How Utilities Can Navigate the Energy Transition with Near-Term and Long-term Actions

• The world is moving toward the adoption of cleaner sources of energy, and to retain their critical role in the energy ecosystem, utilities must figure out how to navigate this new environment.
• There are clear steps that utilities should be taking to enable progress while managing rate increases. Some of these are no-regrets actions that can be taken now and others are bigger and bolder and challenge the historical business model.
• Leaders need to think tactically and creatively about how they will overcome challenges to accelerate the transition in a way that benefits all stakeholders.

Global trends toward clean energy and increasing public calls for decarbonization have created an extremely complex situation for utility companies. This level of change requires significant capital investment that will translate to rate increases. However, in our current economic circumstances, many utility leaders are unsure if they’ll get the approval they need to increase rates to give them the funds to deliver on the ask.

In spite of the uncertainty, the imperative to change is clear: The world is moving toward the adoption of cleaner sources of energy, and to retain their critical role in the energy ecosystem, utilities must figure out how to navigate this new environment. Everyone is in agreement on the destination – a decarbonized energy ecosystem – but most have less clarity on how they will actually get there. The ability to navigate this tension will be one of the major deciding factors as to whether utilities can successfully execute their decarbonization plans.

Right now, there’s a bit of a perfect storm happening. Utilities are spending more on capital to fund the renewables transition, but they aren’t saving on operations and maintenance (O&M) because inflation is driving it up. This is passing unsustainable rate increases on to customers and making energy transition timeframes seem increasingly optimistic.

We posit that, rather than be discouraged, there are clear steps that utilities should be taking to enable progress while managing rate increases. Some of these are no-regrets actions that can be taken now and will resonate across utility players, whereas other steps are bigger and bolder and challenge the historical business model (but could accelerate change).

The playbook for success as a utility is being rewritten and the solutions and business models of yesterday are coming under pressure. This uncertainty can be paralyzing, but we see three clear steps to pave the way.

The utilities that will win in the long run are those that:

• Reduce costs via no-regrets actions to optimize operations and maintenance.
• Accelerate growth with strategic investments in forward-looking technology and process improvements.
• Innovate traditional business models to accelerate capital investment.

No matter the degree of a utility’s ambition (e.g., the extent to which you want to accelerate the rate of your energy transition), making progress to optimize existing core operations while investing strategically in future-focused solutions will enable the path forward.

The simple, no-regrets path for utility companies to take today revolves around optimizing their operations and maintenance processes to contain costs as much as possible. These types of decisions are ones that are generally top-of-mind for leaders, and given the proximity to the core business, are often areas where they can make relatively deliberate decisions around how to drive efficiency.

When the core business is optimized and running efficiently, this frees up resources and capital to invest in forward-looking digital solutions that move the utility closer to the aspirational goals for carbon neutrality and energy transition. The question for leaders to reflect on here is not necessarily are you taking action (the answer is likely yes), but are you acting at a scale that is commensurate with what is needed to fund your future, while sufficiently protecting today’s business?

Some of these no-regrets actions for utilities leaders include:

• Planning for O&M resource transitions as renewables increase. Avoid the trap of bloated resourcing needs as supply transitions by carefully planning for the scale up and scale down of capabilities and people.
• Improving and streamlining your operating model by leveraging data and technology. Ensure a clear and robust technology roadmap is in place that both articulates how systems need to be improved/incorporated and how they will work together to yield meaningful cost savings.
• Reinventing the customer experience. Especially in light of necessary rate increases, consider how you can improve your customers’ experiences with your company, especially by providing exceptional digital interactions, where possible. Improvement in this area, should also be able to drive O&M improvements long-term.
• Developing training and recruiting oriented at capabilities of the future. The time to start training your leaders and employees to adapt to the changing industry landscape is now. Consider what your existing development program looks like and make adjustments as needed to account for the realities of the energy transition.

Unlike the no-regrets actions listed above, making investments in forward-looking digital applications can feel risky.

Predicting the pace of technology development, internal and external demand and adoption, and consequent optimal roadmap is tricky work with real stakes, even for the best equipped organizations. There’s substantial risk involved in overinvesting in the short-term. In contrast, in the case of underinvesting, there is diffuse responsibility so that it’s not tied to any one person or decision. This leads to a tendency toward risk aversion because inaction feels safer.

However, that inaction is at the expense of longer-term value creation. Any steps utilities do make in this direction throughout the earlier stages of this transition will help them to leapfrog the competition on the other end. Some of the actions that might help them do that include:

• Optimizing the customer experience. As competition increases and consumers have more choice about where they supply their power and charge their devices, electric vehicles, etc., the experience each utility provides will become paramount. Utilities need to deliver a step-change in this area to replicate the retail customer experience with intentional technology investments.
• Having a plan for marketing, public relations, and community engagement. As the energy transition progresses, it will be important for utilities to increasingly enroll their community members as advocates in the energy transition.
• Understanding the utility’s role as an energy manager and facilitator. This will require new systems that are more capable of managing a microgrid in a much more sophisticated way than legacy technologies.
• Building more dynamic and responsive strategic planning and forecasting capabilities. Forecasting energy demand and supply variability is becoming exponentially complex. The better equipped utilities are to forecast amidst this uncertainty and drive real-time decision making as things change, the better equipped they will be to take quick action.

The topics in the first two sections already cover what amounts to very significant levels of change. But they also largely assume that utilities play a somewhat similar, if slightly more expansive, role on the value chain. However, in the interest of helping drive huge industry change and accelerating the energy transition, utilities might ask even more foundational questions around how they can deliver more value creation in that context. This entails wrestling with questions such as: What is our vision of that future environment? What are the new emerging areas of value creation and capture? Who do we want to be in that future and which opportunities are we best positioned to pursue? How might we rethink the business model of today to pursue those opportunities?

In times of seismic change, it is important to step back, and question implicit assumptions around identity, vision, and the types of solutions and business models that are in and out of bounds.

If the determination made during this strategy phase is that your organization needs to think beyond the historic core business, there are four things you might consider as you embark upon this daunting, though doable, exercise.

• Finding “white space” areas for potential growth. As you consider the competitive landscape, take into account any frontiers that appear ripe for tapping into new customer segments or jobs to be done.
• Deploying new solutions to serve target customers. Take a look at how customers’ needs are currently being fulfilled (or not) and consider whether you could provide (ideally a better) alternative. Keep in mind that this might mean questioning the current regulatory bounds of a utility player.
• Testing out new markets. Think about where and whether there might be underserved markets that you could serve.
• Creating new systems, rules, and metrics. When you undertake a fundamentally new business model, it’s important to ensure you have the right infrastructure to execute efficiently and effectively.

The history of the utility-scale electricity provider is a little more than a century old, but we are facing a level of unprecedented change. Leaders need to think tactically and creatively about how they will overcome challenges to accelerate the transition in a way that benefits all stakeholders. The above lays forth a stepwise approach to making progress against the energy transition mandate and includes increasingly bold actions that should be evaluated against the level of ambition leaders have to adapt for the sake of leading the change and driving accelerated impact.