Utility companies can’t afford to simply keep the lights on. They need to embrace innovation at scale and be willing to take some risks.
By Trey Thornton and Violetka Dirlea, EY
Utility leadership teams have a lot to think about and do when it comes to decarbonization. Ramping up renewable generation and supporting the proliferation and integration of distributed energy resources (DERs) while maintaining reliable and affordable service amid heightened geopolitical tensions are big challenges that require significant capital, infrastructure upgrades and regulatory support. Moreover, addressing these issues amid ongoing supply chain shortages, significant rate pressure, an increase in extreme weather events and volatile natural gas prices makes the task of building for the future more difficult.
Utilities must balance their own efforts to decarbonize with those of their customers. The industry’s ability to be strategic in the way it transforms infrastructure and adapts operating practices while also lending support to customer eager to reduce their own carbon footprints will go a long way toward determining the success of this transition.
New landscape, new mindset
The decarbonization agenda requires utilities to strategize differently than they have before, shifting from the risk-averse mindset that often has informed utility decision-making, to one that is more agile in response to the dynamic environment we are in. This shift has become even more critical with significant pieces of US legislation enacted over the past 18 months, which are accelerating decarbonization and providing tailwinds for energy and other commercial development in the United States.
The energy landscape is evolving as nontraditional players and suppliers infuse the market with innovative technologies and new operating methods. From microgrids, small-scale renewables, and combined heat and power facilities to energy storage and controllable loads, a plethora of options is emerging. Excess electricity generated by self-sustaining distributed systems that can be stored and used when centralized grids are hit by outages will protect customers. Markets around the world are adopting a variety of measures to integrate more DERs, such as metering policies to support distributed solar power and favorable legislation for installing rooftop photovoltaics.
While these innovations are in various stages of development, it is critical to begin scaling these technologies so they can play a significant role in the energy transition. Engineers will continue adapting and adjusting systems and processes that are already available, and new ones are sure to follow. Hydrogen has the potential to work for numerous energy-intensive applications, while emitting only water and oxygen as by-products when burned. While it still needs a viable commercial model and enabling infrastructure, hydrogen continues to gain momentum.
Electric vehicles (EVs) are also gaining traction in the market – another significant development that has implications the energy industry will need to address sooner than later, such as how broader electrification will impact the power grid. It’s not only upgrading infrastructure and conducting demand forecasting. How will providers leverage managed charging and educate customers, creating the right tools and solutions to best manage the power demands of EVs while transforming the grid?
Each option in the decarbonization journey is another opportunity to learn, and another step toward the broader goal of reducing reliance on fossil fuels. Established providers in the US are proactively looking for ways to be engaged and to lead the decarbonization and electrification movements.
Drive a culture of innovation
The decarbonization effort received a big boost in 2022 with the passage of the Inflation Reduction Act (IRA). This landmark legislation increased the incentives and economic attractiveness for energy-transition-related investments, core renewables projects and alternative energy technologies. The $369 billion through IRA provisions is complementing the Infrastructure Investment and Jobs Act’s commitments toward energy security and climate change, with more than $1.2 trillion in funds and competitive grants. These policies are presenting transformational opportunities for power and utilities companies.
Utilities need to look at strengthening their strategy teams, or even setting up a transformation office within their organizations, to drive decarbonization options and develop scenarios that forecast how different innovations would impact performance. What advantages do they provide? What shortcomings still need to be addressed? How can strategies be adapted to respond to continuously changing external and internal factors? Energy providers that can embrace innovation and work with ecosystem partners to address gaps will create additional opportunities for growth. Market leaders who can drive a culture of innovation, curiosity and exploration should find opportunities they can leverage in the challenges that lie ahead. This goes both for how each company approaches energy transition and how it handles the makeup of its team and optimizes internal capacity to meet the needs of the market. What skills can a company develop internally? Which opportunities require external hires or consultative expertise to support the company’s ambitions? How could strategic M&A activity potentially fill a gap?
Creating a tangible decarbonization pathway that demonstrates progress toward organizational goals will hold everyone, from leadership to field employees, accountable to the goals set by the organization. As with many transformations, there isn’t a finish line to achieving decarbonization. There are always ways to do it differently, and new ideas will arise to boost performance. Driving visibility and creating a tracking mechanism gives everyone a better sense of what’s happening and what still needs to be done.
Keep stakeholders engaged
Energy providers can’t afford to lose sight of the customer, and of regulators, as they pursue decarbonization. Traditionally, regulators negotiate rate cases over multiyear windows, which makes keeping pace with electrification and DERs challenging. Developing a portfolio of services that can meet the customer where they are at, educating regulators about what customers need, and then pivoting as needs change and evolve can build loyalty and advocacy in the market. It’s about survival. While a collaborative approach is important on many fronts in the reinvention of the energy industry, providers need to balance that with ensuring that their own business model is where it needs to be. Customers have options they didn’t have in the past and won’t hesitate to pursue those options if their existing energy provider isn’t meeting expectations.
Utilities leaders need to be proactive in the dialogue about decarbonization. They must demonstrate to customers that they are working hard on their behalf to protect their interests and be able to communicate that effectively with regulators to establish an appropriate ratemaking structure.
Moreover, utilities need to be ready for unexpected disruption to their strategy. Would a new administration in Washington take a different stance on decarbonization and green energy efforts? Could that impact the availability of tax credits, grants and incentives geared toward encouraging homeowners to invest in green technologies?
This is where a dedicated team focused on decarbonization efforts can play a key role. This team can monitor regulatory developments, stay attuned to customer relationship management tools and strategies, keep an eye out for new technologies that emerge on the market, and even identify partners to accelerate the transition.
One thing is certain: Utilities need a sense of urgency when it comes to strengthening their capabilities to scale up decarbonization. At a time when political will and global public opinion are focused on profound climate action, climate risks and opportunities should be front and center for organizations as they plan their future growth strategies. Leaders need to look at decarbonization from every angle and critically examine how technology can support them on their journey, whether it’s with internal operations, customer experience, protecting their infrastructure, managing ecosystem partnerships or longer-term sustainability goals. Use consistent communication and strategic, informed actions to make decarbonization an organizational imperative — now and into the future.
This article is second in a three-part series written by professionals in the EY Americas Power & Utilities sector. The first article was about how the utility customer experience is changing, and the third will focus on the digital transformations taking place.
About the authors
Trey Thornton is a managing director at Ernst & Young LLP and serves as the EY Americas Power & Utilities Leader. He oversees consulting, strategy and transactions, tax, and assurance work within the EY Americas Power & Utilities sector. With more than 25 years of experience in the management consulting industry, he has worked with electric, gas and water utility companies across the globe. Based in Los Angeles, he is an active business leader in the Southern California market in business organizations such as the Southern California Leadership Council.
Violetka Dirlea is an EY-Parthenon principal in the Strategy and Transactions service line of Ernst & Young LLP, focused on the power and utilities sector. Throughout her consulting career, Violetka has worked with energy companies, automotive and industrials solving strategic and operational challenges across the value chain. She has developed innovative business, product line and aftermarket strategies and driven large-scale transformation programs.
The views reflected in this article are the views of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
