Page 4: New business
While PowerGen’s strategy for the core business has been successful in helping it to manage the reduction in market share, it has not been sufficient on its own to deliver future growth for the company. For the longer-term PowerGen had to look for new ‘earning streams’ by expanding its activities into new areas which were still related to the company’s core areas of expertise.
If an organisation has succeeded in one area of business, it does not automatically follow that they will be successful in another. PowerGen was aware of how easily a diversification programme can go wrong, having seen the mistakes of some other diversifying utilities. In the search for new business activities PowerGen imposed two strict criteria:
- Investments would have to add material shareholder value. The risk-adjusted returns had to be equal or better than those available from new investment in the core UK electricity business.
- New activities would have to be in related areas to the core business, which could utilise the core skills and expertise that already exists within the company and which support the company’s existing portfolio.
PowerGen approached its new business development in two phases. The first was to establish a balanced portfolio of new businesses based in the UK that would offer short to medium term earnings growth. The second was to develop an international power generation business that would bear fruit in the longer term.
Upstream and downstream
PowerGen’s interest in gas-fired generation made it one of the largest users of gas in the UK. Broadening its activities across the gas chain, both upstream and downstream was a logical step.
Upstream has involved developing a balanced portfolio of production and development assets in the North and Irish Seas, which provide gas for the core business. PowerGen has committed more than £375 million to the acquisition of upstream assets in the North and Irish Seas. These investments are already contributing to earnings.
Downstream, PowerGen is the owner of a gas marketing and transportation business. This company, Kinetica, has grown into a leading independent gas supply company, with 10% of the competitive gas market, supplying 11,400 customers on 26,500 sites.
PowerGen’s third major new business activity in the UK is the rapidly growing area of combined heat and power (CHP). CHP schemes provide industrial customers with dedicated, high efficiency generating plants which meet their electricity and heat needs. PowerGen has established itself as a major player in the larger end of the CHP market. Three of PowerGen’s CHP schemes are already under way and contributing to earnings, with three others under construction. By establishing these new UK-based businesses, PowerGen has been able to focus more clearly on both the longer-term and its international power generation interests.