In my previous blog in this series on how utilities can reinvent themselves for a new power model, I examined the importance of digital and innovation in delivering the radical transformation they need. In this second blog, I’ll drill down into the strategies and evolutionary path that I believe utilities will need to follow to succeed in the new environment.
I ended my first post by observing that utilities’ reinvention should focus on seeking out new revenue sources and taking advantage of the opportunities of the new power model – but that full implementation of the new model will take several decades. In my view, this combination of factors means utilities must focus on three strategies simultaneously.
First, they must look to transform their current core, by taking steps to maximize the efficiency of traditional parts of their business through the application of new digital technologies. Every process can be reinvented, adding significant value to the bottom line.
Second, they should identify and exploit the potential to grow their core business, by seeking out expansion opportunities such as in countries where there is growing demand, a better return on assets or greater regulatory predictability.
And third—of course—they should look to “Grow the New." This means shaping and sustaining a new wave of growth by leveraging new generation technologies and capitalizing on the downstream opportunities of a more distributed resources world, together with a new spectrum of customer-related services.
The fact that utility leaders need to pursue all three strategies at once means striking the appropriate balance will be difficult. But that won’t be the only challenge. The implementation of the new power model will take both time and major investments—with most of these going into renewables and transmission and distribution.
Through that period, utilities will need to operate in a “hybrid model," with a traditional centralized system coexisting with a more distributed model. For international utilities, the picture will be further complicated by the need to cope with different degrees of development in each geography where they operate.
So, there are big investments ahead. But will traditional investors be willing to fund it? This question is especially relevant amid today’s conditions in the energy market, with declining profitability, regulatory instability, a lack of clear vision over the future model, and technology risks as new opportunities mature.
These challenges mean interventions are needed from key stakeholders to help develop the most efficient energy model from the consumer and society standpoint. For instance, policymakers and regulators must understand the vision of the hybrid model, and define mechanisms and incentives to achieve it in the most efficient way, taking the needs of the whole system into account. This will require new compensation models, new market designs—like capacity payments—and clear responsibilities all along the value chain. Plus clarity and stability around regulatory frameworks to facilitate long-term investments.
And something else will also be needed: a readiness by utilities to innovate and collaborate with a broader ecosystem, to develop new business models, become even more customer centric, and create new capabilities. It’s time for utilities to close that gap compare to other industries. And harness the combined power of innovation and digital to drive their next wave of reinvention—and growth.