The electrical revolution – it changed the way we live, the way we work, and the way we view the world. But while many think the electrical revolution was as simple as a flip of a switch, it was far from it. In reality, the launch, expansion, and success of our electric service was largely driven by the regulation of the industry and the rewards that were embedded in an ROE business model. It was this business model, propagated by Samuel Insull’s early efforts to regulate the industry, that actually activated the spread of electrification across the US.
But just as electric companies proliferated, PUHCA was passed, fracturing and fragmenting the industry into smaller localized companies and empowering states to regulate local utility monopolies. This set the stage for a business model that was mainly focused on growth and expansion, slowing new advances in energy technology and innovation. Core competencies were established in engineering, construction, operations, and regulatory strategies and execution. Organizational structures mirrored this strategy. Hiring concentrated specifically on these areas, ultimately transforming these companies to ones aimed at expanding and operating the existing technology. That is until the model began to falter, and the need for a new, innovative way of operating started becoming a priority.
The Changing Economics of Energy
This model, that was responsible for electrifying all of the US, began to break down in the 1970s when the energy crisis erupted. As a result of this crisis, energy conservation started to become a greater focus. In 1978, PURPA was enacted, which began the end of the electric utility monopoly status, allowing other renewable power producers to connect to the grid.
But it was the laws enacted in 2005 and 2007 that further broke down the barriers to connect to the grid by requiring all utilities to implement net metering and further encouraged energy efficiency.
Utilities have slowly reacted by forming new teams to fulfill these energy efficiency requirements. And now, for the first time since Samuel Insull, the core business model of the industry is being looked at in a serious way.
A Rising Demand for Innovation
As utilities began to realize the realities of flat demand, the pressures have forced many things, including a renewed focus on the customer. Customer satisfaction has become a top-level metric that drives organizational focus today.
Departments were formed to manage customer complaints. Corporate communications staff were bolstered to send out positive community brand messages. The new energy efficiency requirements for utilities were enveloped with customer satisfaction as a key goal.
This customer-focused organizational shift is being echoed across the industry according to a recent study by Atos. In their study, The Future Utility: Transformation of the utility business model, they found that the most important driver of transformation is customer expectations, followed by profitability, policy and regulatory changes, and lost revenue. Nearly 50% of the utilities surveyed are hiring or planning to hire a Chief Customer Officer or a Chief Innovation Officer.
Right now, we are on the cusp of the biggest shift in organizational priority since the utility industry’s regulation. But an organizational shift toward innovation will take more than just creating new titles and positions. It will demand the strategic integration of innovation.
Organizationally, utilities can go about integrating innovation into operations through a variety of different strategies. The strategies include a wide array of approaches with many different considerations. The table below provides key characteristics of each approach and consideration (i.e. Internal Capability and Acquisition).
Each of the approaches has strengths and weaknesses that are important to the utility’s ultimate expectations:
- Internal capability: Building internal capability is the most difficult of the approaches and will take the most time. However, it may be necessary if the capability is deemed strategic for long term utility growth. It will be crucial to form highly empowered cross-functional teams that are a mix of long-term veterans and experienced outside hires that can escalate and execute decision quickly.
- Acquisition: Acquisitions may be rarer in the utility space but it does happen, for example, Southern Company’s purchase of PowerSecure. These kinds of plays are highly strategic and would be done when a utility can leverage industry relationships and channels to amplify the acquired company’s revenue potential. Usually, these acquisitions will stand-alone from core utility operations.
- Partnering: Finding a technology partner is an approach that more utilities turn to when they realize internal development will take too long or become too costly. Technology partnerships often involve establishing a small cross-functional team that includes people with IT, regulatory, and marketing skills who are given cover by a senior sponsor, including the utility’s CIO. An example of this is DTE Energy’s partnership with Powerley to develop the DTE Insight app – a mobile platform that empowers residential customers to manage their energy and home by combining real-time insights with smart home automation.
- Venture Capital: Some utilities may supplement their innovation effort by joining an energy industry venture capital fund to collaboratively foster selected technologies among the utility investors and the technology providers. Although participation will provide a utility great insight into some emerging technologies, it may require integrating other approaches discussed above to build best of breed solutions.
Utility companies have a number of different opportunities to organize around innovation for developing new products and services for their customers. Depending on the goal, there could be many pathways to success. Only in the last few years have utilities really started experimenting with these different ways of establishing innovation within their organization, but already, we are seeing the impact it can have across the industry.
A Return to Innovation
As advanced rates, customer engagement, demand management, and other initiatives push transformative efforts forward within utilities, restructuring the utility, along with the laws and regulations that govern the utility business model to promote innovation will be critical to the success of these initiatives. Yet, even after innovation takes place within the organization structure, it is a process that must make its way across the utility, transforming the utility’s business model and culture. Only when this happens, does a utility have the chance to capture all the benefits innovation can create.
With the economics of energy evolving, we find ourselves at a crossroad today – where customer needs and competitive forces are pushing utilities to instill innovation back into the organization. No longer is customer satisfaction merely a by-product of communications and operations, but rather a driving factor of innovation. We are now returning to the age of innovation, from which the industry was born. Whether this innovation is fueled by ability, alliance or acquisition, it will be necessary to get these solutions to market in a timely manner if utilities want to remain relevant to their customers.
A note about the contributor: Over the past two decades, Emmett Romine has held key utility leadership positions focused on fostering new innovation. His work at DTE Energy culminated into the creation of Powerley, giving him a unique perspective on the cultural and organizational attributes that promote innovation within the energy industry.