The New Horizon: Changes Defining a New Era for the Electric Utilities Industry

Transformation

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March 10, 2017

Recent and current trends in the electric utility industry signal an industry transformation toward a more dynamic and advanced industry structure, “Energy 3.0” as detailed in our recent post Disrupted: A Brief History of Recent Electricity Industry Transformation. The Energy 3.0 environment is characterized by two types of players: the traditional utility company and the new agile entrants. We do not believe there is a one-size-fits all solution for success. The variables of free market forces, different regulatory environments and different technologies will require diverse operating models and cultures.

Two Distinct Environments

The journey toward the “Energy 3.0” state is creating two different environments within the electric utility industry. This development is reminiscent of the transformational experience in other industries. For example, the airline industry, financial services and telecommunications industries have all adapted to embrace technological disrupters such as smart phones, mobile devices enabling synchronization with airline flight displays and tracking of customer journeys through airports, and apps allowing crowd funding to raise capital. We see that these differing environments are representative of the components of the value chain:

  • A classic utility which operates within the traditional previously regulated (or currently regulated) parts of the value chain, and;
  • A new utility model which operates in the customer-facing elements of the value chain and deals with new technologies and new business models.

We are now seeing this trend reflected in the capital markets with some recent major restructuring announced by large utilities in Europe, and investment in non-traditional offerings by U.S. utilities.

Two Distinct Business Models

Divergent business drivers and operating models govern these separate environments. To be successful, organizations must ensure that the focus of their activities is aligned to the very nature of each of these environments. Electricity market deregulation has occurred to varying degrees in different parts of the country, with varying success, and even traditionally regulated markets are experiencing disruption in the Energy 3.0 environment. While we don’t suggest that further market deregulation is on the horizon anytime soon in the U.S., new market entrants by their nature are making all markets more diverse.

EU graphic 1

Traditional Environment

The traditional utility company operates within the asset-intensive value chain. Success in this environment relies upon superior asset management, works management and operational excellence.

EU graphic 2 v2

New Utility Environment

The new utility will operate in the customer-facing end of the value chain and will deliver some of the innovations that smart grid technology enables.

EU graphic 3

Core Competencies

Evolved utilities will need to exhibit these agile-like characteristics for success in the market:

  • New agile product development capabilities that are best in class, covering strong knowledge of industry developments in communications, software, smart devices
  • Ability to scan technology developments outside their own organizations and incorporate these into product offerings
  • Strong collaboration with grid companies to develop commercial models with those companies as they support the implementation of new, grid-reliant products (e.g. internet of things)
  • Ability to develop new business models based on a comprehensive understanding of their customers
  • Develop a culture that promotes and nurtures innovation across the entire value chain

While some of what determines these two distinct environments is the regulatory and political characteristics in the jurisdiction and the technologies that are competitive in the region, there is a role utilities play in shaping the environment by either embracing or resisting change. In our final post in this series, Leadership Lessons for the Next Generation Utility Leader, we’ll explore ways that utility leaders can successfully guide their companies through this transition.

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