Accelerating growth of new energy technologies is already having a profound impact on energy demand and on the utilities industry. Over the next decade, this trend, driven by policies, technology innovation, shifting consumer behaviour and other macroeconomic factors, will force a transformation of utilities´ business models. There already are numerous popular reports of a looming utilities ´death spiral´: - customers migrating off the grid or using the grid only as a backup, thus, forcing utilities to increase rates for their remaining customers, and thereby pushing more customers off the grid - a vicious cycle.
To determine the likelihood of this scenario and to assess the impact and the extent of the disruption to the utilities industry in the coming years, Accenture conducted an extensive research and modelled several potential scenarios.
This analysis found that the ´death spiral,´as commonly defined, is a myth. It is unlikely that customers will defect from the grid due to physical constraints and because the economics of doing so will remain prohibitive in the foreseeable future. We do, however, see major effects on load as a result of accelerating adoption of energy demand-disrupting technologies, such as photovoltaics (PV), electricity storage, electrification of heating and transport, energy efficiency, and demand response. The impact of these technologies on load will significantly impact utilities revenues. According to Accenture´s Digitally Enabled Grid research, these technologies are evolving rapidly and could reduce demand by as much as 15 per cent by 2025.
Just as energy technologies are evolving, so are utilities executives´ perceptions of the threat that they pose. Our research found that utilities executives are notably more concerned about the impact of these technologies on future revenue streams than they were last year, they expect an increase in grid faults in low-voltage connections, such as shorted circuits, bi-directional power flows, and power quality issues, and anticipate more competition in multiple areas of their business such as data-related services.
´No Regrets´ Capabilities
The first question that utilities executives need to answer is what operating capabilities they should invest in now given the changes that are likely to occur. Above all, utilities have to develop, what we call ´no regrets´ capabilities, driving performance improvement in today´s context while also providing a foundation for emerging utilities models. We believe utilities should focus on three main areas, which will be important in any new business model.
Grid optimisation: Utilities should invest in capabilities that will help run the grid in a more optimal way, such as real-time grid analytics; power optimization; grid automation and sensing devices. These will support more effective decision-making and control optimization, and eventually enable dynamic integration with demand response. Our research indicates that utilities executives are stepping up investments in key control solutions. In 2014, 68 per cent of respondents said that distribution sensing and automation solutions were a top priority for investment, up from 58 per cent in 2013. Nearly as many respondents (61 per cent) identified distribution management systems as a top priority in 2014, up from 46 per cent in 2013.
Predictive and control analytics using data from intelligent grid devices were named as a top priority by 60 per cent of respondents in 2014 and 2013.
Regulations and tariffs: Companies need to protect their earnings in the current model while developing their earnings stream in the new model. In order to do this, utilities need to map out regulatory policies that will help accomplish these objectives and work with regulators to shape the direction of these policies.
As many as 56 per cent of utilities executives expect to seek tariff changes to ensure viability of the grid.
New customer models and services: To prepare for growth in energy-related services, utilities need to inject their customer interaction models with digital capabilities. This will not only improve customer satisfaction and lower the cost to serve, but also establish a viable platform for providing and managing additional services. A majority of utility executives expect to provide storage solutions, distributed generation installation services, micro-grid and data-related services, and 4 per cent expect to provide home-automation solutions.
A path forward - developing a new business model
The second question utilities executives need to answer is what are the new business model options for utilities in the future? When telecommunications companies faced threats from voice-over-IP competitors, they made critical strategic choices in terms of technology and scope.
More than ever, utilities now face similar choices about their role, and the scope of services they will offer in their markets. Several utilities in Europe and Asia are already making strategic bets to restructure their company.
The evolving business models will focus far greater emphasis on the optimization of the distribution system and integration with the customer, including services to manage more complex and distributed energy resources. We see a new model displacing the traditional obligation to serve, which was a foundation principle for utilities for decades, with a ´duty to optimize´ - the commitment to optimize energy resources on all sides of the network.
As the industry continues on its course of evolutionary change, flexibility will be critical to balancing the priorities of managing stability and prosperity, while charting a course for a new business model. New operating capabilities, like analytics and automation, take time to implement and mature, and there is inherently a need to balance risks of acting now with waiting for more clarity on a future model. However, while there is indeed an element of risk in moving forward now, the risk in betting on status quo is far greater.
Author: Sandeep Dutta, Managing Director for Accenture´s Resources practice in India, and Shalabh Srivastava, Principal, Resources, Accenture in India