Revenues are squeezed and disruption is up, but the outlook for electricity distribution companies is positive.
Network utilities have been grappling with regulatory pressures on revenues, disruptive new technologies such as distributed generation (DG) and storage, heightened operational complexity, tougher output performance targets and weaker demand growth. Amid these circumstances, it is no surprise that many distribution companies have seen their profits compressed.
Accenture believes this challenging environment is likely to continue in the near term, as utilities and regulators evolve toward a more distributed, cost-effective electricity system. However, irrespective of short-term challenges, Accenture’s view is that distribution has the potential for a bright future, both as profitable businesses and playing a key role as a pivotal component in the evolving power sector.
This buoying optimism shouldn’t mask the critical transition required to transform network companies to succeed amid complex business conditions and position for future growth. Regulated financial returns for many network utilities will be increasingly tied to operational, societal and customer-related performance. Network utilities are also not immune from the interests of new entrants, looking to secure positions to profit from the growth of new services in areas such as microgrids, DG, storage and energy platforms to support active optimization of supply and demand across networks.
How to thrive and unlock new value? First electricity networks companies need to transform their core business through digital solutions deployment. By making the leap to become intelligent utilities, electricity network companies can tap into significant value trapped in traditional operating models and free up investment capacity, by unlocking cash for reinvestment. Doing so will provide an efficient basis to grow their core by maximizing income from within existing regulatory models through targeted investments and outperformance on incentive mechanisms. Utilities could also position themselves to benefit from potential industry consolidation or from opportunities in new geographies.
Finally, where appropriate, network companies could then scale new businesses, making plays such as data hubs, IoT platform solutions for DG, microgrids, smart cities or engineering services. These new businesses could ultimately exist within the regulatory fence or developed as new unregulated businesses.
While there are many considerations about the future of the electricity system, the one certainty is that it is evolving. Digital technology is taking hold, enabling new value from smarter grids, in meeting the demand and growth of a low-carbon economy and in releasing hidden value from inefficiencies in the existing business operations. Network utilities have an opportunity to thrive in the new power model, forming the central platform for an increasingly distributed and actively managed system.