A Strategist's Guide To Power Industry Transformation

by Norbert Schwieters and Tom Flaherty In many ways, the electricity industry makes an unlikely candidate for disruption. Not much changed between the 1880s, when Thomas Edison began building power stations, and the start of the 21st century. Top business leaders rarely had to think about electricity. They got their electricity from the power plant, or the local utility, or the government, and had little say in how it was produced, delivered, or managed. Utility executives, for their part, could make and execute long-term plans with a great deal of security. Demand tended to rise along with the economy; natural monopolies were the norm. No longer. Several coincident, significant transformations are causing a revolution in the way electricity — the vital fuel of global commerce and human comfort — is produced, distributed, stored, and marketed. A top-down, centralized system is devolving into one that is much more distributed and interactive. The mix of generation is shifting from high carbon to lower carbon, and, often, to no carbon. In many regions, the electricity business is transforming from a monopoly to a highly competitive arena. Until recently, for most users, electricity was a commodity over which they had little choice. Now, consumers can choose from a wide array of potential power sources and providers. Technology is giving them greater autonomy and more choices in the way they source, use, and store electricity — and maybe even the opportunity to make money at the same time. We have entered an age in which the technology-powered push and the customer-driven pull have beneficially collided. This has led to a paradigm shift within the power industry, from a premium on rigid capacity to a focus on flexibility. Long known for clear borders with sharply defined roles — generation, transmission, distribution, trading, and retail — the global electricity market is now characterized by new players and technologies, more provider–customer interaction, broader options, and eroding distinctions between industries. Incumbents accustomed to dealing only with one another are finding themselves facing a wide range of upstarts. As a result, the electric power system is evolving from a unilateral system to an integrated networked ecosystem. The digital revolution, which is layered on top of these changes, is transforming the system from static to dynamic, and from stable to disrupted. Shares of utility companies were once referred to as “orphans and widows” stocks — so safe that even the most vulnerable citizens were secure in holding on to them. But in the emerging environment, utility companies themselves risk the possibility of being left behind. It’s no surprise that in PwC’s 2015 CEO Survey, utility executives stood out from their counterparts in other industries in recognizing that they faced disruption. But rather than fearing the changes, these leaders are realizing that they need to embrace them and seek to take advantage of the emerging opportunities. The root causes of the transformation of the sector are a unique conjunction of global megatrends. Concerns over emissions and climate change are bringing heavy political and social pressure to bear on providers — pressure both to change the mix of fuels they use and to encourage efficiency. According to PwC’s 2015 Global Power & Utilities (P&U) Survey, the falling costs of renewables such as solar energy, breakthroughs in large-scale and smaller-scale energy storage, and new energy-efficient technologies are catalyzing greater distribution of generation. The rise and adoption of big data and Internet-based applications are making systems more intelligent and interactive; altering the habits of personal energy usage; and stimulating the rapid development of new business models by incumbents, startups, and aggressive companies in adjacent fields. This momentum is not confined to mature power markets. In fact, the processes we’re describing may be even more relevant to less developed countries in which basic access to electricity remains a challenge. In regions such as sub-Saharan Africa, the adoption of distributed energy technologies is giving customers their first access to electricity. Just as mobile telephony has proved to be a leapfrog technology in Africa, making the development of landlines unnecessary, local renewable energy systems have the potential to obviate centralized generation. In the face of all this change, companies that have been in the business and wish to remain so in the future clearly need to rethink their strategy. But the revolution carries implications for all businesses, whether they are part of the electricity sector and its supply chain or interact with it primarily as customers. Instead of being merely a cost over which companies have very little control, electricity is becoming much more variable — and potentially more valuable. These transformations are opening up immense opportunities while enabling consumers of electricity to approach power in a new way — as “prosumers,” who both produce and consume energy. Companies can participate in demand management programs, strike power purchase agreements for wind power (and hence bolster their green credibility), install storage that allows the avoidance of peak demand charges, and deploy data and software services to manage use effectively. In the coming years, they will be able to harness the technologies and applications that will boost the capability of customers to create and capture real benefits. Each of these options presents business opportunities for new entrants, for companies in adjacent fields, and for savvy consumers. In short, it is now possible — even imperative — for a much broader range of leaders to think strategically about electricity, to imagine new possibilities, and to consider whether their capabilities match emerging demands.