TODAY’S STUDY: THE CHANGES COMING TO UTILITIES IN 2014

IDC Energy Insights 2014 Predictions: Worldwide Utilities; Getting the most out of the New Normal

December 11, 2013 (IDC Energy Insights)

Business and Regulatory Environment

An Industry in the Midst of Transformation

Utilities are Under Performance Pressures:

 Utilities performance continues to be under pressure:

• Share prices index lost more than 50% of value compared to 2008 peak

• Across top 20 Utility companies only 5 still have an “A” credit rating

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 Natural disasters and extreme weather continue to pressure on utilities grids

 Utilities are investing in infrastructure, but current rate of investment is unlikely to be sufficient to achieve the desired outcome

 Nevertheless, at global level, Utilities executives economic outlook is improving

 There are very strong regional differences in gas and electricity prices. Prices are generally increasing across the world

 More choice and flexibility for consumers in competitive markets, but retail market concentration remains high with low average switching rates (10%) for residential customers

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Top 10 Predictions 2014

#1 Utilities will Hunt for Flexibility and Innovation in their Operations and Business Models

Drivers

 Distributed generation and changes in the generation mix

 Overcapacity in some regions

 Financial pressures and deteriorating margins for centralized generation

 Technology development and IoT

Details

 Disruptive energy technologies (Solar, DG, Solid-state lighting, Grid batteries, V2G, Compressor-less air conditioning, …) will continue to impact the power sector

 Decentralized generation and community led energy initiatives will continue to shift the power from incumbent utilities to Prosumers

 The industry will call for new roles for distribution networks, new compensation mechanisms and smart regulation. More broadly pre-conditions will need to be set to unlock downstream innovation

 The virtual power plant (VPP), already a commercial offering, will become more demand oriented, enabling new customer engagement models and commercial arrangements.

 Utilities will continue to strive towards customer centricity

 Business flexibility will impact legacy IT systems and will call for more agile IT capabilities

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#2 At High Impact, Microgrids will Force Business Model Change. At Minimum, Service Opportunities will Require IT and Distribution Adaptation

Drivers

 Escalating service costs from regulated utility segment

 Increasing outage disruptions

 Affordable micro and renewable generation options

 Willing financial investors, community based buyers

 Technology vendor innovation – DR, SB

Details

 The utility industry has been slow in warming to this model, though increasing examples of utilities creating new service revenue streams demonstrate potential.

 A growing ecosystem of enabling technology includes rapid adoption in Smart Building technology, affordable gas microturbines options and scalable renewable generation supports campus and small community based scale microgrids.

 In developing countries, rural village electrification supports an organic market for microgrid technology leading to new business value.

 Utilities will need to examine how technology investments today will enable or restrict the ability to accommodate and thrive with microgrid adoption by end users, especially in the C&I segment.

 With significant adoption, microgrids will force business model changes on utility. Left unaddressed, microgrids will displace a growing portion of utility generation and distribution revenue.

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#3 CIOs will Devote more Time and Attention to Working Closely with Line of Business on Cybersecurity, Enlarging their Scope of Action

Drivers

 Smart grid cybersecurity is among top smart solutions that utilities are investing in the next 2 years

 Increasing cyber attacks by hacktivists and foreign actors

 NERC CIP Version 5 redefines compliance; GridX II helps to test vulnerabilities.

 Reports of viruses moving from control systems to corporate networks and software that sniffs controllers.

Details

 Regulations have already forced IT into a compliance role, and concerns about process control will mean IT must work more closely with operations (transmission, distribution, power generation, water treatment, etc.) and ops tech vendors to protect assets

 As IT becomes easier for the line of business to purchase services via the cloud or write their own web applications especially in the field, IT risks becoming dis-intermediated and security may be threatened.

 Utilities believe that application monitoring, risk modeling and detection and big data and analytics can help with enhancing risk management, metrics collection, and maturity measurement activities.

 “IT is no longer back office – it’s now a critical operational partner to the business.” Utility engineer for Grid Modernization

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#4 The Role of Utility CIOs will Evolve, Driven by IT and Operational Technologies Convergence

Drivers

 Digitalization and Internet-of-Things

 Disruptions in Information and Operational Technologies

 Business increasingly IT savvy

 Pressure on improving business effectiveness and customer satisfaction

Details

 More than 65% of new IT initiatives will have a direct involvement from business executives. Moreover, IT investments will be treated in the same way as any other company investment

 A new kind of “shadow IT” is expected to considerably increase. IT components will be part of the budget of specific business projects, especially where operational technologies are involved

 CIOs will need to enlarge their role, shifting their primary focus from IT operations and business service to business innovation and flexibility.

 Utilities will start to tackle more organically the governance of IT/OT integration

 CIOs will consider alternative options for IT sourcing (“cloud first” strategy, managed services, ...) and will evaluate how to better leverage at least one dimension of the 3rd platform (e.g., mobile apps, big data analytics, social networking)

 The 3rd Platform will change the skills for 90% of IT roles over the next 3-5 years. CIOs will have to find creative solution for a wide range of IT talent issues

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#5 Eroding Utility Revenues and the Increase of Capital and Operating Costs will Force Utilities to Develop Analytics Strategies

Drivers

 Revenue eroded through energy efficiency, demand response, increase in customer-owned generation.

 Availability of more types or data and more of it through smart grid, smart metering investments.

Details

 Utilities intent to implement a cost effective enterprise analytics strategy and architecture will increase.

 IT and the line of business will intensify discussions about analytics requirements for customer engagement, operations, and portfolio planning and the most cost effective analytics infrastructure.

 For data management, utilities will primarily deploy in-memory databases, enterprise search engines relational databases, and document storage . For analytic tools, utilities will deploy rules engineers and graphical representation.

 Beyond 2014, utilities will take advantage of analytics applied to video, audio and web logs for situational awareness and customer engagement.

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#6 Adaptive Utilities will Embrace Dynamic Resiliency to Survive Ecosystem Changes

Drivers

 Distributed energy resources

 Consumerization of generation

 Grid infrastructure limitations

 Security threats, black swan outage events

Details

 Consumerization of energy production ruptures utility's grid operating model of long term horizon planning.

 Reliability will continue to be assured only through flexibility and adaptability at the grid's edge, as consumer impact is just beginning.

 Technology investments will require a tighter coordination of grid equipment and infrastructure assets through network convergence, operational analytics and leverage of IoT instrumentation.

 Long term, cooperation and shared infrastructure will likely become an economic requirement as systems complexity becomes untenable for even the most capable utility.

#7 Utilities will Need to Seek New Paths for Data Management to Propel Smart Grid Innovation

Drivers

 Operation and business systems integration

 Reliability-centric, closed loop systems

 Ambiguous government security requirements

 Under investment in communication network Infrastructure

Details

 New value chains and participants leading to internal and external services integration requirements.

 While data volume and granularity are increasingly available from various sources, harmonizing utility systems data follows few conventions.

 Control systems will continue to move toward tighter component integration

 Utilities will be increasingly pressed to “rapidly” integrate new data sets for short term efficiency plays and long term new business value creation.

 Advanced analytic offerings will enhance applications in control systems and network infrastructure.

 Cloud technology will provide a viable approach to affordably, securely and flexibly adapt to business realities of constrained budgets.

 Expect non-traditional vendors to address the control systems space.

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#8 Utilities Multi-channel Customer Management will call for Platform and Architecture Investments

Drivers

 Reduce Operational ‘Cost-to-Serve’ and Cost-to- Acquire

 Enhance Profitability and Revenue Potential

 Increase Customer Value

 Improve Customer Satisfaction

 Implement Energy Efficiency Goals

Details

 Utilities continue to be demanded to create a more consistent, relevant and personalized customer experience, leveraging mobile and social interactions

 Pressures on costs and satisfaction will call for effective and efficient delivery of unified customer engagement through customer-preferred channels (possibly pushing digital channels)

 Utilities will move towards the creation of a unified customer centric IT platform which works as an integration layer, as a repository of information/content and procedures to be leveraged for different operational processes and across communication channels (removing applications and organizational silos)

 More Apps requested by customers will be easier developed using the platform as a foundation

 Advanced customer intelligence and analytics will play a pivotal role in understanding customers’ engagement preferences

#9 Gamification will Gain Traction in Utilities to Create Consumer Engagement, Loyalty and Trust

Drivers

 Adoption of gaming in enterprise business

 Smart Metering implementation and pressures to make data accessible and available to customers

 Efficiency targets

 Customer satisfaction

 Competitive energy market

Details

 Across industries, social technology-based customer communities will become a standard – and strategic component of virtually all customer engagement and marketing strategies

 A number of utility companies have started experimenting with gamification, usually with the support of 3rd party vendors, resulting in a new flourishing start-up sector, which sits between a utility and their customers.

 An increasing variety of vendors are bringing on the market gamification technologies which integrate with social platforms and enterprise applications

 Early indications for gamifying utilities seem positive. Utilities are wondering if ramification is strong enough to sustain consumer engagement over long periods, and whether the positive behavioral changes they inspire are sustained thereafter

 Utilities maturity level in customer engagement will steadily evolve

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#10 Global Utilities’ IT Spending will Surpass $59.3 Billion in 2014

Drivers

 3rd Platform and IoT

 Ongoing operational efficiency improvements

 Compliance with energy policies and regulation

 Security concerns

 Updating and replacement of outdated technologies as well as new projects

Details

 WW 2012-2016 CAGR for utilities IT spending will be 5.9%, led by the smaller emerging markets: LA, CEE, and MEA.

 Software spending will see the most significant growth, with 2012-2016 CAGR of 7.8%. BPM, Project Management and Security will be the fastest growing SW applications.

 Electricity companies will take the most significant share of IT spending in 2014, 61.3%, and grow 6.4% between 2012 and 2016.

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Essential Guidance

 Embrace the “New Normal” and leverage digital technologies to drive business innovation and agility

 Leverage cybersecurity as an opportunity to overcome organizational silos

 Develop a comprehensive service portfolio to ensure that everything that IT does is positioned to support business value

 Develop an IT skills plan to support the future enterprise needs

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