When Thomas Edison opened the Pearl Street power station in New York City in 1882, it lit up to 400 lights and served 85 customers. That number quickly rose to 500 customers in a few years, and the system used a series of indicator lights to show increases and decreases in load. This rather crude method of load management is one of the earliest instances of technology being used to manage energy supply. Fast forward a century and a quarter, and high-powered computers have replaced indicator lights. But the premise is still the same: to keep the grid in balance and the lights on.
The difference in today’s increasingly decentralized world, is that technology innovation is enabling – and demands – adjustments in real-time. System operators can instantaneously balance a multitude of distributed generation resources, pushing to and drawing from the grid.
Technological advances are allowing greater management of power but the evolution to distributed energy resources (DER) and the rise of the prosumer are also having a detrimental impact on traditional utilities. Just look at what has happened to the pan-European utility majors over the past decade: US$150b in write offs in the past six years, 400 GW of Europe’s around 900 GW of installed capacity struggling to break even, and the market cap of Europe’s top 20 utilities halving from US$1.5t.
What’s more, new competitors – particularly from the technology space – have accelerated investment in the sector and have introduced new products and services to the market in areas like robotics, artificial intelligence, machine learning, data analytics and blockchain [see my blog on blockchain here].
While innovation may be opening the door to more mobile or tech savvy competitors, it also opens up opportunities for utilities if harnessed and commercialized in the right way. Embracing transformation requires a new way of doing business and a different cultural mindset. Across the board, I am seeing utilities starting to adjust their approach to innovation. General-purpose technologies advancing rapidly in other sectors are enabling the creation of new business models. For instance:
- New utility customer engagement models focused on the connected home;
- Distribution companies transitioning to reactive DER management and using automated controls to improve network resilience, safety, and efficiency;
- The use of drones as well as augmented and virtual reality to increase workforce efficiency and improve asset management;
- The automation of some back office and call center functions using robotics.
These are just a handful of examples. The biggest challenge for the utility executives I meet is knowing how to stay on top of this technology wave and create a strategy for technology evaluation and sustainable innovation. New technologies open attractive evolutionary pathways and new forms of collaboration and can be successful where new services, such as EV charging and energy services, are developed around the core business. But success of emerging services and business models also needs to be measured.
Examples of success include:
- Reducing customers’ costs to buy (e.g. through better interfaces and more flexible services)
- Increasing ease of access to information including intellectual property and safety
- Positioning brands for next generation revenues, such as in-home
- Improving businesses cost to serve creating lower risk networks
- Providing lost cost, high transparency platforms allowing consumer participation
Utilities have started innovation programs to define and develop their business models but my experience suggests there is still work to be done. Companies are often focused on what I call “innovation as theatre,” where the latest technologies are wrapped into a product and launched without proper analysis of the size of the opportunity or target market. Then there are those companies that spend a great deal of effort developing and testing new products and services but don’t have an ecosystem to pilot and then execute them. Finally, new products and services require access to new skills and input that aren’t always in place; there are organizational gaps and new products subsequently fail to move beyond the concept phase.
So how to respond? Utility executives should evaluate these lessons. Taking advantage of hot technologies in the complex utilities context requires discipline, pragmatism and organization. To be successful, utility executives should undertake the following three steps:
- Organize for innovation: define and design a strategy and operating model for innovation
- Execute for innovation: manage the innovation process emphasising defined KPIs, process discipline and self-awareness
- Venture for innovation: take advantage of the innovators and build the capabilities to do this effectively
Transformational digital technologies provide a foundation to reinvent the sector, to create new information and customer-centric business models that can service networked and sharing economies. The new wave of disruption is coming and bringing with it new competitors that are cash rich, agile and aggressive. How are you preparing to counteract this threat?