Utilities: 3 things to consider for cloud parity
June 17, 2022
When I talk to our North American utilities clients about cloud, roughly 9 times out of 10 a question around capitalization comes up.
Why?
By and large, utilities leaders know that cloud and related technologies can bring huge benefits: reduced costs, agility, scalability and drive innovation.
They know that the road to net-zero demands new ways of working, partnering, sharing information and connecting—just consider the emerging electric vehicle (EV) ecosystem of energy providers, charging station operators, automotive and others.
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And as utilities executives come under increasing pressure to deliver on net-zero targets, cloud is a key tool to deliver lower emissions, with an Accenture report estimating that faster migration to cloud computing could result in carbon reductions equivalent to removing 22 million cars from the road.
Further, Accenture research shows that adoption of leading-edge technologies correlates with innovation and cost reduction, with advanced cloud adopters 2-3x more likely to innovate and re-engineer knowledge work, and achieving 1.2x greater cost reductions in North America compared to those with lower technological maturity.
Meanwhile, in early 2021, we compared the financial performance of leaders in technology adoption versus laggards. Just 6% of utilities were identified as leaders—compared to a cross-industry average of between 10-18%.
So what’s getting in the way?
In my conversations, there is a key barrier for utilities: the lack of regulatory and accounting parity for cloud versus on-premise systems. In short, the ability to capitalize cloud-based investments. The status quo, and some options to help resolve it, are laid out eloquently in this paper from the Advanced Energy Economy (AEE) and the Edison Electric Institute (EEI).
Here I want to reflect on what this all means, and some things I’m counseling my North American utilities clients to consider.
Why parity matters, and why now
If utilities are behind on cloud, they’re not reaping the benefits other industries are enjoying – and more importantly neither are their customers, the grid nor their plants & operations. And with industry convergence for the energy transition blurring the boundaries of who does what, new market entrants will displace utilities before long, if they don’t catch up!
At the crux of the problem is this: regulation traditionally favors on-premise IT systems by treating them as capital investments and accounting for them accordingly. Meanwhile, cloud solutions are generally treated as operating expenses, and therefore less favorable in an industry which incentivizes capital spend through a regulated rate of return.
And here’s the real question: how long can this argument stand, when cloud does the same job as on-premise solutions—and is more secure, lower-emission, more agile, and helps businesses deliver more efficiently at lower cost? Are current regulations helping, or hindering the greater good?
That’s where the idea of parity comes in: the notion that on-premise and cloud-related costs should be treated the same in regulatory and accounting terms, when they perform the same function.
Increasingly, utilities are making the case for this change, and initiating productive conversations with regulators to move the agenda forward.
The AEE and EEI paper cites a survey by Cloud for utilities, which found that 79 percent of investor-owned utilities believe that the disparity in regulatory treatment is impeding the adoption of cloud computing. [1] From my view, 100 percent of them are right.
But cloud adoption can’t wait.
To that end, here are some things I’m suggesting my clients consider.
#1: Look at the statutes
Understand state by state what the current accounting rules are around on-premise versus cloud systems, and the tone of regulators across those different locations.
The AEE and EEI paper helps you do that, as well as providing other reference points that help make the case for what others are doing in the industry and where interpretation of capital dollars versus operational expenses may vary. The 2018 updates to the GAAP accounting standards may help, but as the paper points out, they have limitations in terms of addressing regulation around cloud computing adoption.
#2: Look to global & local precedent
Examine where cloud is being used in utilities and what benefits are cited as the basis for making a case for adoption.
That might mean looking to deregulated examples in Europe or Australia to see how moving to the cloud can position utilities out in front, and which use cases will eventually be seen in more tightly regulated markets. Remember too, that many regulated utilities in Europe benefit from recent forward-looking legislation in this area & can be interesting for comparative purposes. I’m counseling my clients to look to these other markets, and be strategic about where cloud might be applied for the most beneficial use cases.
Within North American utilities, some states have viewed long-term cloud leases favorably. As an option, a long-term lease (e.g. five+ year commitment) offers regulators roughly the same duration as for depreciation of an on-premise asset, and may help further support the rationale for parity.
#3: Engage!
These examples and benefits pave the way for engaging with regulators, and innovating for parity. I hope these discussions will additionally create the opportunity to bring sustainability into the discussion, and to lay out the emissions reduction benefits as part of the business—and value—case. It connects to the broader notion of system value, a holistic concept of value beyond cost alone.
The writing is on the wall, with 77% of global energy providers saying their organization is transforming to become more agile and digital, and less commodity-focused. Meanwhile, with 78% of energy providers saying those who do not help their customers achieve net-zero with greener products and services will get left behind, it’s time for utilities to step up on (green) cloud.
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It’s time to increase engagement with regulators to pave the way for cloud at scale. I believe it’s essential to the energy transition, and the connected products and services utilities must deliver to both B2B and B2C clients to deliver on the imperatives of a low-carbon future and compete with new entrants.
Contact me to talk more about the business case and the road ahead!
[1] February 2021. Survey available upon request from Cloud for utilities: https://cloudforutilities.org/
