9 minute read 11 Apr 2019
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How your risk program can help manage the investment dichotomy

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.

9 minute read 11 Apr 2019

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Trust is the foundation of a healthy relationship. For utilities, pursuing a balanced investment strategy while maintaining trust is paramount. 

Historically, customers have trusted utilities to reliably deliver electricity, gas or water consistently, responsibly and cost effectively. Employees have trusted their employers to provide challenging career opportunities and a level of security, and to treat them with dignity and respect. Investors have grown accustomed to utilities as an asset class with a mandate to pursue profitable growth, operate cost effectively, protect the brand and deliver reliable returns on their investments. Regulators have relied on utilities to comply with established regulations and manage their companies in ways that are in the best interest of ratepayers.

However, the rapid pace of disruption occurring in the utility industry brings on new risks that could adversely impact trust with stakeholders

Technology is dramatically changing the landscape for utilities — and the trust stakeholders have in them

Advances in technology are driving many of the dramatic changes that utilities throughout the world are experiencing — changes that can either instill or erode trust.

Electric utilities across the entire value chain are having to respond to the “3D” forces of disruption:

  • Decarbonization – toward a cleaner generation mix to meet emission reduction goals
  • Digitization – with technology enabling a smarter, digital grid
  • Decentralization – empowering customers to produce, store and sell their own distributed, renewable energy

For natural gas utilities, the “electrification of everything” is bringing the low carbon agenda increasingly into focus. As consumers embrace cleaner sources of energy, electricity sourced from renewables and batteries is a rising threat to natural-gas-fueled heating and cooking applications. And for water utilities, digitizing the network offers an opportunity to offset the rising costs of addressing sustainability and quality challenges. However, it also substantially increases the exposure of the water network to a cyber incident.

Utilities are having to embrace a dual strategy that balances the need to continue to invest in providing safe and reliable service, while simultaneously investing in innovative technologies and new business models required for future success. This duality — the coexistence of essential but conflicting imperatives — underscores the need for a new approach. Every utility now needs to consider how to become skilled at both initiating and responding to disruption in ways that engender trust among all stakeholders.

Trust has always been important, but as technology pushes utilities into new frontiers, bringing with it an exponential growth in data, trust becomes the key to a utility’s ultimate success — or failure. The ability to harness this data to improve decision-making will create significant competitive advantages. However, this new digital ecosystem also represents an existential peril if data is not captured, stored, managed, used and disposed of properly.

Every utility now needs to consider how to become skilled at both initiating and responding to disruption in ways that engender trust among all stakeholders.

Trust is key to a successful growth strategy

Utilities need to enhance customer trust beyond delivering safe and reliable service. Indeed, trust must become a growth imperative. Customer trust will be a decisive factor in the success of the utility seeking to expand services and products to compete against non-traditional competitors behind the meter.

Regulator trust will be central in building collaborative relationships to develop new rate constructs. Utilities need the right incentives to invest in the technology and innovation required for future success while achieving effective cost recovery on investments made to provide safe and reliable service today.

Investor trust will be hard-fought as utilities work to educate investors on necessary capital deployment decisions, given that existing reward mechanisms disproportionately reward traditional investments over investing in the disruptive innovation that is needed for future success.

Employee trust drives productivity and galvanizes employees around a common purpose. There is a high correlation between employee trust and business performance, evidenced by trust comprising two-thirds of the criteria for Fortune “100 Best Companies to Work For,” and that these companies beat the average annualized returns of the S&P 500 by a factor of three.

Managing the right risks at the right time can help utilities with the trust imperative

In a recent article, Amy Brachio, EY Global and EY Americas Advisory Risk Leader, declared that “risk and trust are inextricably intertwined. In fact, loss of trust is possibly the biggest risk that a business can ever face since everything else depends on it.”

To navigate through this transformative period and build the trust essential to future success, utilities need to think differently about risk management. Until now, risk has been focused on avoiding negative outcomes. To thrive in the Transformative Age, utilities need to embrace disruption and embed trust as a design principle into their businesses — something EY teams refer to as “Trust by Design.”

Embed risk into the business strategy

Utilities should start by explicitly considering risk when evaluating alternative business strategies, selecting the path forward and planning its execution. Each business strategy creates both upside risks (risks that offer benefits) and downside risks (risks that offer negative impacts). Outside risks (risks that are beyond the utility’s direct control) will have further impact.

Utilities will want to consider upside risks in terms of what must go right for them to achieve their objectives. They can then execute a risk strategy that monitors the upside risks to confirm either that they are behaving in line with expectations or are exhibiting early warning signs that the risks are going outside a defined tolerance level, allowing for timely recourse.

Similarly, utilities will want to consider downside risks in terms of what could go wrong. With this in mind, they can implement a risk strategy that eliminates, avoids, mitigates or transfers the downside risk cost effectively.

Outside risks are what may surprise a utility. Although these risks are outside of their direct control, utilities can take certain actions to increase or decrease the level of exposure. The risk strategy can monitor the evolution of outside risks to identify opportunities to exploit (increase exposure) or mitigate (decrease exposure).

Coordinate and align risk to the operating model

In support of the risk strategy, utilities should coordinate and align their operating model across the first, second and third lines of defense. There needs to be clear accountability and an understanding of how each function’s role supports the risk strategy and complements the chosen level of control.

Utilities need to embed their risk program into new product or service design and operations, accelerating the speed to market while designing and sustaining trust. The risk program needs to instill a risk mindset and culture that coexist and co-evolve with the innovation culture utilities need to embed to disrupt themselves. This new cultural paradigm embraces new behaviors and thinking while harnessing digital solutions for greater agility and efficiency. While multiple functions will be involved in managing and monitoring risk, there must be a single, common view of the current residual risk exposure. And, if an unplanned event does happen to play out, utilities need to be ready to respond and recover in an organized manner that doesn’t erode trust.

Gain valuable insights through accelerated risk intelligence

To support the operating model and make timely and informed decisions, people need access to near real-time risk information. Many current risk management programs rely on periodic assessments, which are slow and cumbersome and often are not supported by empirical data. And, they rely on subject-matter opinions that tend to disproportionately weight recent experiences in the past.

Risk management programs must evolve to accelerate risk intelligence through digital technologies that can deliver new insights. The risk program must digitize risk intelligence, monitoring and reporting and shift to a more predictive and dynamic focus.
 

To thrive in the Transformative Age, utilities need to embed trust by design principles that embrace the duality of disruptive innovation and the ongoing provision of reliable service.

It starts by asking the right questions

Risk programs must be digitally led to strengthen trust and increase business performance. Utilities need to ask themselves the following questions:

  • How can stakeholder trust be sustained and enhanced?
  • How should strategy and the risk operating model be aligned to create the foundation of trust?
  • What is needed to make risk-informed strategic decisions?
  • How can the power of data and technology be harnessed to improve decisions?
  • Will trust be sustained through the biggest tests?

Risk programs need to be skilled at both initiating and responding to disruption

Disruption presents an opportunity to redefine the risk program as a business enabler. Utilities are already leveraging technology, such as drones, robotic process automation, artificial intelligence and advanced analytics to collect risk intelligence, monitor controls and make more informed decisions. Consortiums have been established to share the cost burden on activities, such as monitoring vendors, and in the case of the financial services sector, commercializing these skills by offering the service to other banks.

The need to coordinate and align across different functions is becoming more evident, as each function establishes its role in the new strategies. The duality of investment that the utility must pursue today between providing a safe and reliable service while also investing in innovative technologies to find the upside of disruption equally applies to the risk program. Every risk program now needs to function in a way that continues to achieve its current mandate, while simultaneously investing in new tools and capabilities to transform how it can deliver value to the organization.

With the right risk program in place, utilities can gain and sustain stakeholder trust

The rapid pace of disruption to the utility industry brings new risks that could adversely impact trust with stakeholders. Risk management needs to embrace disruption and become an enabler to guide confident decisions that strengthen trust. It demands a new and different way of thinking. It requires that trust be embedded as a design principle into the business. Done right, a digitally led, Trust by Design risk program will serve as an anchor in helping utilities to become digitally confident and trusted organizations with the intelligence and insights to drive growth, increase business value and maintain stakeholder trust. Standing still, waiting and seeing, and relying on past success to carry utilities forward are no longer options.
 

Summary

The rapid pace of disruption occurring in the utility industry brings on new risks that could adversely impact trust with stakeholders. To navigate through this transformative period and build the trust essential to future success, utilities need to think differently about risk management.

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.