Disrupted: A Brief History of Recent Electricity Industry Transformation

This is the first in a three part series of blogs where North Highland explores the drivers of change in a utility market that is moving beyond Energy 3.0.

The electric utilities industry, and the grid, are undergoing a profound transformation to a fully digital system, although progress is uneven across the globe. Companies face tough choices on the timing of investments, the markets they wish to participate in and the value propositions they offer their customers. The move to an “Energy 3.0” environment will provide massive opportunities for those prepared to embrace the future, and significant challenges for those too heavily invested in tradition.

Uneven Progress

Globally, as well as across the United States, progress toward Energy 3.0 has been uneven. Some organizations have moved quickly, while others have made attempts but stalled due to transitional barriers, cost constraints, investment horizons, and operational complexity. Certainly, there are critical impediments to overcome. However, there are some organizations neglecting to adopt the Energy 3.0 vision altogether, instead committing to their core business at the risk of losing future opportunities.

The uneven progress is caused by jurisdictional constraints inherent in the regulated nature of the industry, among other factors. Utility companies are bound by the regulatory environment within which they operate. In some states, regulators have struggled to keep up with the technological transition currently underway.

In most jurisdictions, current regulation propels a ‘status quo’ focus for the energy industry while placing pressure on how energy is priced for the consumer. In the United States as a whole, prices have fallen for the first time in many years due in part to low natural gas prices and mild weather. Modest increases in some states are a result of investments made in the transmission grid and natural gas pipeline networks. This phenomenon benefits consumers’ by lowering their total energy bills and household expenditures.  We have observed that this pressure, coupled with the industry’s own outlook, has made the difference between whether utilities take a progressive attitude or lag behind technological changes.

Both locally and across the world, the transition to Energy 3.0 and beyond is a two-speed race. The old world of traditional utility is meeting the new world of re-imagined energy value chain. The traditional environment is stimulated by the imperatives of capital intensive asset management. These companies require optimal value from operating and maintaining their assets, to cost reduction and efficiency measures. In the new utility environment, it’s the opposite. It is based on (often digital) products and services to help manage how electricity is consumed and transported. Many new inventions, or disrupters, are emerging in this arena. The commercial model and market launch method for these new products means utilities need to be more nimble and think more like technology companies, and less like a traditional utility.

One of the largest investor-owned power and gas companies in the U.S., Pacific Gas & Electric (PG&E), is moving away from traditional generation and utility assets, while harnessing new technologies for cleaner, smarter energy, and is committed to staying the course despite questions about the longevity of the Clean Power Plan under the new administration. PG&E, along with state regulators who determine policy and approve rate cases, have realized that the two core businesses cannot coexist. How to position themselves to customers within this new reality is a major challenge for U.S. electricity retailers.

What We Have Seen

The electric utility industry is on a definite path towards a more distributed model, containing more digital products and services to help consumers manage their consumption in an automated manner.

We believe this change, along with the associated new business models, is unlikely to emanate from today’s traditional utility companies. Traditional company operating models and cultures are embedded in asset management, operations, and public safety priorities.

Evidence and experience indicate that contemplating this transition brings challenges that are extremely difficult to overcome. When considering behind-the-meter asset management, we anticipate these products and services will be delivered by new entrants to the market.

Stay tuned for upcoming posts from North Highland in this blog series, comparing new and traditional business models, as well as opportunities and challenges for utility leadership.