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Mastering the innovation challenge in the utility industry – Together

Posted on behalf of Hans Kobler – Energy Impact Partners

New technology is rapidly changing the utility industry and it requires leadership to manage the change.

The utility industry is facing its biggest transformation in 100 years. The advent of cost-competitive, clean distributed generation; expanding customer needs and engagement; and demanding policy changes are creating a dynamic environment for utilities, start-ups, investors, and customers. Utilities are being forced to innovate, change strategy, and adapt. New technology players need to plot their path to success through a very complex market and must decide whether to compete or cooperate with incumbents. Investors returning to a challenging market environment are trying to pick the winners in a segment that is partially deregulated and regulated, making their job vastly more difficult.

Why is it so hard to innovate in this space?

The utility industry is one of the most challenging investment environments. Investors face the typical hurdles of any other industry in transition: finding the transformational play in a segment that matters; picking the right technology; betting on the right leadership; and then seeing it through. The stakes in the electric industry are much higher, however, because electricity is the most fundamental resource of our economy. It helps grow our food, deliver our water, power our hospitals, and heat, cool, and light our schools and businesses. These high stakes make innovation especially challenging.

Above all, power needs to stay on, which naturally requires a conservative and thoughtful approach. And the costs and benefits are asymmetrical: utilities are not usually rewarded for innovation, but state governors can be recalled when electricity becomes a problem (see Governor Davis of California, 2003). Also, the electric grid is a natural monopoly that has been entrusted to the utilities; electricity must obey the laws of physics and run through these wires. One cannot ship electrons from an Amazon warehouse to a customer or send them through the airwaves. Thus the utilities are the natural—and perhaps the only—agent of change. Last but not least, regulators have a great deal of say over who will be successful as they lay out the rules of the road for utilities and new players. For innovation to work, innovators, investors, incumbents, and regulators have to collaborate.

A collaborative approach to innovation

Under the leadership of Southern Company, National Grid and Xcel Energy, a group of like-minded power companies has come together to jointly tackle this challenge. Working together, investigating technologies, building working groups to share experiences, finding the right solutions to reduce the risk of innovation, and discussing winning strategies, this group is taking a collaborative approach to innovation. At Energy Impact Partners, we are leveraging this best practice approach with a joint investment effort. We collectively scout for meaningful technology companies using a process that our team pioneered successfully at General Electric in the late 1990s.

Strategic Equity Investing – a win/win for industry innovation

Our approach is very simple: we provide our utility partners with important strategic insights and proprietary information so they can 1) find new revenue opportunities; 2) get closer to their customers; 3) improve operations; and 4) identify threats that might be coming over the horizon. By working together, this group not only significantly expands its visibility and insights into developing trends, but is able to discuss the impact and potential strategies with like-minded peers. New technology innovators, on the other hand, benefit not only from invested capital but from easy access to a global group of leading utilities that could become customers. This reduces each utility’s risk of innovation, since the emerging solution providers benefit from both solid balance sheets and greater revenues. Everybody wins.

Expanding to a global footprint

More utilities in North America and globally are joining the team. We recently announced that Ameren, Great Plains, Fortis and Avista have joined what we call the Nexus coalition. This group covers more than 30 million households, generates 100 GW of power, operates more than 3 million miles of wires, invests $18 billion annually, and has a combined market cap of nearly $200 billion. Shortly we will be joined by other international players, who bring different experiences and insights to broaden the dialogue and strengthen the coalition.

In this industry, innovation is necessary – and possible. Utilities are at the forefront of many groundbreaking developments. Contrary to popular perception, they support and encourage innovation. Working with organizations like EPRI, U.S. National Laboratories, Edison Electric Institute and others in the sector, these utilities are blazing a trail forward, all while making sure the lights stay on. By leveraging a collaborative, strategic investment approach, utilities are both accelerating the pace of innovation and reducing its risk.

About the author: Hans Kobler is CEO & Managing Partner of Energy Impact Partners, a utility-sponsored private equity firm and collaboration platform focused on the transformation of the electric utility industry. As Chief Strategy Officer at General Electric’s Equity group, Mr. Kobler was one of the pioneers of successful strategic equity investing models. He also led GE Equity’s investment efforts in Power Technologies. Later he was CEO of Digital Power Capital and ICx Technologies. Mr. Kobler holds an MBA from the University of Texas and a Master of Aerospace Engineering from the Technical University of Munich. 

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