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Five to thrive
Change is coming. In 2014, US power markets are in the early stages of a transformation driven by the adoption of DER. Many predict that by 2020, a tipping point will be reached, when power from rooftop solar photovoltaic (PV) will become cheaper than power from the grid in most parts of the US. This growing trend towards DER, combined with increasing energy efficiency initiatives, will impact how electricity is produced and consumed, transforming utilities’ business models and how they create value for customers and shareholders.
Five to thrive
Addressing the impact of distributed energy resources (DER) will require US utilities to move from the defensive to the offensive. Five imperatives will help companies build new business models that focus on creating customer and shareholder value. Dean Maschoff reports.
But, until now, many utility companies have chosen to lobby against rather than lead this inevitable energy transformation. It’s time for the sector to move to the offensive by developing DER- friendly strategies and
business models that focus on creating customer as well as shareholder value. While there is no one-size-fits-all solution, businesses prepared to shift their thinking can build success on five imperatives.
1. Position the utility to competeUtility leadership teams need to design and commit to a transformation roadmap that will create a more efficient and effective utility operating model. This means rethinking traditional capital investment strategies and repositioning the company to compete with new DER entrants. All of the elements of the operating model — business processes, organization design, in-source/outsource decisions, the performance management model — need to be taken apart and put back together again, but at lower cost and high or improved service levels.
US distributed solar PV capacity projectionsCumulative
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Five imperatives for utilities
Sources: Solar Electric Industry Association, Navigant, Greentech Media, Bloomberg New EnergyFinance, Deutsche Bank, Edison Electric Institute, Solar Electric Power Association, Energy InformationAdministration, EY analysis.Note: Out-years in the Deutsche Bank and SEIA forecasts represent extrapolations.
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Deutsche Bank (Q3 2013)SEIA (Q3 2013)Bloomberg New Energy Finance (Q1 2013)Navigant (Q3 2013)
2 | Five to thrive
Dean Maschoff Power & Utilities Executive Director, Advisory [email protected] +1 312 879 2671
Dean has more than 30 years of experience in corporate and business unit strategy, strategic performance management, capital investment and market performance, and organizational
design and effectiveness. He has deep consulting experience in all sectors of the electric power and natural gas utility industry.
2. Transform the gridWhile the electricity grid will remain a “must have,” the old-fashioned “static” grid must become far more distributed, digital and dynamic to handle the two-way communication between customer DER and the utility. Utilities will need to make more, and better, use of real-time data to accurately adjust for the variability of DER and ensure the distribution network remains balanced. These complex changes will undoubtedly bring challenges, as well as significant expenses, but they also offer an opportunity to plan for system upgrades in a more strategic way, minimize total costs and improve network flexibility.
Long-term planning will also evolve to consider, not a one-way closed entry distribution system, but a more dynamic open architecture.
3. Manage the transitionIn a DER world, many utilities’ older
“legacy” assets will no longer be fit for purpose. Recovering the costs of these assets will require utilities to:
• Replace net metering with a more transparent, and adaptable, pricing model
• Implement a wires cost recovery mechanism that is non-volumetric, independent of energy consumption from the grid (e.g., all fixed costs, including return on equity, will be, instead, recovered through demand or interconnection charges)
• Improve the economic viability of backup power capacity regardless of the technology (e.g., coal-fired plants required for transmission grid support)
• Put in place proper incentives to support capacity additions, as well as appropriate cost recovery/returns associated with ancillary and related services and supporting systems (e.g., operating reserves (regulation), contingency reserves)
Utilities will need to work closely with regulators and stakeholders to secure the investment required to make these changes. Regulatory models will also need to evolve to enable DER while still allowing regulated utilities to continue to provide essential grid services.
4. Focus on the customerAs DER adoption rates increase, utilities’ reliability and customer satisfaction rates will continue to be important. But DER will see roles shift as customers’ consumption patterns begin to define their capability as suppliers. There will also be the opportunity for some customers to complement energy from DER with managed energy consumption patterns via load control and measurement devices.
As different consumers will respond to DER in different ways, utilities will need to increase their customer knowledge and the range of their offerings in order to maximize the benefits of their DER strategy.
5. Innovate and accelerateLeading utilities will do more than enable the DER transformation. They will use it to drive innovation in their business models. Making the most of the opportunities presented by DER means asking three key questions:
1. What business or businesses are we in — what products and services do we provide, and what markets do we serve?
2. How will we compete — what are our strengths?
3. How do we tailor our future operating model and structure?
Clear, strong answers to these questions will guide the development of a business model that can adapt to the changing conditions presented by DER. This new model is one that shifts the company’s entire mindset — from being a passive supplier of a product to being an active manager of that product. This includes managing the supply and demand, price, marketing and even the timing of energy consumption to maximize capacity utilization and optimize a system that will be dominated by DER and gas-fired generation.
Time to leadFor the US electric power sector, the question is not if, or even when, the change brought by DER will come, but rather, how fast. Increasingly, utilities will feel the impact on profitability as rising rates of DER adoption reduce revenue associated with electricity provided by the utility. Competing in this new environment will require a commitment to making significant changes to the business model based around the five imperatives. The critical success factor will be changed behaviors — the determination to lead, not fight, the transformation.
Read more about these five imperatives in our article, From defense to offense: distributed energy and the challenge of transformation in the utilities sector
3 | Five to thrive
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About EY’s Global Power & Utilities Center In a world of uncertainty, changing regulatory frameworks and environmental challenges, utility companies need to maintain a secure and reliable supply, while anticipating change and reacting to it quickly. EY’s Global Power & Utilities Center brings together a worldwide team of professionals to help you succeed — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant sector issues. Ultimately it enables us to help you meet your goals and compete more effectively.
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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
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