American Electric Power is an American public utility holding company headquartered in Columbus, Ohio, United States. The company was founded in 1906 in the United States. It has more than 16,787 employees in the US and doing business in more than 11 states (Forbes, 2021). It generates, transmits, and distributes electricity through its seven major local operating companies, including AEP Ohio, AEP Texas, Indiana Michigan Power, and Kentucky Power. It is a vertically integrated company. Its production units consist of conventional plants, hybrid plants, nuclear power plants, solar power plants, and wind farms. Porter’s five forces model is a valuable tool to identify threats and opportunities faced by American Electric Power in the energy utility industry.
Competitive Rivalry in the Market
The electric generation industry has grown invariably and is one of the important proponents of growth. It is a crucial part of today’s industrial revolution. The industry is at the forefront of every industrial process and played a significant role in it. The most significant competitors of American Electric Power are FirstEnergy and CenterPoint Energy. FirstEnergy has earned $10.79 Billion in revenue (Macrotrends, 2021). On the other hand, CenterPoint Energy has posted $7.418 Billion in revenue (Macrotrends, 2021). American Electric Power has published an annual revenue of $14.924 Billion in the last fiscal year; it is ranked 204 in Fortune 500 companies (Fortune, 2021). The competitive rivalry is high due to the presence of multinational companies with specialized entities and artificial intelligence to increase the efficiency and reliability of the system; in 2018, wind farms produced around 7% of the electricity generated in the US compared to less than 1% in Threat of Substitutes
Climate change forces the industry to move away from conventional production methods such as fossil fuel-based plants, which is the cause of the significant pollution in the world. The growing demand for energy due to the increase in population and advancement of technology makes it challenging for the industry to meet the requirements. Alternative renewable energy products are a threat to conventional companies. These solar energy and wind energy is a significant threat to traditional electric companies. The transmission and distribution industry is incorporating high-tech instruments 2000 (Arcadia, 2019). The company can reduce the threat of substitution by adapting the technology and transferring to renewable energy generation method. All these factors result in low-level threats for the time being.
The Threat of New Entrants
The capital required is the biggest impediment for the entrant, as the required capital is high. In the utility industry, regulations are strict. The government has stringent oversight protocols because of the involvement of the general public. The main barriers to entry in any industry are capital requirements, product differentiation, regulatory requirements, and economies of scale (Grant, 2010). Private companies need to consider the return on investment. The startup needs to establish the link with transmission and distribution companies as well. The well-established companies already have those links. Few of them have their distribution or transmission companies. AEP is a vertically integrated company. It owns many major transmission lines and distribution companies in the US. It gives it the upper hand against the newcomer. The regulated bodies determine the price; companies aren’t allowed to set their price, which results in a decrease in their profit. The competition is stiff, there are tight profit margins with stringent compliance requirements, and thus the threat of new entrants remains low.
Bargaining Power of Buyers
Buyers exercise higher bargaining power if there are available options. Solar energy is the general solution, but it requires higher capital per person. The cost of solar energy per watt is way higher in the US than in other developed countries such as Australia (Energysage, 2021). They need to depend on their products because of the unavailability of any other affordable solution. The buyers of the energy utility company are commercial entities and domestic users. The buyers can’t exert any influence because they don’t have anything to a bargaining chip in this case. Commercial or industrial users get electric power at a subsidies rate. Domestic user’s only hope is a minor relief in the form of direct subsidy or tax relief. States can exert their power to bring the tariff down from companies. Considering the available facts, buyers have no or low bargaining power.
Bargaining Power of Supplier
The major suppliers in the electrical equipment industry are providers of raw materials and distributors. Distributors bring the consumer. The major equipment is Solar panels, wind turbines, and fossil fuel generators in the energy production industry. The stronger the power of suppliers in an industry, the more difficult it is for firms within that sector to make a profit. The suppliers can determine the terms and conditions on which business is conducted (Oregon State, 2021). The products are industry-oriented and specialized. There aren’t many suppliers in the market. It provides them a little bit of advantage, but suppliers also have limited clientele due to industry specialty. By analyzing all the facts mentioned above, suppliers hold moderate bargaining power.
References
Forbes. (2021). American Electric. Available at: https://www.forbes.com/companies/american-electric/?sh=47f98985601a
Macrotrends. (2021). CenterPoint Energy Revenue 2006-2021 – CNP. Available at: https://www.macrotrends.net/stocks/charts/CNP/centerpoint-energy/revenue
Macrotrends. (2021). FirstEnergy Revenue 2006-2021 – FE. Available at: https://www.macrotrends.net/stocks/charts/FE/firstenergy/revenue
Fortune. (2021). American Electric Power. Available at: https://fortune.com/company/american-electric-power/fortune500/
Arcadia (2019) The rise of wind energy in the US. Available at: https://blog.arcadia.com/the-rise-of-wind-energy-in-the-u-s/
Oregon State (2021) Analyzing the Organization’s Microenvironment. Available at: https://open.oregonstate.education/strategicmanagement/chapter/3-analyzing-the-organizations-microenvironment/
Energysage (2021) Why is solar more expensive in the US than in other countries? Available at: https://news.energysage.com/why-is-solar-more-expensive-in-the-us/
Grant, R. M. (2010). Contemporary Strategy Analysis. 7th Edition.