TODAY’S STUDY: The Utility Of The Future, By The Numbers

Digital Innovation; Creating The Utility of the Future

Jian Wei, Andrew Slaughter, Suzanne Sanborn, April 9, 2019 (Deloitte Insights)

As disruptive forces transform the power and utilities sector, many companies are turning to digital technologies and a more innovative mindset to thrive in the new era. Those that don’t seize the opportunity to evolve risk being left behind or displaced by more agile players.

Introduction

THE power and utilities sector was traditionally where many parents or grandparents parked their savings as they got older, attracted by low volatility and stable returns. While solid and dependable, the sector wasn’t generally considered cutting-edge, innovative, or exciting by any stretch of the word. Its main goal was to keep the lights on without breaking the bank. Fast forward to today and, while still laser-focused on reliability and affordability, the power and utilities sector appears to be morphing into an increasingly attractive, high-tech magnet for a multitude of new players. From large conglomerates in the technology, retail, oil, and other sectors to asset managers and hot new tech startups, a lot of outsiders are looking to enter this market.

Why? The sector is being reshaped by forces that have been evolving and converging for more than a decade. From rising costs and changing load patterns, to newly viable technologies, regulatory change, and the growing call to decarbonize, disruptive forces are transforming the industry, driving it toward a new and different future. And that future could be bright.

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Opportunities abound in today’s power and utilities sector, and more will likely open as the future unfolds, marked by three growing trends: electrification, decarbonization, and decentralization. To further reduce carbon emissions, some groups are advocating electrification of end uses such as transportation, water and space heating, and industrial processes. In transportation, a projected 55 percent of global new car sales and 33 percent of the global fleet may be electric by 2050, accounting for about 9 percent of electricity demand.1 And that electricity is becoming cleaner, with emission-free sources such as wind and solar power projected to reach as much as 48 percent of total global electricity generation by 2050 from about 8 percent currently.2 In the United States, power sector carbon emissions were down 28 percent from a 2005 baseline at the end of 2018, and many power companies have voluntarily committed to reduce emissions as much as 80 percent from the 2005 level by 2050.3 At the same time, the traditionally centralized, hub-and-spoke power grid continues to decentralize, as deployment of distributed energy resources such as solar PV and battery storage rises rapidly. Global battery storage capacity at customer sites is projected to rise by 516 GW by 2050.4

Overlaying these trends is the advance of digital technologies, sometimes at a breath-taking pace. Technologies such as artificial intelligence (AI), Internet of Things (IoT), cloud, and blockchain can catalyze new business or operating models, help new entrants disrupt the sector, and enable incumbents to reach new levels of performance. For those incumbents, a lot may be at stake, and even more may be possible. But to thrive in this bright future, power and utility companies will need to develop new capabilities and transform their working environment. Continuing what they’ve been doing for the last century is likely not going to work.

This report will discuss the multitude of forces disrupting and driving change in the power and utilities sector, explore the exciting future the industry is moving toward, and help companies plot a digital path to thrive in that future.

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Disruptive forces are reshaping the power sector

Disruptive forces are transforming the electric power sector, and many power company leaders are planning their digital journeys based on the impact of these forces (figure 1)…

Power companies face unprecedented challenges and expectations

It’s by now a well-established trend that, due to energy efficiency gains, electricity consumption in developed countries no longer grows in tandem with GDP growth.5 This often means utilities must operate, maintain, and modernize their systems without the benefit of increased load-based revenue to pay for it. In fact, capital expenditures have trended upward in recent years as utilities boost spending to upgrade aging infrastructure; harden systems against increasingly severe climate events; modernize and digitize systems and processes; defend against increasingly virulent cyberattacks; and address the growing mandate for cleaner energy sources from legislators, regulators, and customers.6 Other societal changes pose additional challenges, such as sophisticated consumer expectations set by high-tech companies and the need to replace retiring workers and attract new ones. Such rapid and multipronged change may, in turn, compel organizational and cultural transformation to manage and adapt to new technologies. In many of these challenges lie opportunities to create value through innovation.

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New digital technologies are sparking change across industries

Another well-established trend is the acceleration of technological advances across industries as innovation drives rapid cost declines for key building blocks such as computing power, data storage, and internet bandwidth. Faster, cheaper, more powerful computing and improved connectivity are fueling growing deployment of technologies such as sensors, mobile, advanced analytics, robotics, additive manufacturing, cloud computing, IoT, AI, and virtual and augmented reality. Such innovations are ushering in new and disruptive competitive risks—and opportunities—for enterprises that have historically enjoyed dominant positions in their industries, including the power industry.

Advanced energy technologies are increasingly competitive as costs fall

The power and utilities industry is seeing unprecedented opportunities for innovation and growth from rapid technological advances and cost declines in areas such as solar power, battery storage, wind power, electric vehicles, smart buildings, two-way power flows, microgrids, and more. Of course, these opportunities are also opening doors for startups, entrepreneurs, and companies from adjacent industries who may compete with incumbents and disrupt the industry. But at the same time, large enterprises such as today’s electric companies can take advantage of these opportunities to disrupt the industry status quo themselves and remain competitive and profitable.

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New practices and business models are shaking up markets across industries

New twists on design, processes, and ways of doing business also offer opportunities and fresh ways to approach challenges—or to challenge the status quo. For example, human-centered design, agile and adaptive business practices, trends shaping the future of work, crowd-sourcing, the sharing and subscription economy, and mega-platform ecosystems are all accelerating disruption and amplifying opportunities to start or grow enterprises and industries.7

A common thread runs through these four types of forces—digital. Digital technologies can act as catalysts that help incumbents or new entrants develop new business and operating models, such as using advanced analytics to segment customers and target prospects for new services. Or they can be disruptors that open the door to new market entrants—such as technology platforms that aggregate output from distributed energy resource (DER) owners and bid it into wholesale electricity markets. Nothing is protected. Digital technologies can also be enablers, enabling new levels of performance, such as cutting maintenance time and costs by using automated drones backed by cognitive capabilities to inspect assets in the field.

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Digital is the pervasive thread through all of these disruptive forces—as a catalyst, a disruptor, and an enabler.

To understand how companies are investing in the connected web of digital and physical technologies that enables digital transformation, known as Industry 4.0, Deloitte fielded a survey of 361 executives in 11 countries in the Americas, Asia, and Europe. The survey was fielded in association with GE Digital in spring 2018 by Forbes Insights, and captured insights from respondents in seven industrial sectors, including power and utilities. The responses discussed here are from the 81 respondents in the power and utilities sector. All power and utilities respondents were director level or higher, including CEOs (6 percent), CFOs (9 percent), COOs (10 percent), CDOs (7 percent), CIOs (5 percent), CTOs (7 percent), CSCOs (3 percent), business unit presidents (6 percent), executive VPs (9 percent), VPs (12 percent), executive directors (7 percent), and directors (19 percent). All power and utilities executives represented organizations with revenue of US$500 million or more, with more than half (51 percent) from organizations with more than US$1 billion in revenue.

Which forces are impacting power companies the most?...The future looks bright…Customer…Employee…Assets…Digital platform enables distribution system planning…Automation and machine learning cut costs of asset inspections…What are power companies seeking to achieve in the near future?...Digital pathway to the future…Digital innovation model…Digital DNA is a catalyst for digital transformation…How do we get there?...

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Getting started

The power and utilities sector is in an unprecedented period of disruption and transformation as a multitude of forces reshape it, and a wide array of new players appear to want in. Being already there, with assets in place, terabytes of customer information, and typically a high degree of brand permission,16incumbents may have an advantage from the starting gate—but likely not if they keep doing things the way they’ve always done them. Power and utility companies that seek to thrive as the future unfolds should start their digital journeys now or keep moving if they’ve already started. Here are some steps to consider:

Chart the path: The first step is to recognize that the transformation to “being digital” will be a substantial, significant, and long-term undertaking. It’s an ongoing process that won’t end anytime soon. Start by defining your organization’s ambitions and then chart a path to success by developing a road map to achieve those ambitions. A sequenced road map that is actively managed and well understood internally and by regulators is critical.

Develop innovation capabilities: It’s important to establish repeatable innovation capabilities to continuously supply the business with a robust pipeline of digital projects. Ideally, the innovation process will enable your organization to rapidly design, test, and iterate each concept through to launch.

Develop or acquire new technology: Participate in a technology incubator, start a venture capital organization, or consider investing in or partnering with technology companies to develop innovative products, services, or business models and test use cases.

Transform culture: Cultural transformation involves not only adopting new technologies but incorporating a digital mindset into the DNA of your organization. This requires developing processes to encourage experimentation and innovation in a continuous feedback loop. It will likely require an organizational transformation that introduces organizational, operational, and behavioral changes and instills them enterprisewide.

Invest in a digital foundry: This will be the hub of your digital activities—a dedicated function that can continuously ideate and carry concepts through implementation. It will use new skill sets and new ways of thinking, such as agile and design thinking. And because of repeatable processes, it’s less likely to require heavy governance. Taking these steps can set your organization on a sound path to becoming, and one day being, digital. Enjoy the journey.

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