Innovating for our Survival: Part 1: Are We Spending Enough?

Utilities are in the critical path to solving the carbon emissions problem. Power generation, buildings, industry, and transportation are responsible for close to 80% of carbon dioxide emissions. If utilities work with their regulators and communities to find ways to safely remove fossil fuels from the power generation mix, we can rapidly electrify these carbon-intensive activities with clean energy. We can also offer new forms of resiliency by incorporating renewables into the mix. However, this transformation will require unprecedented levels of innovation - the likes of which many argue the utility industry has not seen in recent decades because they have been traditionally underfunded.

Note: This figure was taken from May 11, 2022 webcast hosted by Lawrence Livermore Labs with many industry players sharing their research on the state of innovation in the energy industry and the presentation can be downloaded here.

Innovation can be the antidote to mitigating the negative effects of climate change. But we will not be successful unless systematic changes are made to regulatory structure and business models to make it easier for utilities to take risks and invest in innovation.

Utilities are also saddled with the additional responsibility of leading the rapid shift away from fossil fuels safely, without compromising system reliability. Therefore, urgent systemwide transformation must be built in parallel to guarantee a more climate-resilient future. This change will not be easy, but it will be well worth the risk.

This series looks at the complexities of innovating inside energy utilities to address the systemic change needed to lead the clean energy transformation in 2023. We ask four important questions:

1. The spend: Are we spending enough on innovation?
2. The pace: Is innovation taking too long?
3. The collective: Can innovation be more inclusive and higher performing?
4. The urgent need: What happens if we don’t change now?

Are We Spending Enough?

In the first part of this series, we examine the question, "Are we spending enough? The National Science Foundation reports that utilities invest 0.1 % of their net revenues into Research and Development (R&D) programs (see Table 2) and in our own surveys of frontline innovators, the number one barrier was “not spending enough”. The data supports why the utility sector is often cited as a “laggard” in innovation when compared to other industries.

Figure 1: McKinsey

“The concern we are spending too little in the US is very real – and R&D is a hard sell if we are only looking to seek short term ROI alone and over other benefits… the evidence would suggest that speedier action on a larger scale would serve the public interest (source NRRI).”

Time to Think Differently?

It would be naive to think the investment question isn’t a complicated issue. Investment is tied to how utilities are regulated and this topic on its own is complex. Regulation must align utilities’ interests to serve both their customers and the greater societal interest at large.

At the core, we must ask, what is the right mix of regulation, incentives and mandates required to drive the right level of investment to unlock our innovation programs’ full potential to meet the clean energy needs capable of 2030 and beyond? It may be time to think differently, for example:

• Allowing utilities to profit (reasonably) from new technologies – especially when these technologies can also drive societal benefits in alignment with deescalating climate change is needed urgently today.
• New methods of accounting treatments and business models that consider the shorter life cycles of digitally based and more disruptive technologies that will be needed if utilities will be responsible for orchestrating the societal need for safer, faster decarbonization efforts.
• Encouraging utilities to provide oversight and measure the outcomes of innovation pilots and prototypes could support higher levels of investment and accountability.

It’s time to reverse course and start meaningful conversations inside utilities and with regulators today to reframe what the future could look like:

• Is the downward trend in utility-funded R&D a legitimate concern for the communities and society at large that you serve? 
• What are the strategic initiatives that would form our innovation portfolio and how long would these innovations take to move to production? How will we measure success? How would they benefit customers, community, and society at large?
• What happens if we don’t change? What is the cost of “business as usual”?
• What information should regulators have to adequately evaluate the merits of an innovation program or R&D investment? How should they treat the inherent uncertainties in the benefits and costs?
• How can the value of innovation be measured? What are the major challenges for regulators in evaluating and overseeing a utility’s investments in innovation? What information do regulators need from utilities to change “business as usual”?

Conclusion

In 2014, Bill Gates wrote an essay about who should pay for innovation in the energy industry. He answered the question the way:

“Why should governments fund basic research? For the same reason that companies tend not to: because it is a public good. The benefits to society are far greater than the amount that the inventor can capture. One of the best examples of this is the creation of the Internet. It has led to innovations that continue to change our lives, but none of the companies who deliver those innovations would ever have built it.”

As we stated at the beginning of this article: decarbonizing will not be easy, but it will be well worth the risk. Today there is too much at stake not to invest in our utilities’ future ability to aggressively drive decarbonization programs. The role utilities play in the clean energy transition is far too vital for society to leave them out of the innovation conversation. And, to make the safe and rapid infrastructure changes needed to support more sustainable options, utilities must be allowed to experiment with and buy more technologies faster. With rapid experimentation, engineers can guide the safe and reliable infrastructure changes needed to make the transition clean energy requires.

Going from “laggard” to reaching higher levels of maturity on the innovation capabilities curve will include operationalizing innovation programs for effectiveness by using transparent metrics, reporting and data-insights that can provide oversight to place higher levels of confidence in increased investments. We now have new ways to measure innovation and provide more oversight to regulators, communities, and shareholders. With this transparency into the innovation program, utilities can share their efforts and learnings about how their investments will be used to drive infrastructure change faster – and time is of the essence. 

In the second part of the series, we will explore the pace of innovation and the timeline for transformation looking at the mega trends forming in the “fifth and six waves” of the long-term innovation lifecycle. This is where the expected digital transformation and the clean energy transition will occur. But will the impact of the delayed investments in the utility R&D sector open the door for industry disruption? We attempt to explore this further.

Tell us what you think! Are we over or under investing in innovation? What is your utility doing? Are incentives or mandates helping or hurting? How do you engage your regulator in the innovation discussion?

Let us know and be sure to register for Energy Central’s PowerSession™ webcast May 31:  Innovation 2.0 – The Human Side of Leading Innovation inside Today’s Modern Utility where we will be joined by Harvard Business School professor Dr. Linda Hill, co-author of Collective Genius: The Art and Practice of Leading Innovation whose TED Talk on innovation has been viewed nearly 2.8 million times and the innovation team at Portland General Electric. This will be a can’t miss Energy Central PowerSession!