Winner takes all? Digital in the utility industry

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Load growth is slow, energy prices are soaring, inflation is rising, and grid reliability and resiliency is becoming an ever-present concern—North America’s population is under pressure and would welcome an easing on their wallets from the utility industry. Meanwhile, most utilities’ bold aspirations to reduce their carbon footprint to net zero over the next few decades are being met with capital, labor, and materials challenges that make achieving this goal uncertain. For public utilities, these challenges are only further amplified by earnings pressure amid a volatile energy market. And the grid is only getting more complex to operate as distributed energy resources introduce an influx of new information and variables into the system.

Key questions to be asked

With these issues in mind, solutions need to be sought. The North American utility industry is massively fragmented—over 3,000 electric utilities and many more gas and water ones—across three primary ownership models that are either investor- or municipal-owned utilities or cooperatives.1 This raises questions:

Why hasn’t the industry consolidated more to take advantage of scale and best practices to deliver a better product at a lower price with higher customer satisfaction? At this stage, it is very difficult to prove that they can provide this. Many proposed M&A strategies run into well-meaning, state-based utility commissioners, city managers, or cooperative shareholders who may wish to protect local communities and potentially disallow the typical M&A deal synergies—such as reducing corporate overhead costs and operational expenses that could risk service levels or other actions, leading to lay-offs, higher customer rates, or reduced service levels. When trying to compare utility performance, discussions often quickly get lost in the nuanced differences of each utility—such as whether it is urban, suburban, or rural and overhead or underground; weather and vegetation variations; historical capital-spend levels per customer; or age of assets.

What if there were a way to build a utility that could demonstrably prove that it could provide a better product and service at lower rates? Digital disrupting business models across industries are increasing rapidly. This began with entirely new sectors being created (such as search or social media); some of the companies in those sectors are now among the world’s most valuable. Then disruption moved to mostly “asset-light” industries: those where the product or service was primarily based on information or data such as banking, media, or insurance. The disruption then traveled to industries where physical products were involved, for example, e-commerce. Now the disruption is increasingly blurring the lines between physical and digital such as Tesla and Peloton Interactive—where the combined digitally-infused physical product is fundamentally superior to alternatives. Despite this, the utility industry barely takes advantage of digital.

What if monopoly-based sectors could use digital to disrupt the monopoly structure? As digital has not yet fully infiltrated the utility industries, what would happen if the regulated utility networks of electric, gas, and water businesses could use digital to deliver electrons and gas or water molecules in an alternative fashion? At present, there is little evidence that the industry is pursuing such innovation at the same scale and pace seen in other industries, so why not flip the question on its head and ask: If digital could enable a utility to provide a fundamentally better product and services at lower rates, what could that do to the utility industry’s underlying structure?

In this article, we explore answers to these questions, expose the significant opportunities that the space presents, look at what is needed to build a digital utility platform, and identify six key factor for success.

A modern digital platform: A once-in-a-generation consolidation opportunity

Digital could open an exciting consolidation opportunity for fast-moving companies that create digital platforms to meet their customers’ needs. The pace of technological change is increasing—look at the fast-decreasing cost of cloud computing, the growing availability of powerful machine-learning (ML) and AI capabilities, the rapidly evolving tools to deal with persistent and chronic data issues, and the increased intelligence in smart phones.

While more utilities are starting to adopt many of these digital trends, the rate of adoption is not keeping up with the pace of innovation. The opportunity gap to improve key outcomes by deploying technologies and methodologies that have been utilized in successful transformations increases every day.

The evidence for digital is clear. When working with leading utilities, we have seen exceptional step-change improvements in select use cases such as:

  • a 25 to 30 percent field productivity improvement from AI-powered scheduling
  • up to an 80 percent capital reallocation based on ML insights in asset health
  • more than a 30 percent improvement on customer satisfaction in select journeys
  • a 2 to 5 percent increase in heat rate or yield for fossil as well as renewable generation assets
  • more than a 30 percent improvement in reliability and resiliency outcomes within existing spend levels

If the “product” is defined as clean, reliable, resilient, safe, easy-to-do-business with, and an affordable energy or water service, then a step change in every dimension is possible. This can be done by looking at a collection of already-achieved impacts from utilities using select digital use cases.

A digital platform on top of an available technology foundation

What would happen if a digital platform that deploys every known high-impact use case to its full extent was built on top of a flexible, extensible, available technology foundation that could “bolt on” additional utilities?

While almost all major utilities are utilizing digital, data, and analytics in some fashion, it appears that few executive teams can articulate a cohesive strategy on how a comprehensive digital, data, and analytics platform could provide “best-in-class” outcomes across reliability, safety, resiliency, affordability, and customer experience—with no trade-offs.

In our perspective, if a cohesive strategy is not devised within a three-to-five-year timeframe, likely no one will “break out of the pack” and the industry will continue on its linear improvement trajectory.

However, bold industry companies that adopt a digital platform could achieve a step-change performance ahead of peers and, more important, use the once-in-a-generation opportunity to fundamentally restructure the entire industry. The value at stake is massive for those that take action. They could invite energy regulators, customers, and communities to join an unbeatable deal—a digital utility platform that provides the best reliability, safety, resiliency, affordability, and customer experience. Those jurisdictions and utilities that connect to the platform could be set up to tackle the energy transition from a position of strength. If the core utility product can be offered at lower cost and better customer experience, it will create more headroom to invest in carbon-free technologies or improvements in grid resiliency, or both.

Many stakeholders would need to be involved to achieve this, including customers, investors, policy makers, and regulators. The regulatory relationship would be critical, given the authority that regulators generally have in approving (or disallowing) investments. For the vision to succeed, it would require an open utility and regulator relationship, with both willing to explore a new partnership based on transparency and verifiable outcomes.

What it will take

Building a base that can serve as a comprehensive multi-utility platform will require a detailed, layer-based framework and associated design elements. These layers can collectively transform legacy utility architecture into a “digital-native-style”, secure, and inter-operable platform that allows business services to be scaled across utilities (exhibit).

Adopting a digital platform architecture model could enable a utility to forge ahead of competitors.

How to build it: A new approach and new leadership

Most utilities are already building parts of these features across some layers of their tech-stack; in other words, these features are being built on a use-case by use-case scenario—think of it as “drip irrigating” a farm with new elements. While these enable specific use cases, the escape velocity that is needed for all the layers to be in place will take too long to deliver an efficient model quickly. Moreover, this is an optimistic outcome that will require a lengthy history of delivering cross-business use cases, alongside a visionary enterprise architecture team that can enable the organic buildout to collectively scaffold this cross-layer end state.

Building the multilayer future state will require a cross-functional team and a close partnership with the enterprise architecture organization. The team needs to set the intention to focus on creating and delivering this future state, while the rest of the IT organization delivers nearer-term use cases and other “must-do” regulatory or systems migrations.

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A platform architecture roadmap

Building such a platform will be a multiyear endeavor, and utilities will need the ambition and the resolve not only to embark on the journey but to stick with the aspirational vision over a three-to-five-year horizon, and buttress against shifting priorities throughout. Various key enablers are necessary to have in place upfront to put utilities on the path to success when making this leap.

A strong business case backed by estimates of measurable business value will be needed to develop a long-term roadmap and strategy and return value to the utility. The roadmap could include the series of strategic investments required to deliver the transformative business-enablement platform, and an estimate of the necessary foundational investments. Further, leadership will need to keep front of mind the necessity for significant new talent and partnerships to create the blueprint and execute the buildout of this platform.

New technical capabilities and skillsets will be required, including cloud engineering, DevOps, and data science. Digital skills like these will be critical to deliver the target state platform. Utilities will need to ensure that best practices around core cloud and software engineering capabilities are in place—for example, Infrastructure as Code, cloud FinOps, automated testing, and cybersecurity.

A well-defined set of foundational architecture principles and a lean tech governance model will be necessary to ensure that maximum value from the investment is returned to the business. This is essential to steer strategic design decisions made along the way. An architecture governance model, backed by a shared set of principles and guardrails, could drive delivery consistency through the use of acceptable patterns, streamline technical decision making, and empower delivery teams by giving them the autonomy to move at pace with agility.

Strong organizational cooperation and commitment by multiple stakeholders will be essential, beginning with the C-team and board. As this transformation is a multiyear journey, dedication and support from top-level leaders will be important to stay the course, with frequent and consistent communication at all levels. The development of the target state platform needs to be a collective effort—it cannot be achieved in isolation. Business stakeholders could consider partnering with the whole IT function to ensure the alignment of goals and outcomes, address dependencies, and reduce risk.

Three phases of transformation

We have observed that a successful transformation to a digital utility platform takes place over three phases.

Phase 1: Developing foundational patterns for integration architecture

The first step in implementing a target state platform model is to establish foundational patterns for system integration and platform consumption. The integration layer is a vital starting point—getting it right means fewer headaches during large system upgrades or consolidations in the future. Getting it wrong, however, can lead to multiyear overruns of large system modernization efforts.

A sound integration architecture could decouple user-facing systems of engagement from the backing core IT systems, thereby reducing dependencies and eliminating sizeable tech debt. This often accrues when utilities build business functionality within rather than on top of core IT systems. With this layer of abstraction in place, future M&A efforts could be simplified and consolidations made easier. Applying the architecture principles from the lean governance model at the integration layer could serve as a replicable blueprint for scaling and expanding the platform over time.

We recommend beginning by focusing on use cases within work, asset, or customer management as these core IT systems are central to many digital value cases. Organizations can start with one or two foundational use cases (such as customer payment journey or asset analytics) to prove end-to-end platform integration. For these use cases, the integration patterns can take two forms: operational integrations and analytics. Operational integrations can exist as managed enterprise APIs, designed to provide abstracted, consumable interfaces to read from and write back to core systems themselves. Analytical integrations can serve to build out of the “enterprise data hub”, replicating data from core systems—often in streams or real time—for analytical use cases.

Successful delivery of this foundational integration architecture layer requires a combination of strategic guidance from enterprise architecture to help steer teams on key design decisions. Additionally, new or underrepresented skillsets, such as data engineering, may be needed in the organization for it to scale, as well as a sound cloud strategy and infrastructure automation capability.

Phase 2: Establishing consumable interfaces, integration points, and self-service tooling

With the foundational integration patterns in place, the next step comprises the development of consumable interfaces and integration points, and the associated self-service tooling roll out. Socialization of the enterprise APIs, data marts, and available integration points through living documentation artifacts (like Swagger or wiki-hosted data catalogs) could open the doors for business as consuming apps, dashboards, automation bots, and other products begin leveraging the platform’s offerings. A self-service model is ideal, where consuming teams have everything they need at their fingertips to find, connect to, and communicate with points of integration across the platform. Sandbox environments (secure, isolated areas for experimentation with data and integrations) could be set up to encourage citizen development—a safe way to explore new use cases for harnessing the data within the platform.

Phase 3: Incrementally scaling to additional domains and expand off-the-shelf accelerators

Once the first end-to-end use cases are delivered for a given domain, phases 1 and 2’s processes can be repeated to expand the API and data catalogs with additional business domains, data sets, or system integrations. These could be based on use cases and prioritized by business value. In addition, the integration patterns defined in phase 1 could be applied to additional core systems (such as planning, scheduling, and outage) to bring new read or write capabilities to consuming apps and user-facing products. As the platform delivery initiatives scale and capabilities mature over time, efforts could be focused on the development of assets and capabilities to accelerate platform adoption for consuming use cases. For example, this could include software development kits (SDKs) for easy platform integration or reusable components for engagement-layers (including dashboard widgets, mobile and web libraries, forms, and more). Assets like these can accelerate development and help speed up the adoption of tools across business or customer workflows. More advanced acceleration use cases may include cross-platform services like event hooks or notification services.

Within the data and analytics space, an open-source library of baseline analytics models could help kick start new teams or inspire new citizen-development experiments to unlock untapped value from existing data sources.

Beyond IT: What also has to be true to transform the industry

Building a comprehensive digital utility platform is much easier said than done. Taking key lessons learned from other sectors, we have uncovered six significant factors that could lead to success.

  1. A strong CEO and executive team backed by a board willing to stay the course. While achieving a better product and service is likely a technical certainty, the path can be rocky. Data privacy, cybersecurity, model drift leading to adverse outcomes, critical talent leaving, and many other issues can derail short-term efforts. Yet an organization with a strong CEO and high-performing executive team committed to the vision will likely overcome such obstacles. Technology talent, however, is vital for a successful team—utilities are often run by engineers, lawyers, and accountants without the necessary technical expertise to guide change.
  2. Product and platform agile operating models combined with lean management principles. More legacy companies, from automotive to energy, are realizing that they need to adopt a new agile operating model and product development culture. For a successful utility platform to be built, a fundamental change needs to happen across the enterprise from the frontline, back office, the executives, and the board room.

    IT and business siloes need to be completely broken down into sustained, impact-oriented product teams, with platforms carefully separated into systems of record versus product that represent systems of insight and engagement. Correspondingly, the product manager’s or product owner’s role will become more important. A large utility will likely need to hire or train more than 30 product managers—a quick search online across major utilities indicates the current dearth of product-manager or product-owner roles.

    Beyond digital products and platforms, the rest of the utility organization needs to accelerate more than 30 years of lean management system into three to five years. Here’s the opportunity for utilities to move waste and variability, improve frontline problem solving and accountability, enable performance dialogues, and operate a utility with a cohesive operating system—all enabled by lean management system thinking. The combination of lean plus digital is critical: research shows that the hardest part of digital transformations is not talent, technology, or data (although those are difficult enough) but driving operating-model changes that ultimately ensure that the intended business outcomes are achieved.

    To enable this new operating model, winners will hire more employees like agile coaches, ML engineers, or full-stack developers—people who are in great demand globally. Utilities need to attract this talent by creating compelling career paths linked to the opportunity to build an industry-leading digital platform that drives industry consolidation and plays a meaningful role in the energy transition. Companies could consider “acquihiring” a lot of talent at once by buying one or more small software start-ups.
  3. Key differentiators that are built, not bought. Building a comprehensive digital utility platform is not just about upgrading to the latest management system. Research shows that reliability, safety, resiliency, affordability, and customer experience, among others, have to be internally developed for organizations to achieve best-in-class levels of insight and action and industry-leading differentiation.
  4. Domain-based and design-led customer service and workflows. Domains need to be at customer-care level, electric-distribution asset management, workforce management, and supply chain. Core utility customer journeys (such as paying bills or reporting an outage) and utility workflows (for instance, vegetation or asset management) can be reimagined by using design thinking to create better products and service. While all domains are important, the most critical is getting supply chain right—this will enable industry consolidation. Utilities spend substantial amounts of capital on supply chain but, due to the incredibly fragmented industry, wield almost no buying power. The winning industry consolidator will most likely have a meaningfully better, digitally enabled, supply chain.
  5. Recognizing the importance of cloud. A 100 percent cloud-based platform that recognizes the flexibility and AI-powered capability of cloud far outweighs any capital-expenditure or operating-expenditure accounting treatment. “The digital utility platform needs to be in the cloud,” is not a technical statement anymore. Whether the IT infrastructure is in a data center or the cloud is irrelevant—what is important is that cloud capabilities far surpass what is generally available in an on-premises data center—as shown by the pace of available data science and ML and AI capabilities that major cloud providers (such as AWS, Azure, and Google Cloud) have released in the past few years. Regarding the global utility industry in this space, an important milestone was reached in 2019 when Enel (Italy’s national entity for electricity) became first large utility to be 100 percent cloud-based.2
  6. Developing stakeholder skills to enlighten and empower regulators, legislators, the workforce, and other stakeholders. Historical or legacy regulatory requirements that were mostly put in place in reaction to, or in anticipation of, historical events can hinder progress. Radical transparency is required to educate all stakeholders, partially enabled by a much more rigorous approach to data.

When a utility is transformed by both digital and lean management using the principles above, three things will likely be true. First, the utility could be higher performing (for example, across reliability, resilience, customer satisfaction, safety, and compliance) and more affordable. Second, with a rich focus on data and analytics, the utility could have the ability to prove better performance and cost outcomes to third parties, which would enable an M&A strategy. Third, the digital platform and operating model will be extensible so that acquired utilities could be “bolted on” to improve the utility’s performance.

The path ahead

It’s not clear yet whether any utility in the North American industry has transformed enough digitally to impact the fundamental industry structure. A number of utilities have digital transformation strategies underway in various forms—some are standing-up digital units (for example, using the digital-factory concept), some are systematically upgrading their core systems, and others have made great progress in specific journeys or domains. While it’s difficult to estimate exactly how much investment is required, it is likely to be between $500 million and $1 billion. A winner with across-the-board, industry-leading performance and a compelling M&A platform could build a $200-billion-plus value company—one that consistently delivers top-quartile reliability and customer experience while keeping customer rates among the lowest in the industry.

This is a once-in-a-generation moment. Significant step change in performance could be achieved in a consolidated, regulated industry that is asset intensive, engineering focused, and safety conscious. The first few leaders who recognize the end-to-end opportunity in a greenfield digital utility platform—one that drives an M&A strategy to bring a better and more affordable energy product to millions of customers—could accrue disproportionate value. Why wait?

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