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TAKING STOCK OF THE STATE AND FUTURE OF THE POWER INDUSTRY

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Utility Transformation, Strategic Investments, and Business Model Evolution for the Energy Cloud

 

With tech giants and disruptive startups delivering customer solutions that radically transform our daily lives, power utilities are not typically at the top of the list of most innovative companies. Their culture is inherently risk averse, with their value proposition built on safe, reliable, and affordable power. Delivering on these goals requires predictability, which runs counter to the idea of disruptive innovation.

But, then again, 2020 is no typical year. With climate change and the coronavirus outbreak casting a long shadow over the next decade, building infrastructure and operational and business model resiliency will be critical to utilities’ survival. At the same time, utilities are a critical lifeline for a global economy rapidly shifting to a more virtual, decentralized, and vulnerable reality.

As utilities wrestle with an expanding portfolio of looming threats, ambitious innovation is needed now more than ever to deliver the predictability so often taken for granted. Utilities must also proactively pursue new business models and solutions to preserve future market share. With an increasingly networked and connected Energy Cloud system, which Guidehouse (formerly Navigant) describes as a decentralized grid with two-way value flows and a greater abundance of demand-side solutions, remaining relevant and sustaining value will be more difficult going forward.

Embracing Transformation

Guidehouse and Public Utility Fortnightly’s recently published fifth annual State and Future of the Power Industry report shows a growing consensus that the industry is in the middle of significant transformation. Specifically, business model evolution, distributed energy resources (DER) integration, and climate change are top of mind for industry stakeholders as new and existing challenges accelerate unprecedented change.

In the face of climate change, utilities are increasingly taking a leadership role. A pulse survey of nearly 400 utility executives conducted as part of the State and Future report found that nearly three-quarters of respondents recognize that climate change is a disruptive force threatening current business models today. Over 65% of all customer accounts in the US are served by a utility with a carbon or emissions reduction goal. Still, accelerated commitments to decarbonization initiatives are needed to reduce risk and stay up-to-date with evolving customer demand.

Meanwhile, two-thirds of utility executives see increasing renewables and DER as the most disruptive force to legacy utility business models. A changing US generation mix supports this view. Solar and wind are the fastest growing sources of generation across the country, according to the US Energy Information Administration, and renewable energy generation surpassed coal for the first time in over 130 years in late 2019.

New global DER capacity deployments continue to outpace new centralized generation capacity. Guidehouse Insights forecasts show that annual net new DER installed capacity is estimated to reach 36 GW by the end of 2020 and is expected to triple by the end of the decade.

With so many competing priorities—turning over generation fleets, grid modernization initiatives, and grid-edge transformation—where should utilities invest?

Strategic Investments

The power sector is among the least digitally transformed industries in the global economy and underinvested when it comes to infrastructure. Interconnecting bulk utility-scale renewables to the system and effectively managing a diverse portfolio of DER across the Energy Cloud requires significant upgrades to the transmission and distribution system.

Among other things, investments in greater automation and remote monitoring solutions go a long way toward mitigating disruptions caused by more powerful storms and the shifting load profiles precipitated by the coronavirus outbreak. Utilities will depend more on technology and data to drive value, manage the grid, and enable decision-making. Many of the technologies needed to enable these capabilities are available today. Moving beyond pilot programs to full-scale implementation is a critical next step.

While grid modernization initiatives remain a high priority for most utilities and a critical evolutionary step to improve system resiliency, utility executives are less likely to prioritize digitization and artificial intelligence to support sustained growth according to the State and Future survey. By contrast, around half of the utility executives surveyed favor investing in electrification opportunities to support growth initiatives and one-third support product diversification.

With transformation well underway, utilities will need to be more discerning in defining the role they want to play before committing multiyear strategic investments. Potential roles include developer, operator, service provider, solutions provider, or orchestrator of what Guidehouse calls emerging multi-stakeholder Energy Cloud platforms such as Building-to-Grid, Integrated DER, and Smart Cities.

Fast-forward a decade where we live in a fully Internet of Things (IoT)-enabled world in which each load-consuming device can precisely measure and control its energy usage. In this world, would a utility still only be selling commodity kilowatt-hours?

The utility as we know it will soon cease to exist, replaced by a flexible service provider that orchestrates an ever more complex energy system. To continue delivering safe, reliable, and affordable power while building clean, flexible, personalized, and decentralized customer solutions, utilities should begin tactically investing in disruptive Energy Cloud platforms. Platforms sit at the confluence of investments into assets and technologies that will form the backbone of our future global economy.

Business Model Evolution

Only 1 in 4 major utilities in the US 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.

Meanwhile, technology and telecommunications companies, oil and gas majors, and energy companies from outside the US are increasingly acquiring customers away from US utilities. The rapidly evolving energy as a service market, which Guidehouse Insights estimates could have a potential of $278 billion in revenue globally by 2028, represents one such highly contested market opportunity.

Utility executives need to adopt an agile, dual-track approach to business model innovation. For the near-term, this means optimizing the current business (commodity sales) and addressing the immediate impacts of climate change, the pandemic, and cyber threats through proactive business continuity initiatives.

Opportunities to scale new and improved customer journeys across Energy Cloud platforms are expanding as well. In Smart Cities, for example, cross-sector coordination, a focus on citizen well-being, and climate adaptation offers a fertile testbed for new business models and customer-centric solutions.

As utilities are required to operate more horizontal and integrated, they should change their operating model to enforce collaboration of previously siloed departments. For example, a dramatic increase in DER requires diverse expertise drawn from across the organization to inform cross-functional strategic planning initiatives and support implementation.

Looking Ahead

The global energy transformation will require a shift away from a centralized, one-way, hub-and-spoke power grid to a far more distributed, two-way, and highly networked Energy Cloud.

No forward-looking discussion of the utility industry is complete without acknowledging that the coronavirus pandemic has ripped the rug out from under business-as-usual thinking. The pandemic has turned our collective eye toward business continuity planning and raised new questions about the role of technology in serving customers, maintaining operations, and keeping people safe.

Coupled with an energy transformation already underway, utilities need to approach the energy industry and its associated infrastructure differently, rethinking the customer value proposition and relentlessly innovating. Risk management practices will need to change to address new evolving and emerging threats that complicate strategy execution, business model design, and enterprise operations.

The latest State and Future report shows that the utility industry has made significant progress since the first executive pulse survey was conducted 5 years ago. However, present day challenges will require more ambition and a willingness to tackle significantly more risk. While the challenges are daunting, if there is one takeaway, it’s that preparing for the effects of highly probable events needs to be central to utility strategic planning and investment prioritization going forward.

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Guidehouse
Guidehouse is a leading global provider of consulting services to the public and commercial markets with broad capabilities in management, technology, and risk consulting.

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