When power and utilities (P&U) organizations consider strategy, they want to know what their objectives are, where the right opportunities lie and how they are going to drive value.
But a robust strategy also requires an explicit recognition and understanding of the need to manage the risks that matter most.
As my colleague Benoit Laclau described in his recent blog, we have been working with a leading global analyst firm to forecast the following “tipping points” for the sector:
- In the next 5 years, the cost of locally generated and stored electricity will equal the retail price of grid delivered electricity (Grid cost parity)
- In the next 10 years, the price and performance of battery electric vehicles will achieve parity with combustion engine vehicles (EV parity)
- In the next 20 years, the pure cost of transporting electricity will exceed the cost of generating and storing it locally (Grid parity)
Take a moment to think about that. How will an industry that makes large capital investment decisions based on 30-40 year time horizons adapt, when the entire operating model will potentially be turned on its head in the next two decades? Critically, the decisions utilities make today will dramatically impact their success – and possibly their survival.
Rise of new strategic risks
In our global survey and report, Risk Pulse: Navigating the power and utilities sector in transformation, utilities rank business interruption from cyber-attack, storms and catastrophic events as their top risk.
In previous blogs, I have written extensively about utilities’ heavy focus on business interruption risks and growing cyber threats, which strike to the heart of the challenges in providing a safe and reliable service. But Risk Pulse also highlighted the growing importance of new strategic risks, which increasingly require the board’s attention – along with traditional operational, financial and compliance risks.
Our survey respondents prioritized the rise of distributed energy resources (DERs), changing customer demands and expectations, and the evolution of digital technologies and Internet-of-Things (IoT) as their top three strategic risks in today’s environment. And as they look to a future energy world, they expect these risks to grow in importance.
Bringing the right talent mix to the table
There needs to be a sense of urgency to tackle utilities’ strategic risks today. Organizations need to make sure they have the right disciplines at the executive table, to identify and evaluate risks accurately and at the right time.
Significantly, the Chief Risk Officer (CRO) is very often not brought into strategic discussions, to the detriment of an organization’s overall mission.
But it is also the responsibility of CROs to make sure their voices are heard and that they actively participate in strategic discussions. By clearly identifying and articulating the opportunities that can be unlocked from an effective risk management strategy, they can improve their visibility and demonstrate their value.
A great example of an area around which CROs can add value is the impact and implementation of digital technologies. DERs, IoT and the digital grid create both existential threats and exciting opportunities for utilities to discover new revenue streams and create business models that can help them thrive in a future energy world. CROs can help the organization identify threats to the business, assess the organization’s level of risk appetite and tolerance, and help to integrate risk management into the overall business strategy.
As we move closer toward a new energy landscape, CROs can play a critical role in providing an in-depth understanding of the internal and external drivers of change, and develop a roadmap that offers multiple paths to sustained success.