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Rethinking Utility Strategy for the Post-COVID Era

Posted to Guidehouse in the Utility Management Group

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If 2020 was an unprecedented year in which gray rhinos – obvious dangers that we choose to ignore – stampeded over best laid plans, 2021 may very well prove to be a watershed moment for the utility industry’s evolution toward the Energy Cloud.

Post-COVID, the energy transition is expected to further accelerate. Build Back Better has become a central theme for governments across many regions, including within the U.S. under the new Biden administration. Momentum and the funding needed to invest in new energy solutions and infrastructure are growing rapidly, while policies and regulations continue to set the course for a new energy era.

Utilities can and should lead the transition to a more virtual, cleaner, decentralized, and equitable energy future. Staying ahead of market shifts will be critical to delivering on this social contract. Utilities will need to do so while managing an increase in unplanned costs as well as addressing multifaceted customer demands.

Below are five trends that are likely to significantly impact the trajectory of the power industry in 2021.

1. A convergence of physical and cyber risks will accelerate efforts to improve resilience.

While clean and net zero initiatives remain top of mind across the power industry, the conversation is expected to expand to prioritize climate and cyber resilience. Last year, the industry experienced a higher incidence of blackouts linked to historic wildfires, along with heatwaves that stretched system capacity, destructive hurricanes, a global pandemic that upended energy consumption patterns, and one of the most pervasive cyber attacks in the U.S. in the SolarWinds hack.

In response, business continuity planning will likely take center stage with a marked shift beyond theoretical initiatives to a focus on minimally viable solutions that bolster business continuity capacity. Specifically, the industry should expect greater implementation of robust cybersecurity and emerging technology solutions aimed at improving critical utility infrastructure resilience, including power plants, grids, water networks, and gas pipelines. Meanwhile, the legacy of COVID-19 lockdowns suggests greater investment in operational agility and solutions focused on protecting workers in the field, including the integration of technologies and solutions to reduce reliance on truck rolls.

2. Utilities will find themselves increasingly under the ESG performance microscope.

With 2020 described as the year that the environmental, social and governance (ESG) movement in capital markets and financial services came of age, more utilities are expected to integrate ESG into their business model planning. The drivers behind this shift are many and unlikely to subside. Utilities, which are deeply embedded in the communities they serve and often scapegoated for their role in contributing to climate change, are likely to face shareholders demanding that company leadership adopt more proactive corporate initiatives.

Diversity, equity, and inclusion initiatives are expected to expand across the power industry in kind, especially in light of social developments in the U.S. With a rapidly aging workforce, utilities will embrace hiring and staffing goals that better reflect the demographics of the communities they service and prepare their organizations to better compete for talent in the decades ahead. This also suggests a greater focus on diversifying leadership teams.

3. “Green Recovery” is expected, but uncertainty related to the timing and scale of economic recovery will impede the return to normal.

Utilities will grapple with questions around the timing and pace of global recovery, which will undoubtedly delay utility customers’ “return to normal” well into 2021 (and likely beyond). That said, the incoming Biden administration with support from a Democratic-controlled Congress will likely use investments in broadly inclusive decarbonization and infrastructure as a key stimulus vehicle for the U.S. economy. The state of the economy combined with plans to rejoin the Paris Accord suggest that a “Green Recovery” stimulus could be heavily skewed toward energy initiatives on par with the American Recovery and Reinvestment Act enacted under the Obama administration in 2009.

Utilities should expect a focus on building out an economy centered on broadly inclusive climatech solutions with a particular emphasis on critical infrastructure and renewables. Over 65% of all customer accounts in the U.S. are served by a utility with a carbon or emissions reduction goal. The focus is already shifting beyond one-off emerging technologies – electric vehicles (EVs), storage, and all things “smart” – to holistic grid modernization strategy, customer-centric solution design, and business model innovation. While recovery will take time, all signs point to the expansion of a cleaner, intelligent, distributed, shared, and more equitable energy system.

4. A growing focus on integrated energy systems, electrification, and hydrogen initiatives will deepen decarbonization.

The role of electricity is becoming more prominent and more central in the global energy system. With the continued rapid expansion of distributed energy resources (DER) capacity, incumbent energy companies and utilities will see more diverse opportunities to capture new load growth across a more distributed and connected infrastructure base. In 2021, support for electrification efforts is expected to continue targeting building infrastructure and mobility. At least half of the utility executives surveyed in Guidehouse’s 2020 State and Future of the Power Industry report favored investing in electrification opportunities to support growth initiatives. As such, utility EV and fleet decarbonization investments should continue to increase in response to aggressive state and local decarbonization initiatives.

At the same time, multi-fuel-based energy companies and utilities will look to take advantage of integration across energy carriers to access adjacent end markets and high growth applications. Power-to-gas schemes in which electricity is converted to hydrogen and eventually to other fuels, like synthetic methane, should see progress toward more widespread commercialization in the U.S. As a result, more power and gas utilities are expected to consolidate their operations further, while traditional oil & gas players are expected to continue increasing their investments across the new energy ecosystem.

5. Consolidation will continue across the broader energy sector.

When NextEra Energy, a company that has built the world’s largest collection of wind and solar farms, unseated, first Chevron, and then Exxon, to become the most valuable energy company in the U.S. in 2020, it was a watershed moment for the energy transition. Although a short-lived milestone as the oil & gas industry recovered later in the year, it was certainly no less significant in marking the ascendance of the post-carbon energy economy in the U.S.

With utilities making a compelling case for clean energy growth in the power industry, they will undoubtedly face stronger competition up and down the value chain in 2021. International oil & gas majors, particularly those headquartered in Europe, are expected to continue moving aggressively to acquire innovative startups and partner to commercialize disruptive clean energy solutions. Meanwhile, U.S. utilities must also contend with consumer technology giants as well as energy companies from outside the country grabbing market share with customer-centric solutions. Considering that a number of emerging technologies proven out in the prior decade have reached or are rapidly approaching cost parity, 2021 will likely see significant consolidation across the broader global energy sector.

Only 1 in 4 major utilities in the U.S. have made meaningful progress in developing future-oriented business models according to Guidehouse’s 2020 Energy Cloud Readiness Index study. Only 1 in 10 have done so proactively with little outside pressure from regulators, customers, or competition.

Ultimately, we will likely see a more pronounced shift in 2021 away from a centralized, one-way, hub-and-spoke power grid to a far more distributed, two-way, and highly networked Energy Cloud. In turn, this will usher in a cleaner and more equitable energy system among stakeholders (including the end consumer). For utilities, this means expanded opportunities to scale new and improved customer journeys across stakeholder platforms like transportation, smart cities and integrated DER (iDER) networks that will form the backbone of our future energy economy.

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