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Renewables revolution – what should utilities do? Part 3: Survive and succeed

Renewables revolution – what should utilities do? Part 3: Survive and succeed

Across the globe, renewables are entering into their second phase: no longer driven by subsidies or even climate concerns, they directly compete with existing fossil fuel based power. So far, few utilities have been able to manage even the first phase successfully. And they seem to be struggling to strategize the second. Why is that the case? Should they oppose or embrace renewables? This is Part 3 of a three part series on utilities and renewables, looking at what utilities need to do to survive and succeed. To refer to part 1, click here. To refer to part 2, click here.

  • Utilities need to become more flexible organisations to succeed in a more flexible market
  • New business models need to be mastered and a different risk profile needs to be developed
  • Smaller utilities might be at an advantage, if they are able to more quickly adapt

Utilities are currently failing to change with the times, to see the future coming. They sometimes remind one of the IBM of the 80s, before the spread of PCs and the growth of Microsoft and Apple. Or perhaps of the formerly monopolistic fixed line phone operators, who were forced to live up to fast changing regulatory, technological and competitive circumstances, driven by privatization and the growth of mobile telephony. Some of the big traditional phone companies have survived and found a new role for themlselves (as has IBM). Others have failed.

Like the phone operators, utilities were profoundly risk-averse and used to very stable market conditions with established (if complex) technologies. Now the certainties are gone. The rate of change in the industry has stepped up several notches and its very structure and business models are being revised.

At the same time, utilities are under significant pressure to invest. They need to replace old grids and reduce costs (in developed countries) or expand them and upgrade them to carry more loads and reduce losses (in developing countries). At the same time, grids need to be made smart enough for intermittent renewable supply. In rapidly developing countries like India and China, vast new generation capacities need to be added.

Utilities can only succeed, if they become operationally better and more flexible. Power systems used to be run almost on autopilot. In future, they will resemble fast paced computer games or hectic stock market trading floors.

Becoming operationally excellent means becoming much more efficient in the way the established business is conducted. (Many are still used to the glacial pace of quasi-governmental institutions.) It also means innovating and constantly improving processes. A much more refined load-demand forecasting would help. As would a state-of-the-art maintenance strategy that strikes the right balance between quality and cost by stringently differentiating between components that are best served by corrective maintenance versus those that require time-based, condition-based and reliability-centered maintenance. Most importantly, organizations need to be rewired to provide the kind of flexibility needed for a more complex electricity market. This relates to how research is conducted, how investment decisions are made and how much time decision-making takes, among other things. It also requires a shift in focus: away from the centers of political power (and lobbying) and towards the power customers.

But is this enough? In addition to managing their core business, utilities need to simultaneously re-invent themselves to service future businesses. For this, they have to become risk takers. There are new, exciting market opportunities in storage, power trading or grid-management. New services for the more complex power economy need to be provided for instance in maintenance, or software solutions. New types of power purchase contracts are emerging and new generation and transmission capacities will be funded in different ways. Energy efficiency on the generation and consumption side remains a huge, still largely untapped opportunity. It could be unlocked by new business models, which the utilities, with their wealth of data and experience as well as their still unrivaled customer access, are very well placed to develop. They are also in a good position to link the second major energy revolution, the shale gas revolution in the US as well as in future probably in China and other countries, with the renewables revolution. In addition, they need to start thinking about small, distributed solutions that can be scaled. These are fundamentally different to the infrastructure investments utilities are used to and more akin to selling cars or white goods (or fleets of cars and bundles of white goods). Money here will be made through scale, maintenance contracts and related financial services. Utilities will need to build brands that end customers like and trust. Since, there is still a high degree of uncertainty about what models will work in future, utilities will need to place more bets on new ideas. They need to develop a bold, nimble institutional mindset.

This, they will only be able to do so, if they embrace the change at a deep level; not grudging acceptance, not fearful tugging-along. They need to become credible stakeholders in the future energy system. If they can succeed in this, they will not only retain their ‘license to operate’ but, more importantly, win the influence to shape the system and perhaps bring back some strategic certainty to their business. They have been consistently too conservative with respect to renewables and the change they bring. Can they develop a progressive vision, outlining not only the risks (which is important), but also the opportunities? With an ambitious roadmap?

Refer to part 1 of the blog series here.

Refer to part 2 of the blog series here.

Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.

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