5 minute read 29 Aug 2018
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How will you navigate the perfect storm?

By

Matt Chambers

EY Global and Americas Power & Utilities Risk Leader

Risk management leader in power and utilities. Solving complex problems with pragmatic solutions. Avid snow skier. Sports lover. Father.

5 minute read 29 Aug 2018

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The EY Global Power & Utilities Risk Pulse Survey reveals the challenges transforming the industry and ways to navigate through uncertainty.

A perfect storm is brewing for the power and utilities (P&U) industry. The pace of change is accelerating, and the risks are growing.

Respondents to the EY Global Power & Utilities Risk Pulse Survey told us they are worried whether they will still be here in ten or even five years’ time.

  • How is your organization navigating both today’s risks and the long-term, emerging risks of the new energy landscape?
  • Are your concerns the same as your competitors and peers around the world?
  • How prepared are you to weather the storm?

The answers to these questions may determine whether you will thrive or even survive a decade from now. The Global Power & Utilities Risk Pulse Survey explores the risks P&U organizations are prioritizing now, how they expect those risks to change to meet the demands of a new energy world, and what strategies they should have in place to manage them.

Read on to discover the top five risks for P&U organizations and dig deeper to find out what your peers are saying about critical strategic, financial, operational and compliance risks. Gain insights into response gaps you may have and use the leading practices to develop a more integrated, agile and resilient approach to manage risk in your organization.

Take the risk pulse of your own organization and see how you compare to your peers and competitors. How prepared are you for the risks that lie ahead?

 

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The top five risks overall for P&U organizations

No. 5: Changing customer demands and expectations

Today’s empowered customers are more engaged, informed and connected than ever before, demanding more choice, different products and better service. The potential for customers voting with their feet and moving to a customer-oriented, innovative supplier poses a significant risk to utilities that don’t respond to these expectations.

Historically, P&U organizations may have viewed the customer as a one-dimensional ratepayer rather than a sophisticated consumer whose tastes and preferences evolve over time. Utilities often had little knowledge of what customers want or need.

A key element of building and improving this relationship will be the ability to deliver a high-quality, interactive, agile digital experience. In fact, a recent EY survey found that 45% of Australian consumers said firms that fail to offer a quality digital experience run the risk of losing them.

Discover how to navigate risk no. 5: How retail utilities moved from behind the curve to innovation

 

No. 4: Energy and environmental regulation

Most countries are debating sustainability goals and the path forward for implementing a low carbon agenda. As a result, many government policies are leaving utilities struggling to navigate complex, changing energy and environmental regulations with global, regional, national and local dimensions.

This ongoing uncertainty surrounding climate policy, carbon pricing and regulatory demands consumes valuable resources and limits P&U organizations’ effectiveness in long-term resource planning.

Discover how to navigate risk no. 4: How to weather the winds of P&U regulatory change

 

No. 3: Rise of distributed energy resources (DERs)

Distributed generation sources plus batteries that can operate in parallel to the grid are becoming increasingly economical, making the prospect of grid independence increasingly feasible. Utilities that become too complacent in relying on a centralized power supply over large networks risk becoming disintermediated from their customers.

But DERs will also create opportunities for innovative incumbents and new entrants to explore new revenue streams and business models. These players will also need to compete with “prosumers” — electricity consumers who are also producers — as they increasingly deploy DERs, blurring the lines between what defines a utility customer and a competitor.

Discover how to navigate risk no. 3: How to navigate the strategic risks of P&U transformation

 

No. 2: Regulatory or rate changes impacting cost recovery of assets

The P&U industry has traditionally been defined by stable and predictable returns on regulated assets, including power plants, and networks. Yet, already, many mature markets — where growth in energy demand is slowing — are seeing the regulatory compact come under increasing strain. With falling demand and rising competition, cost-of-service rate strategies based on capital-intensive asset expansion have become harder to justify.

Meanwhile, current regulatory frameworks still tend to incentivize network expansion, but do not necessarily provide the right financial incentives to encourage utilities to invest in new innovation and digital technologies, including demand response and distributed generation.

Discover how to navigate risk no. 2: How to ride the waves of P&U financial risk

 

No. 1: Business interruption from cyber attack, storms and catastrophic events

The 2017 Atlantic hurricane season was only one headline-grabbing example of how catastrophic storms can impact utility operations.  The list of notable events that have disrupted utility operations is long and growing with several recent events. These include a massive power outage in July 2017 that caused blackouts from Panama to Costa Rica and Nicaragua, leaving millions of customers across Central America without power; the September 2016 storms that left the entire state of South Australia without power; and the unprecedented cyber attack in December 2015 that took down three energy distribution companies in Ukraine, leaving hundreds of thousands of customers in darkness amid frigid winter temperatures.

These kinds of events continue to present huge financial, operational and reputational risks to P&U companies.

Discover how to navigate risk no. 1: How to avoid being sunk by operational P&U risks

 

Finding the right course for your organization

Some companies may take a protective stance and seek to mitigate risks. However, the innovators looking at ways to develop new products and services that attract and retain customers are already positioning themselves to take first-mover advantage in the new P&U landscape.
They are seeking to proactively develop and implement programs to address and minimize the impact of catastrophic events and ongoing trends alike. And they are working with regulators to find ways to create and update regulation to reward innovation.

Take the risk pulse of your own organization

Read our survey results and deep-dive articles to learn what your peers are saying about key risks in the strategic, financial, operational and compliance categories, or find out more about how our risk and cybersecurity professionals can help.

Summary

Customer expectations, environmental regulations, the rise of distributed energy resources, the cost of recovery of assets, and business interruption are all causing significant concern across the sector. But there are ways to mitigate these risks.

About this article

By

Matt Chambers

EY Global and Americas Power & Utilities Risk Leader

Risk management leader in power and utilities. Solving complex problems with pragmatic solutions. Avid snow skier. Sports lover. Father.