I was recently asked how I would describe the utilities industry over the past decade and two words came to mind: disruption and transformation. The unprecedented disruption in the market required significant transformation by utilities to adapt to changing demands and new ways of operating. Looking ahead, I believe opportunity and purpose will be the defining mantras for 2020 and beyond. I’ve outlined below the five key trends that will be most instrumental in driving the opportunities for utilities to reinvent their businesses and serve a greater purpose. And while these trends aren’t necessarily new, I prefer to think of them more as accelerators that will redefine the industry over the next year and decade to come.
1. For the people, by the people
In the absence of true climate diplomacy, citizens will drive the charge for change.
Disagreements on policies—from the Paris Agreement to the COP25 to the EU New Green Deal—has stalled global progress on meaningful actions to address climate change. Without centralized coordination, we are seeing a growing decentralization of the decarbonization push. Frustrated by a lack of action, it has been people, cities, states, corporations and the like setting emission reduction goals to reach 100% renewables over the next 20 to 30 years. This shift will only accelerate as pressure from younger generations as well as activist investors, NGOs and the sustainable investment community look to reverse the climate change tides. This purpose-driven approach is not just being led by younger generations, although they have been the most vocal, but older ones as well who want a better environment for their children and grandchildren.
Utilities will be continually pressured to demonstrate greater responses to increasingly environmentally conscious consumers. Millennials and Gen Zs have become hyper-aware of their impact on the planet and expect more from their utilities—greener options, more products/services, interoperability with smart home tech, EVs, etc. To date, most utilities have not taken bold steps to address the concerns and demands of their customers but will have to act to remain relevant to customers.
These younger generations are becoming a larger share of the workforce as well, requiring utilities to shift their approaches to attracting and retaining talent—they must have a purpose-led, sustainable mission to attract and retain the best talent. Utilities must shift their approach to attracting and retaining the best talent by developing a purpose-led, sustainable mission. Successful utilities will act with purpose and strive to adopt new business models that address the concerns of their customers, shareholders, employees and other stakeholders and work together toward supporting a sustainable planet for generations to come.
2. Tectonic shifts
As industries collide, some will rise while others will be swallowed up.
Like the tectonic plates of earth’s crust, industries shift with time and pressure. Sometimes, massive new industry players emerge and rise like the Himalayas—Google, Amazon and Alibaba come to mind. Others are being slowly pushed down deeper and may eventually cease to exist.
The oil and gas and utilities industries have co-existed relatively well over the past century or more, but times are changing. Utilities have long enjoyed an industry to themselves—monopoly status, high barriers to entry and often generous governmental support. But a new ecosystem has formed, driven largely by the need to transition toward cleaner energy. Players from a variety of industries, including energy management, automotive, startups and oil and gas, are crowding into a space that has traditionally been controlled by utilities.
Energy majors, pressured by ever-mounting environmental concerns from governments, activists and others, will continue to look for opportunities in the utilities space in efforts to decarbonize their portfolios. Over the past couple of years, energy majors have been busy acquiring positions in renewables, electric vehicles and retail energy, effectively testing the waters. Repsol in Spain has been capturing 600 retail energy customers a day for a year—more than all utility players combined—leveraging its petrol station network to offer bundled deals and demonstrating it can be a formidable player in the market. It is likely that 2020 will be the tipping point when majors start to make a meaningful impact on the utilities industry.
Startups, too, will continue developing disruptive value propositions and competing with utilities to lure away customers as well as attract the best talent. In 2020, we can expect more movement from big players in adjacent industries—from digital giants to home improvement retailers. Ikea, for example, is already generating more electricity than its stores consume. The Swedish home goods giant is further developing its home solar service to enable customers to produce and use renewable energy.
3. Flexibility is the key to longevity
As any yogi will tell you, the more flexible you are, the healthier you will be. The same can be said of a utility and how they think about the way their grid operates.
Grid operators are living in interesting times. While there have been significant improvements over the past 100+ years in how an electricity grid is operated, its fundamentals have remained basically the same. In the absence of building an entirely new grid from the ground up, utilities are challenged with integrating increasing amounts of renewables, energy storage and EVs into a network that just wasn’t designed for change. The need for flexibility will become increasingly more evident as these resources become commonplace.
Flexibility, in mindset and in action, is not only critical for efficiently and effectively operating a grid to maintain safety and reliability, but to remain relevant with customers. Energy-as-a-service offerings will expand, increasingly from outside the traditional utility market players requiring utilities to evolve their traditional approaches to serving commercial, industrial and municipal customers. Demand charges and standard rates are being challenged by these end users who are increasingly looking to green their power supply and increase reliability.
New market entrants, offering flexible choices focused on energy efficiency, energy storage, microgrids and renewable procurement are drawing customers away from those incumbent utilities who lack anything more than business as usual. Firms that can offer consumers an energy-as-a-service model that guarantees reliability, resilience and clean energy will increasingly win in the market.
4. Energizing storage
Electric vehicles will be the catalyst that gives storage a real charge
The rapid decline in battery costs is increasingly making effective power storage a reality, which is challenging conventional industry dynamics. Utilizing storage to eliminate renewable intermittency, provide reliability during outages, replace fossil-fuel peakers and power EVs, makes it a true game changer for utilities.
Events in 2019 exposed cracks in the foundation of a ubiquitous storage future. These growing pains ranged from equipment fires, security concerns and supply chain constraints to lower than expected sales growth. But the past year has also showed signs that batteries will play a critical role in the industry over the coming years. Several U.S. states announced storage installation goals, utility-scale renewable projects as well as end-user PV systems that are increasingly being paired with storage as customers are demanding reliably though extreme weather events and pre-emptive shutoffs. Lithium-ion alternative storage technologies ranging from mechanical means, compressed air, to flow batteries will diversify the options for both developers and utilities.
2020 will be a reacceleration of storage. EVs, which are nothing more than rolling batteries, will likely be the primary driver of lower cost battery manufacturing and technological advancement. Future-minded utilities will embrace EVs not only as a new source of revenue but as a distributed network of flexible storage that can be utilized to maintain reliability and work toward decarbonizing their grids.
5. Hydrogen: Liftoff sequence initiated
Renewable gas is more than just a lot of hot air, it could become a critical component to meet decarbonization goals.
Non-fossil-based fuels are nothing new, having existed for decades and used in a variety of specialized applications. Now, a variety of market factors are shedding new light on the benefits of renewable gas, hydrogen in particular.
As the climate change discussion heats up, it is becoming increasingly evident that renewables alone will not be enough to meet decarbonization ambitions. Much attention has been focused on reducing reliance on fossil fuels and moving toward electrification. Electrifying transportation has been at the center of decarbonization efforts, but natural gas is increasingly being targeted as the next wave for emission reduction. Gas use in commercial, industrial and residential buildings, and increasingly in power plants, is coming under scrutiny and several cities already have instituted rules to ban gas use in new construction.
Renewable gas production has long been too cost-prohibitive to be used widely, until now. Advances in bio-methane collection from refuse and agriculture has proven to be a viable resource. Additionally, with solar and wind assets becoming a larger portion of many countries’ power mix, excess capacity could be used to produce hydrogen through electrolysis. Best of all, these gases can be transported through existing gas infrastructure and can be mixed with conventional gases for use in power generation, heating and industrial process with minor equipment modifications.
Hydrogen has long been touted as the panacea for emission reduction, vehicle propulsion and limitless energy. Hurdles remain before it will be widely adopted, but its draw it too tempting to dismiss. Already, several European gas giants have identified hydrogen as a key component of their energy strategies, and it is likely we will see more in 2020 and over the coming decade.
2020: A new decade of opportunity and purpose
As we start the new year and embark on the next decade, change will happen—fast. There is ample opportunity for all incumbent and new players to capitalize on the trends shaping the utilities industry, but it requires a proactive approach and a purpose-driven agenda. It’s an exciting time for this industry and I’m very optimistic about the future not only for utility companies but also their customers, employees, and communities.