5 minute read 7 Jun 2018

Why utilities need to give Chief Risk Officers a strategic voice

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 7 Jun 2018

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The emergence of new strategic risks in the power and utilities industry will require the attention of major utilities worldwide.

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. 

Turn the instinct to say “no” into an opportunity to say “yes”

Too often, the risk function is perceived as the naysayer, telling the business what it can’t do rather than providing the right analysis and tools for them to assume an appropriate level of risk when pursuing opportunities.

With greater visibility of their strategic value, CROs will be able to influence more effective oversight and accountability for risk reporting at board and executive levels. At the same time, by moving from “no” to “yes”, leaders will have greater confidence in understanding the risks and the processes the risk function has put in place for early warning signs on the effectiveness of mitigation strategies.

Utilities are no longer headed into a perfect storm of disruption – they are already in the middle of it. But in an industry where many pride themselves on being “fast followers”, few have realized it.

As they navigate the looming uncertainty, CROs need to arm their organizations with the tools to identify, understand and quantify the threats ahead. Securing key decision-makers as champions of an integrated, agile, resilient risk operating model, they can help the organization power ahead in their transformation journey and reap the rewards of a future energy world. 

Learn more about EY’s new global survey and report, Risk Pulse: Navigating the power and utilities sector in transformation which captures the perspectives of P&U executives around the world. They share the risks that are most important to them now and in a future energy world. Help shape our future results and insights by taking the Risk Pulse survey on behalf of your organization.

Summary

CROs need help organizations to build risk mitigation and management into their strategy in this new energy world.

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.