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Will Electric Utilities Embrace the Paradigm Shift?

The electric utility industry is currently in the midst of a major paradigm shift that could arguably be classified as one of the most important industry transitions of the 21st century. Successful paradigm shifts usually begin slowly and take time to gain momentum, but eventually there is a tipping point. The tell-tale indicator of a tipping point is credible market competition. If one takes an objective look at the trends over the last decade in financial and energy generation markets, public policy, and the evolution of the consumer, it is clear that material competition not only exists but is also growing rapidly. We will explore three facets of this paradigm shift, namely the evolution of the energy ecosystem, the energy consumer, and the utility mindset.

The Evolving Energy Ecosystem

Let’s first explore a simplified diagram of the traditional energy ecosystem that groups the key players, their respective roles, and the interconnections between them.

1.    Energy Information Providers — Informational sources that provide data, insight, and strategic guidance to the energy industry

2.    Energy Solutions Providers — Companies that provide implementation technologies and systems to support the energy industry

3.    Energy Providers — Entities that produce or provide electrical energy services

Electrical utilities have traditionally played a crucial role as the primary energy provider. In fact, an energy ecosystem based on central station generation would fall apart without electric utilities. Without energy, there are no energy consumers and no need for information or solutions providers. But what does the energy ecosystem look like when a greater focus is placed on distributed energy resources (DERs)?

In a DER-focused energy ecosystem, the role of the information provider is relatively similar. The primary difference is in terms of the increasing speed and volume of information transfer. Energy solutions providers have made the most notable shift, both in terms of scope (types of solutions provided) and channels (types of customers pursued). As a result, energy consumers have a much wider swath of implementation solutions to choose from, resulting in increased consumer optionality and control.

The Evolving Energy Consumer

For nearly a century, utilities have met the electrical needs of their customers without facing much of a competitive threat. Ironically, the customers that the utilities have faithfully served are now becoming their primary sources of competition. The other irony for utilities is that the DER transition will not only result in multi-directional power flow on the grid, but also in a power shift between them and their customers.

Residential customers are becoming more concerned with their individual role in the energy sector. Motivations are largely informed by financial return, but are also driven by other topics, such as energy independence, environmental stewardship, and relational relevance.

Governmental entities, at all levels, are driven by a growing public interest in “green” initiatives and in developing and implementing related legislative and regulatory mandates.

Corporations are shifting their business focus towards a triple bottom line approach (i.e., people, profit, planet). Corporations want to express concern for the public and their customers, increase revenue, and pursue operational and environmental sustainability — all in a concurrent manner.

Of the three customer types listed, corporations pose the most immediate and direct source of material competition to electric utilities. There are several reasons for this. First, corporations typically have greater ease of access to financial investment resources. Secondly, the financial burden caused by their energy consumption levels may be substantial, justifying a need to explore energy optimization and generation options. A corporation’s energy rate structure typically includes energy demand charges, which can lead to attractive returns when deploying DER solutions. Lastly, their future profitability is directly linked to customer satisfaction and their client base is showing greater interest in pursuing clean energy initiatives. This does not imply that governmental entities and residential customers are not a meaningful source of competition or that they should be ignored. However, it is likely that corporations will lead the competitive charge which in turn increases the probability that the other two will follow.

The Evolving Utility Mindset

Part of the transition for utilities will need to come in terms of a mindset shift. As the energy ecosystem evolves, utilities will have to challenge their own views and assumptions regarding the importance and purpose of their role and ultimately decide whether they believe that adaptation is necessary. Those that choose to adapt have the potential to succeed. As a proponent of strategic utility leadership, I believe a degree of market chaos and unnecessary cost can be avoided if utilities decide to proactively respond in a timely and prudent manner. However, those that don’t adjust will find their role greatly minimized or will eventually fade away.

So, what exactly does a utility mindset shift look like? It begins with viewing competitive threats as opportunities and potential competitors as potential partners. In fact, the degree to which utilities decide to embrace new partnerships will be one of the primary benchmarks of their future success and longevity. The key for utilities is to discover how they can best meet the changing needs of their customers, while building upon and enhancing the value they already provide.

Most of the puzzle pieces of the energy ecosystem already exist, they just need to be put together through strong leadership, enhanced communication, and the formation of new partnerships. I firmly believe that electric utilities are still well positioned to forge new pathways, but this will depend on how utilities choose to evolve. They will either choose to embrace the paradigm shift and proactively lead or choose to reactively respond and be gradually displaced from their existing role.

This article was originally published by the author on LinkedIn and was republished with permission.