EY - Distributed energy: the challenge for utilities

From defense to offense: the challenge of distributed energy

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For decades, the electric power sector — whether regulated or deregulated, wholesale or retail — operated on a simple premise: we have the power, and when our customers need it, we will provide it.

All of that is changing. Conventional centralized, dispatchable, fossil- or nuclear-based generation will gradually be impacted by the adoption of distributed energy resources (DER) by customers.

"For the US electric power sector, the question is not if or even when the change will come, but rather, how fast".

We took a look at the challenge and opportunities that distributed energy poses to the utility sector. Our key findings:

US power markets are in the early stages of a transformation driven by the adoption of distributed energy.
Most predict that by 2020, utilities will reach a tipping point where power from rooftop solar photovoltaics (PV) will become cheaper than power from the electric grid in most parts of the US. In fact, some foresee a future cliff for traditional generation when DER are combined with affordable storage technologies.

US distributed solar PV capacity cumulative projections

EY chart – US distributed solar PV capacity projections

DER adoption will change the industry’s value chain and business model.
The current integrated one-way model, comprising generation, marketing and trading, transport, distribution and retail, will become multidirectional, with both conventional and new entrants as well as “prosumers” — consumers who are also producers — acting as generators.

In this radically and rapidly changing marketplace, flexibility is key.
Utilities must be ready to move quickly to gain competitive advantage. A strategic options roadmap and a dynamic strategic planning process that enables change are essential.

To deal with the threat posed by DER, it’s time for utilities to move over to the offensive by developing DER-friendly strategies and business models that focus on creating customer and shareholder value.

Now is the time for utilities to start transforming their business models to be able to compete. They must fundamentally redefine and aspire to the standards of competitive leadership, undergoing a radical shift in the way they think about performance.

Success can be built around the following imperatives:

  1. Position the utility to compete. Utility leadership teams need to design and commit to a transformation roadmap that will create a more efficient and effective utility operating model, one that will be able to offer new products and services and compete against new entrants.
  2. Transform the grid. As DER grows as a market force, the grid must evolve into a more distributed, digital and dynamic system that provides two-way communication between customer locations and the utility.
  3. Manage the transition. Utilities need to take actions that seek, to the fullest extent possible, full cost recovery of legacy assets to recover investments made and costs incurred in a pre-DER world.
  4. Focus on the customer. To maximize the benefits of a pro-DER strategy, utilities need to increase their customer knowledge and the range of their offerings.
  5. Innovate and accelerate. Utilities should adopt a business model that can adapt to changing conditions – one that captures and provides value in connection with distributed energy.

DER is triggering the need for fundamental change in roles and relationships not only for utilities but also for customers as they become providers as well as consumers. For utilities, this transformation presents a daunting challenge — one that leading companies will overcome by responding, rather than merely reacting.

Utilities need to move from fighting this transformation to leading it.

For more detailed insights about these five imperatives for utilities, download the complete report, From defense to offense: distributed energy and the challenge of transformation in the utilities sector.