When planning for the future, utilities are naturally biased toward looking inside-out at probable scenarios based on historic experience, cultural organization, and market knowledge.
Looking inside-out -- the belief that a company’s strengths and capabilities will make the organization prevail -- has enabled utility executives to ask how they can better excel at providing reliable service for customers.
However, this approach does not suffice for a sector now undergoing immense change due to external competitive forces -- forces utility executives could not have planned for 10 years ago. This includes disruptive distributed energy technologies, changing consumer behavior, and shifting policy to support emerging technologies.
All three are difficult to influence and nearly impossible to accurately predict or control.
Every day, utility executives will make business decisions with extremely significant consequences. In order to address these uncertainties, looking outside-in -- with the belief that customer value creation and experience are the keys to success -- will allow them to consider all possible futures and expand their thinking.
Understanding FutureWorlds planning
Considering both probable and possible futures will allow utility executives to define their preferred futures, expediting a formal scenario planning and strategy process. Only then can key decision-makers understand the scale of transformation required to catapult a utility from where it is today to where it should be tomorrow, and identify the strategic decisions required to make it happen.
FutureWorlds (FW) is a proprietary method that PA developed more than 20 years ago and has used with multiple clients across many global industry sectors to help navigate and set strategy in volatile and uncertain market environments.
The FW method removes the natural bias of leadership thinking toward a probable future and opens up the analysis debate and dialogue to consider all possibilities and external uncertainties.
This analysis reveals four future energy worlds, all of which can coexist. However, understanding the possibilities these worlds represent leads to an informed view of potential scenarios and business strategies.
The New Order World: Transforming through collaboration
The New Order World suits utilities in regulatory regimes defined by reasonably progressive renewable mandates, technology impacts, and collaborative regulator-utility rate reform processes. Here, utilities can take a slightly more planned approach to introducing new technologies, with a particular eye toward potential business model impacts and customer relationships.
The New Order World presents steady change without disrupting for the sake of disrupting. In this world, utilities can innovate to meet emerging customer and policy demands while avoiding unnecessary disruptions and continuing to run a stable business focused on protecting shareholder value while transforming without huge challenges.
The Exelon Group companies are an excellent example of utilities operating primarily in a New Order World, albeit with an increasing focus on innovation. While the operating companies may function differently, depending on the market, they can innovate and adapt to change without the fear of disruption.
The Managed World: Protecting the status quo
In comparison, utilities operating in a Managed World can focus on protecting the status quo and maintaining energy market stability through limited transformation. Regulators are less progressive in terms of politics, capability, and attitude, limiting any disruption to the current model.
Utilities in this world benefit from stability, especially from a shareholder-value perspective. However, persuading regulators to rate-base investments is difficult because no alternative model exists. This increases the risk of playing catch-up down the road as federal mandates or customer expectations move toward advanced technologies, pushing utilities and regulators alike into a more proactive position.
Nevada’s ongoing net metering fight is relevant here. Operating in a non-progressive regulatory setting, the state’s biggest utility, NV Energy, was not incentivized to innovate ahead of customer demand. As a result, the third-party growth of solar advanced ahead of the utility and forced it to play catch-up.
NV Energy eventually pushed for a rollback of net metering, which angered customers and created a missed opportunity to grow revenue from rooftop solar based on their own business model. The battle continues on, however, with Nevada Gov. Brian Sandoval's New Energy Industry Task Force on May 26 calling for legislation in 2017 to grandfather in existing rooftop solar customers under net energy metering tariffs for 20 years.
The Innovative World: Defined by creative disruption
In the Innovative World, utilities embrace disruptive technologies and create a case for investment and rate-basing. Here, customer expectations do not necessarily drive innovation; instead, they create new customer experiences, which in turn drive new expectations.
Utilities in this world benefit from a collaborative and influencing relationship with policymakers and regulators, while enjoying a first-mover advantage that brings them into new markets. This creates new sources of shareholder value, but it simultaneously increases the risk of getting it wrong as untested business models develop.
Southern Company fits within this world. For example, the utility’s acquisition of PowerSecure in 2016 could position it as the Cisco of utilities -- running infrastructure the customer does not necessarily see and generating revenue from innovation ahead of demand.
The Frontier World: Leapfrogging legacy
The most drastic changes occur in Frontier World, where experimentation and innovation allow utilities to leapfrog the lack of legacy infrastructure or policy. Distributed resources rule this world, and innovation draws upon pilot programs and experiences in other markets -- think total grid defection.
This world is most likely to manifest itself in developing countries with little or no infrastructure. Features of this world can apply to U.S. utilities considering entirely new business markets in demand-side management and distributed energy services.
Some examples of where we see Frontier World developments include M-KOPA Solar, which provides solar home power systems in Kenya, Tanzania and Uganda. Interestingly, Goal Zero, which was recently acquired by NRG Energy, has developed similar products for adventurers and hikers.
Nobody can predict the future
The FutureWorlds approach is not a predictor of the future; however, it is a means of informing strategy and understanding potential business direction and impacts. This is a pivotal time for electric utilities, and the only certainty is that the future will be different from what exists today. Considering all uncertainties and extreme outcomes opens the door for better and more informed decisions.
Peter Siggins is the Americas region head for PA Consulting Group. Read PA Consulting's white paper on FutureWorlds here.