It would be difficult to overestimate the degree of change that will impact utilities in the coming decades. In fact, utilities may turn out to have the most challenging role to play in the larger energy transition. 

Amid the renewables-driven energy transition, decarbonization will radically alter energy generation, while decentralization and digitalization will reorient both the energy delivery ecosystem and the business models that the next-generation grid is able to support. In the near term, energy suppliers will find themselves utilizing an aging, fragile grid, and also preparing to radically update it — which may turn out to be almost as challenging as the shift toward renewable energy sources themselves. 

At its root, the energy transition is fundamentally a challenge of capital allocation in three areas: energy generation, the grid, and new customer-focused business models. Utilities will need to achieve a careful balance of growth orientation and risk management regardless of which pieces of that value chain they manage, sequencing their capital projects to both drive profitability through the remaining years of the fossil fuel era and prepare themselves to succeed in an energy ecosystem that will be largely decarbonized and decentralized by the middle of this century.

Surviving the Change: Risk Management for the Energy Transition

Surviving the coming energy transition means first focusing on near-term operational threats and lingering inefficiencies. 

Beyond the current acute global energy crisis, these near-term challenges include:

• The sunsetting of coal plants
• The rise of DERs
• Microgeneration and non-utility providers
• The need to account for dynamic supply and demand
• Acceleration of corporate net-zero pledges
• A shifting cybersecurity landscape

At their core, near-term risk mitigation strategies will emphasize the adoption of new digital architectures that both serve the energy present and point directly at that energy future. These near-term strategies will enable utilities to evolve into companies that not only deliver energy, but that increasingly orchestrate systemic solutions, deliver data-driven insights and enable their customers to achieve new efficiencies and decarbonization benchmarks through renewables-driven electrification. 

On the power generation side of the equation, utilities obviously need to begin by installing more renewable plants, but utilities also need to shift their mindsets: become both plant operators and distributed asset managers. This shift will require more than just technology solutions: A company with a large stake in energy generation will become a fundamentally different kind of enterprise, and will need to develop new kinds of expertise, new job functions and new organizational structures. All utilities will also need to develop robust energy tracking and carbon accounting capabilities from source to consumption. Even companies that rely heavily on fossil fuels, and are not currently focused on reporting decarbonization activities, need to be prepared to rapidly respond to both new regulatory mandates and to companies demanding to see transparent, up-to-date carbon dashboards and clear pathways toward renewables. Throughout this transition journey, aggressive pursuit of digitalized construction and plant operations will pay significant dividends. Digitalization will make even fossil fuel operations more cost- and energy-efficient through predictive maintenance, remote intelligence and enhanced supply chain visibility and price tracking. 

In the near term, when it comes to the grid, most key investments should be designed to optimize both fossil fuel and renewables operations. Enhanced network management, including advanced outage management, variability management and whole network visibility, will generate ROI regardless of power source, and should be prioritized. Precise supply and demand forecasting will become increasingly critical, as will extreme weather resiliency. 

Another key aspect of grid risk mitigation is to involve the customer community as a stakeholder, engaging with customers to reduce consumption and supply flexibility. Adopting open data platforms and “smart,” responsive digital grids will pave the way for future DERMS (distributed energy resource management systems) rollouts. Utilities must also invest in cybersecurity — both to ensure the security of the current aging grid amid increasingly sophisticated attacks, and to prepare for protecting a distributed grid, which will present new and distinct cybersecurity vulnerabilities.

The most urgent customer-focused risk mitigation strategies will involve optimizing current business models in a way that also builds capabilities critical to the future business models that will emerge in a distributed, fully digitalized grid and marketplace. Utilities must adopt cloud-native platforms to modernize meter-to-cash (M2C) processes and support seamless product composition and rollout. Forward-thinking utilities are already investing in advanced customer analytics, new variable pricing models and green energy pricing and tracking. Contact center modernization will become a crucial tool for cementing customer relationships with a strong omnichannel strategy, equipping utilities with new channels to inform customers about novel and unfamiliar pieces of the green energy transition.

The New Role of Utilities: From Commodity Provider to Value-Added Service

On the supply side, many future-focused “big bets” for utilities will involve commercial optimization through energy storage and supply security solutions. To achieve a largely decarbonized energy system, utilities need to both enable grid-scale storage and commercially optimize that storage to balance out periods of low output from solar and wind sources. Developing grid-scale batteries is a core innovation priority, and will require deep engagement with technology partners and leading academic institutions. Other storage solutions, like hydro storage, will be expensive projects that will require decades-long runways and massive capital expenditures. Scaling up green hydrogen may eventually require a complete rebuild of much of our fuel infrastructure and would entail unified country-wide public/private implementation plans. To ensure a secure and flexible energy supply, utilities will need enhanced demand and frequency response solutions, which will include creating vibrant markets for electricity, capacity and ancillary services. They will need to make significant investments in technology to improve the efficiency of renewable energy production, and achieve a truly diverse energy portfolio that allows them to hedge their risks. Increasingly, utilities will also need to become experts in carbon capture, utilization and storage (CCUS).

For utilities, the electrical grid is both a fundamental challenge and a significant growth opportunity, and enhancing system/grid flexibility is essential. An aging infrastructure designed to operate on the basic principle of constant supply (base load) and fluctuating demand is going to be replaced by a bidirectional grid that can cope seamlessly with fluctuating supply and demand while incorporating decentralized and disaggregated power generation. Utilities will need to enable next-generation connected grids and microgrids, as well as related real-time balancing solutions for physical dispatch and commercial balancing. Vehicle electrification will provide a consistently growing revenue stream, while a flexible grid will be able to optimize EV demand management. Entirely new heat delivery infrastructures will further drive new business models.  

Today’s utilities operate primarily on a commodity provider model: While they are heavily involved in infrastructure and large manufacturing projects, their end product (energy) is relatively simple. In the future, the utilities business model will become much more complex as utilities seek to deliver value to customers who will often be equipped with their own local energy generation capabilities. This new business model will be a radical hybrid. Utilities will still sell electricity, certainly, but also manufacture and sell power generation and storage equipment, monetize technology orchestration services and manage a revenue-generating marketplace model. In concrete terms, utilities will manage P2P energy trading and provide EV services. They will sell and service solar and wind equipment as well as battery solutions on both an enterprise and retail scale, and enable equipment-based billing. They will also become consultants and technology integrators working with corporations and municipalities to orchestrate whole systems solutions that rationalize a confusing abundance of energy generation and storage options. 

Does this mean that utilities need to abandon their current business model? For better or worse, the answer is Yes. In the near term, they need to prioritize digital transformations that are applicable across their entire current value chain. At the same time, they need to begin investing in initiatives that will support entirely new value chains. Monetizing retail micro-generation, for example, might require not just radically new sales approaches and maintenance teams, but also a brand-new equipment factory and a sudden need spin up a retail shipping/logistics operation. Only by building responsive, digitalized operations in the near term will utilities be able to achieve a workforce and balance sheet that is prepared to unlock value in the decentralized energy future.