Monday, April 29, 2024

Why Utility Business Model Innovation Matters

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In a series of new white papers, EPRI examines the role of utility business model innovation in a decarbonized world.

Much of the discussion about transitioning to a net zero electric power system focuses on technology. This is understandable. The shift from a system dominated by large central station power plants powered by fossil fuels to one that is far more decentralized and decarbonized can only happen successfully with significant technological advances—everything from more efficient wind, solar, and energy storage to improved load and weather forecasts to grid support from bidirectional electric vehicle (EV) chargers.

It’s critical to continue to leverage research and development (R&D) to improve existing technologies and create valuable new ones. However, achieving 2050 net zero targets also demands significant utility business model innovation. The challenges and opportunities utilities face in adapting their existing business models to a rapidly changing energy landscape are significant and wide-ranging. Current utility business models depend on the regulatory environment companies operate in—some utilities are vertically integrated and function in highly regulated markets, while others operate in more competitive deregulated markets. Business models are also heavily influenced by utility types, which range from independent power producers to distribution or transmission utilities or vertically integrated firms.

EPRI recently completed an exhaustive analysis exploring future utility business models. Over the next year, EPRI will publish 12 white papers highlighting the challenges requiring utilities to evolve their business models and the opportunities that come from doing so. The papers also examine the factors that need to be assessed in making decisions to change business models and provide tools and guidance to help utilities make choices that maximize the opportunities and minimize the energy transition risks. The main purpose of the papers is to initiate discussion and debate among utility executives so that they can develop a business model strategy uniquely suited to their situation.

The first four papers were published in late 2023 and early 2024. Perspectives on Transforming Utility Business Models: Towards Net Zero outlines the landscape and imperatives driving change as well as the reminder that utilities have choices in how they navigate change and that those decisions should be guided by knowledge. Among the choices utilities must make is the role they want to play, what markets and customers they want to serve, and the types of products and services they need to develop to serve existing customers, attract new ones, and still serve societal goals.

The paper provides important context and frameworks utility leaders should consider as they assess business model evolution. Among these are the drivers and influences propelling the need to at least analyze potential changes to how utilities engage with customers and earn revenue. Primary among those drivers is the imperative to decarbonize, but other factors include energy security, equity, grid reliability and resilience in the face of increasingly extreme weather, continuously evolving technology, changing customer expectations, and policy and regulation.

The report then provides a preview of the 12 business model topics that are explored in EPRI’s series of white papers. For example, two of the upcoming papers will delve into case studies from industries that have undergone similar transformational change now facing utilities, including the telecommunications sector. Over the past 20 years, a combination of deregulation, technology advances, and customer demands have upended traditional models in the telecom sector. Geopolitical changes, cybersecurity challenges, and the fundamental importance of digital technologies to the economy and lifestyles will continue to pressure telecom companies to reinvent their business models. The sector’s experience with transformational change may provide lessons for utilities.

Other papers will address questions that arise when utilities weigh the suitability of new types of business models. For example, one paper will assess the implications of energy being viewed as an integrated system—including electricity, heat, and liquid fuels—interacting in complex ways and with differing business models. Other topics previewed include business models that align with customer and policy drivers and the questions they raise. For example, models aligned to customers’ expectations need to weigh the tangible changes required to reorient investments and operations to put the customer at the center of the energy system. Business models for resilience prioritize system resilience in the face of extreme weather and cyberattacks.

Horizon Scanning and Forecasting

A crystal ball would come in handy to guide business model decisions because it would provide a clear view of the threats and opportunities utilities face. Since there are no energy transition crystal balls, utilities must do their best to gather insights and information that present possible future scenarios. Fortunately, this can be done in a systematic, structured, and disciplined way, which is the subject of the recently released EPRI white paper Horizon Scanning and Forecasting.

Rather than depending on hunches or informed guesses, horizon scanning utilizes a common set of characteristics to uncover likely industry developments and those that extend outside current planning and thinking.

When it is done, utility horizon scanning often takes place in a silo, with no connection to traditional modeling, forecasting, and planning exercises. The Horizon Scanning and Forecasting paper makes the case that these efforts should be linked and are particularly vital when a utility’s business model faces considerable disruption. The paper also lays out specific horizon scanning techniques and ways information gathering can be incorporated into business model decisions. This can include feeding opportunities uncovered into utility innovation efforts to explore new sources of value or assessing newfound risks as part of mitigation strategy development. Done properly, horizon scanning helps utilities develop a comprehensive view of threats, risks, and options needed for strategic business model planning.

Business Models for Innovation

Innovation has always been a constant in the electric power industry. Technology advancement is continuous, but innovation in regulatory frameworks, business models, and commercial offerings has accelerated in recent years as deregulation and the prioritization of decarbonization have intensified competition and the centrality of customers. Today, utility innovation is expected, although it occurs within unique policy and regulatory environments that may widen or constrain what is possible.

Regardless of the environment in which utilities operate, innovation is an important element in business model development and transformation. Perspectives on Transforming Utility Business Models Paper 2: Business Models for Innovation describes how different types of utilities can follow a model for innovation that helps them achieve their business objectives. This can be accomplished with effective innovation lifecycle management through its many stages. The paper describes each stage of innovation, from the scanning and scouting of innovation projects through their approval, funding, execution, and adoption as business as usual.

Given the rapid and unprecedented pace of change in the electricity sector, utilities must embed innovation into their business models, culture, and operations. How this is best accomplished will depend on each utility’s unique circumstances.

Business Models for Net Zero

Perspectives on Transforming Utility Business Models Paper 3: Business Models for Net Zero grapples with questions utilities face as they explore strategies to manage the so-called energy trilemma of supplying safe, resilient, and affordable electricity while maintaining financially sustainable businesses. There are no easy answers.

The paper describes both the drivers of change—which can include the future viability of some utilities—and the extraordinary uncertainty faced by utility leaders, regulators, and other industry stakeholders. For instance, utilities may balk at making investments in existing assets that don’t drive decarbonization and are at risk of being stranded in the future. Regulators, too, face difficult choices. Achieving net zero goals often threatens the affordability of energy, which is a challenge for customers and can result in political pressure.

The paper and an earlier EPRI study describe four future energy system transformation scenarios, which provide a framework for the self-assessment and debate needed to develop lasting and successful business models.

These scenarios can spark discussions that ultimately inform business model decisions. Though utility business models will differ depending on factors like their geographic location and regulatory environment, it is likely that future business models will be significantly more diverse than today. The paper includes characteristics that may be common among energy utilities operating in 2035.

With so many uncertainties and complexity, it can be a challenge for utilities to begin assessing how their future business models should change to drive decarbonization and remain financially viable. A good place to start is with a thorough self-assessment and use that learning to initiate internal conversations about appropriate business model strategies.

EPRI Technical Experts:

Neil Hughes and Francesca Bowden
For more information, contact