8 minute read 12 Sep 2018
ladder of trolls norway

How to navigate the strategic risks of P&U transformation

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.

8 minute read 12 Sep 2018

Show resources

With the power and utilities (P&U) sector being shaken up by a range of disruptive trends, understanding and responding to evolving strategic risks will be vital.

Strategic risks represent uncertainties that impact a company’s strategic mission and execution. Identifying and understanding these is vital for organizations looking to design new and innovative business models to help them adapt and succeed to the future world of utilities.

The EY Global Power & Utilities Risk Pulse Survey asked executives to help us rank the importance of the most critical risks affecting the sector — examining both how important they are today and how they see their importance changing over time.

Read on to discover what they ranked as the five most critical strategic risks. How closely does this match your assessment? And do you have a plan in place to address them?

Climber standing on top on the Totem Pole sea stack in Tasmania, Australia
(Chapter breaker)
1

Chapter 1

The top five strategic risks facing P&U organizations

From aging workforces to changing customer expectations, the potential for disruption is significant.

risk pulse infographic

No. 5: Aging workforce and succession planning

Utilities are already faced with the challenges of an aging workforce and need to ensure knowledge transfer from the current generation to the next. Little wonder that 26% of respondents ranked this in their top three strategic risks.

Utilities will need to attract the right mix of technical skills and entrepreneurial mindsets, competing with other industries to position themselves as 21st century employers of choice. With the P&U sector increasingly focused on developing renewables and leveraging leading-edge technologies to enable a cleaner energy mix, organizations in the sector could be in a strong position to attract the right staff with the right skills.

At the same time, digital technology is reshaping the skills needed in the workforce of today’s P&U organizations. The next waves of disruptive technology — artificial intelligence, robotics, virtual reality, the Internet of Things (IoT) and sharing economy platforms — are poised to create additional opportunities and challenges as we transition to a future energy world.

No. 4: Inflexible culture, lack of change management strategy

Utility business models have traditionally been built upon stable and predictable cash flows within a given regulatory framework. The current transformation affecting the industry is challenging this (see how in our financial risks section).

Cultural flexibility, innovation and first-mover advantages have proven to be critical elements of success in other disrupted industries. When we look at disruption in telecoms, for instance, AT&T and Verizon had the vision to lead the development of non-regulated mobile networks, becoming market leaders in US wireless services through industry consolidation and strong sales growth.

This is why incumbent utilities face increasing pressure to become more flexible and innovative in their cultures, business models and service offerings to survive and succeed. This ongoing need is why 46% of respondents ranked this in their top three strategic risks.

There are so many new technologies at play the question is will there be a retail utility in the future? It’s something utilities need to answer if they want to survive.
Thierry Mortier,
EY Global P&U Technology Innovation Lead

No. 3: Evolution of digital technologies and the IoT

Digital technologies are affecting every facet of the P&U value chain. The IoT, smart meters, digital grids, big data and analytics, and mobile applications and services are transforming how utilities manage assets and operational processes across the enterprise. The energy system is evolving around two-way flows of power and data.

With the current speed of change, the associated security risks and vulnerabilities are rising exponentially, which is why 72% of respondents ranked this in their top three strategic risks.

Utilities should monitor the evolving digital landscape and explore how to engage more effectively with digital-savvy customers while building enterprise resilience capabilities so that they can sense, resist and react to new and evolving cyber threats from digital and the IoT.

No. 2: Changing customer demands and expectations

Customers are increasingly aware of energy usage, utility offerings, service quality and costs, and they have more choices — 76% of respondents ranked this in their top three strategic risks, and the number five risk overall .

The digital grid, combined with distributed generation, batteries, and emerging, enabling technologies, such as blockchain, is allowing more and more customers to produce, store, buy and sell energy among themselves. The addition of peer-to-peer capabilities creates new opportunities for customers and nontraditional entrants to siphon business away from traditional utilities, placing downward pressure on revenues and margins.

No.1: Rise of distributed energy resources (DERs)

Traditional utility business models are structured around centralized power plants with electricity supplied over large transmission and distribution networks. However, the sector is increasingly becoming a decentralized energy system.

Digital grid technology will augment and interconnect DERs, including rooftop solar, batteries and energy management systems (EMS), so that power and information can flow in both directions. EMS promises to improve energy efficiency, while rooftop solar and batteries shift electricity production closer to where customers consume it. According to Navigant Research, 429GW of distributed solar photovoltaic will be installed on a cumulative basis globally between 2017 and 2026, almost triple the capacity installed in the previous ten-year period.

This also places pressure on grid operations, traditional electricity sales and revenue. Utilities also face the threat of becoming further disconnected from their customers: they need a strategic response to customers themselves participating in the energy system.
Little wonder this was listed as a top three strategic risk by 80% of respondents and ranked as the number three risk overall.

Two technicians walk through a solar panel plant under a blue sky
(Chapter breaker)
2

Chapter 2

How to develop a P&U risk strategy fit for the Transformative Age

Understanding your customers and wider landscape, and getting the right people on your team are vital to long-term success.

As the respondents to our survey look to the future, 80% expect their current top three strategic risks — the rise of DERs, changing customer demands and, most especially, evolving digital technologies — to become more or much more important.
As the interdependencies among these strategic risks intensify, utilities should adopt a more integrated, agile and resilient approach to manage them across the enterprise as we transition to a future energy world.

Historically, when utilities set their strategies, they focus on opportunities without fully considering the risks. Utilities need to be much more explicit in evaluating the risks associated with the strategy they’re pursuing.

To succeed in adapting to these changes, P&U organizations should seek to drive a culture of ambition, innovation and agility. They should:

  • Stop thinking of customers as passive ratepayers and:
    • Steating them as the sophisticated, knowledgeable and active players they have become
    • Learn lessons from other sectors, such as financial services and telecommunications, which have forged new paths in providing personalized experiences that engage customers, foster long-lasting relationships and grow new sources of revenue
  • Monitor the shifting landscape to:
    • Identify opportunities to adopt or invest in innovative digital technologies that can improve their customer relationships
    • Ensure robust cybersecurity is built in to their networks to help sense, resist and react to potential cyber issues and ensure long-term customer trust
    • Find ways to work closely with regulators (see our compliance risks section) to develop innovative frameworks that accommodate investment in both DERs and energy efficiency solutions
  • Strengthen their people strategy by:
    • Implementing a future of work road map that inspires their employees to achieve higher performance through clear purpose and reward
    • Involving both current and retiring employees on this journey to ensure experience and knowledge is respected and transferred to the next generation even while building new ways of working for the future

But key to remaining relevant in the face of significant disruption is innovation, including involving greater integration of DERs with rapidly evolving smart grids. Already, some major commercial customers have diversified to become buyers, self-producers of electricity and providers of new energy services, including smart thermostats and home energy management systems.
When things are moving this fast, standing still may not be an option.


With digital moving ahead, what questions should utilities be asking?

  • How do they transform their business model to make it fit for the future energy world?
  • Should they develop in-house capabilities or outsource to third-party vendors?
  • Should they pursue an aggressive M&A strategy or form alliances with other service providers or innovative new entrants?
  • If a business-as-usual approach is taken, what alternative revenue streams have they identified?

Take the risk pulse of your own organization

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

Summary

Strategic risks fundamentally threaten an organization’s ability to succeed, and for P&U, there are many challenges that could change the way the entire industry operates, from new technologies to shifting consumer expectations. To succeed will require a combination of the right people, the right technologies, and the right understanding of your customers.

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.