customers’ appetites for self service options. Now customers expect their energy suppliers to provide the same service.
Headquarters: Ambergate, Derbyshire
Turnover: £4.7 billion
Head of IT: Humza Malik, director of IT
Last year National Grid completed a rollout of its £70 million Integrated Gas Management System (IGMS), which will allow the company to control gas transmissions throughout the UK.
The system, which has been driven by changing regulations in the energy sector, aims to match supply and demand and integrate physical control of gas emissions with financial decision making by analysing 20m pieces of data each hour from telemetry systems on the transmission grid. The Java-based system runs on Unix, Windows and Sun servers. It was developed with Indian firm Wipro and links to gas forecasting software from Advantica.
National Grid changed its name last year from National Grid Transco to underpin a unifying identity and because its old name could not be used in the US.
The company owns an electricity transmission network in the US, as well as operating the high voltage transmission system of electricity in England and Wales.
Fibre optic network
To keep the lights on, the National Grid depends on communication between its operational sites, external generators and regional network operators to manage the national power transmission system.
The National Grid uses a dedicated fibre optic network rather than risk the vagaries of the public telecoms network.
As well as a huge data transmission capacity, optical fibres are safer and more resilient to electro-magnetic interference – important considerations when connecting sites handling high-voltage electricity.
To improve security and resilience against accidental or malicious damage, there are at least two routes between every point which are physically separate, with duplication of essential equipment that is supported by mains independent power supplies. National Grid sub-stations are designed to act as a transfer point from the high-voltage transmission network to a distributor with power being supplied by a generator. So the Grid needs to talk to them to provide generation instructions and metering services. It is based on having a customer point of presence at the Control Centre from which are provided resilient communications to the power station or distributor.
Using a private network allows the National Grid to mitigate against the potential problems resulting from the upgrade of the UK’s public telecoms network to an intelligently routed IP-based network.
This is causing electricity transmission and distribution companies headaches, as the new system can introduce variable delays in the transmission speed of vital control signals.
"The National Grid uses a dedicated fibre optic network rather than risk the vagaries of the public telecoms network"
Advantages of IP
One benefit of modern digital IP networks is that they can be used to converge the transmission of voice and data over the same network, saving duplication of infrastructure and reducing costs. The benefits are flexibility, consistency, availability and scalability.
But clearly there are also risks associated with opening up a secure control network to more general applications like voice over IP.
With the introduction of intelligent routed IP-based systems there is a whole new catalogue of risks to take into account for the heavily regulated and traditionally cautious utility industry.
IP communications run services entirely separately from vital control data over the same network, allowing sharing of infrastructure without the risk of reduced determinism of control signals.
This single platform approach is providing both an intelligently routed service and a legacy-style telecom service, so it can keep the deterministic element through one form of transmission and move the traffic better suited to an IP-based network through the same platform.
Head of IT: Mike Naden, business information systems services director
United Utilities manages and operates the regulated electricity distribution and water and wastewater networks in northwest England, a region with a population of around seven million. Its regulated division serves 2.9m customer premises. The company also uses its core utility skill to manage other infrastructure assets through its United Utilities contract solutions business. Having spun off its inhouse supplier Vertex to Oak Capital as a standalone services provider, United Utilities retained the provider to deliver on its services integration strategy.
United Utilities is embracing virtualisation at a server and storage level. It is in the middle of consolidating 360 Wintel servers down to 15 servers running VMWare. Based on predicted storage growth of 40 per cent yearly, the company has plans to reduce five SANs to one based on EMC technology with a rollout planned for later this year.
Technologically the server consolidation project was challenging enough but Kevin Power, head of IS shared services at United Utilities, says his main challenge came in finding a charging structure. “United Utilities is a distributed environment. Each application has its own server, so moving to a shared assets infrastructure meant reassuring stakeholders on reliability and addressing the usual concerns.
“But the main issue turned out to be finding a charging structure for shared assets. I spent quite a few weeks working on a charging structure which was quite a complicated business,” he says.
“I thought I wouldn’t need to reinvent the wheel on this but neither Gartner nor Sun had anything on it, which was a surprise, since most companies have to recharge for services whether internally or externally. It took a lot of stakeholder management – but we got there in the end.”
At a server infrastructure level the company has embarked on a best-of-breed strategy. “We have quite a lot of Sun infrastructure and we’ve worked with them for many years. Moving to best-of-breed, they were a natural choice. The drivers are big savings based on a 25 per cent cost reduction target in delivery of IT services.”
United Utilities is consolidating from 360 physical servers to 15 Sun AMD Opteron-based Fire servers split across two main datacentres – with further consolidation into one datacentre already planned sometime in the next two to three years. Working to “quite an aggressive” rollout, most of the legwork was done by Vertex and Sun. “It started by picking good candidates for virtualisation. We left out certain servers and instead concentrated on the standard unstructured data, file and print servers and lots of small SQL Server application and web servers. We’re still counting the total number of applications as we get to them as we’re actually in the middle of moving them.”
"Each application has its own server, so moving to a shared assets infrastructure meant reassuring stakeholders on reliability and addressing the usual concerns"
Kevin Power, head of IS shared services, United Utilities
Power acknowledges that the cultural issues had to be overcome, as stakeholders were giving up an element of control and trusting that their applications would be available.
“There was some scepticism about reliability but their haven’t been any issues yet. Most applications were moved when not in use. The team will schedule 20 per week and then work within the limits of the business, if, for example, month end means an application can’t be taken down we move onto the next one.”
With the virtualised infrastructure in its infancy, Power says it has not been tested yet with what he calls “shocks”, such as a big project or the disposal of a business division. “We’ll see how it stands up then,” he says.
On the green side, United Utilities has committed to cutting its carbon footprint by an eighth over five years – IT accounts for 1.5 per cent of total carbon output in the business.
Turnover: £9.7 billion
Head of IT: None as we go to press
The markets in which Centrica, the UK’s biggest residential energy supplier, operates are changing. As gas demand increases globally, UK Continental Shelf production is in decline and new sources of gas are needed to fill the supply gap. Gas prices in the UK have been on an upward trend. At the same time, it is now more challenging to secure fixed price gas through contracts to protect against wholesale price movements.
Centrica believes that the implications are clear: the sourcing of gas is becoming a global business. Strategic infrastructure will become increasingly important and because the market is changing the company needs to evolve in order to remain competitive. It says that it must secure competitive gas and power for its downstream customer supply businesses by continuing with an ‘asset right’ approach that achieves the right blend of its own assets, long-term contracts and short-term trading.
The energy giant’s strategy is to create value for its shareholders by deepening customer relationships, ensuring a competitive cost of supply and achieving operational efficiency by sharing knowledge and best practise.
"Strategic infrastructure will become increasingly important and because the market is changing the company needs to evolve in order to remain competitive"
In July 2006, Sam Laidlaw became the new chief executive of Centrica, at a time when the price of wholesale gas was staggeringly high. Centrica was passing this cost on to its customers, which led to large numbers of them deserting the company for its rivals.
Now gas prices are falling, Laidlaw has streamlined operations and cut some 1,300 jobs. In addition, to ensure access to gas supply, Centrica is pursuing longterm joint ventures and contractual deals with multiple gas suppliers. But the organisation is not out of the woods yet. In February, Centrica reported a 17 per cent drop in full-year profits and a loss of more than one million customers. The figures were better than expected though, and its shares rose more than threee per cent.
At the same time, Centrica announced that it had outsourced part of its IT infrastructure including its datacentre operations and desktop support services, affecting more than 23,000 users. In a 10-year deal, the company said that it would transfer 230 staff to T-Systems, the managed services division of Deutsche Telekom. Last year, Centrica moved a £400m transformation programme inhouse from outsourcing partner Accenture because of delays in SAP migration and termination of legacy billing systems.
This five-phase Jupiter CRM scheme was launched in 2002 to consolidate the separate gas and electricity systems of its subsidiary, British Gas. Centrica said, at the time, that it would continue to use Accenture for warranty work, but would carry out the project management itself.
At the beginning of 2007, the utility giant said that it was on course to save £2.5 million over five years after migrating to a consolidated intranet infrastructure based on Microsoft Sharepoint 2003. Centrica expects to make the savings after rebuilding its existing corporate-wide intranet and replacing previous best-of-breed legacy components while also updating the site’s usability.
The new system means that password resets, which used to account for 70 per cent of calls to the helpdesk, are no longer needed, and disaster recovery time has been reduced to minutes rather than 18 hours.
Centrica believes that all these benefits will create more than £2.5m of net profit over the next five years.