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New delivery model concurrent breakout session summary.

No regrets vs. big bets for creating a new utility delivery model

New delivery model: Concurrent breakout session

“We’ve been talking about the ‘utility of the future’ for 10 or 20 years. When does the utility of the future become today?” asked Todd Durocher, Principal, Power and Utilities Management Consulting, KPMG in the US to attendees at the 2017 KPMG Global Power & Utilities Conference. “If you work for any of the utilities, you feel you’re constantly chasing it and never quite catching it. And no one is able to clearly define what ‘it’ is to begin with.”

For utilities, part of 'it' involves transforming from a traditional energy distributor into a network integrator that coordinates all of the participants in the value chain, according to Durocher and Ted Surette, Industry Leader, Energy and Natural Resources, KPMG Australia. The two led a conference breakout session exploring how utilities can adapt to technology disruption and leverage innovation.

As technology advances, the role of the network integrator is changing. Utilities must now consider expanding responsibilities that include analyzing exponentially growing volumes of data collected from Internet of Things (IoT) sensors, assuming a greater role managing distributed energy resources, and helping to oversee the development of investment plans for equitable distribution of the grid.

Future electricity systems infographic image

Source: World Economic Forum, The Future of Electricity, 2017

“If it was just one or two items, we'd have change,” Surette said, referring to the World Economic Forum's map of influences on the future of electricity. “But right now, we're having change across so many new dimensions, which makes the disruption and the times we're living in fascinating.”

Durocher and Surette outlined a dual approach to managing change and creating the utility of the future that starts with two questions posed by Durocher: “What do we do regardless of where this goes --the `no regrets?' And where do we place our bets to strategically move forward?”

Foundational next steps

The 'no regrets' efforts are activities that most utilities should be thinking about or doing already to make necessary improvements. Utilities can focus their efforts with the following:

1) Strengthen core infrastructure and operations

One of the primary responsibilities of the network integrator is outage management resiliency. No matter what new technologies or market shifts are on the horizon, utilities must first meet operational, reliability, resiliency and safety standards.

“I'm sure no one in Puerto Rico is sitting there and saying, `I wish I had some new product, I wish I had a new supplier.' I think they're just saying, `I wish I had power when I flipped the switch,'” Durocher said. He added that with a number of third parties and non-utility companies building assets on the grid, the industry has to make sure all participants share the same standards.

2) Focus on operating costs and overall cost to serve customers

Cost of service for customers has been steadily rising in most markets and is reaching breaking points. Utilities must focus on how to run their operations more efficiently and effectively in order to stabilize and ultimately lower customer costs.

New technologies are helping utilities run more efficiently, which in turn will help them better serve customers in a marketplace that is increasingly value driven.

For example, utilities are increasingly looking to more efficient processes, increased use of data and analytics for asset optimization, and digital labor and cognitive technologies to automate repetitive or costly tasks and improve decision making.

Ted and todd in a conference

3) Invest in infrastructure and operations

Utilities should shore up the operational technologies that support the functional building blocks of the energy platform, including advanced distribution network management systems (ADMS), intelligent automation, asset optimization, advanced grid sensors and analytics.

Surette said that there is a 'resurgence and significant uptake' across utilities to upgrade ADMS systems as they grapple with managing more distributed assets on the network and responding to outages in an environment increasingly prone to dramatic weather-driven events.

Security remains an issue, particularly as the energy system becomes more disaggregated. “If we have a hundred operators, or 10,000 people with access because they have devices and systems on that network, every one of those is a vulnerability,” Durocher said. “We want control, we want to build a hardened infrastructure.”

4) Simplify rate structures

Current rate structures usually tie distribution charges to customer consumption. However, this assumes that consumption of power from the grid is a fair indicator of a customer's cost to the utility. As behind-the-meter distributed generation and storage become more prevalent, this no longer holds true. Cost should be based on the infrastructure required to support the customer as a fixed rate, regardless of the energy flow. 

In addition, while infrastructure rates should continue to be within a regulated rate structure, ancillary and optional services that distribution companies may offer in the future could be under a deregulated structure. This could enable distribution companies to increase their revenues and rate of return. 

Strategic next steps

While strengthening their foundation, utilities also need to grow amidst the change by focusing on market enablement, customer preferences and technologies such as blockchain that will facilitate transactions. As such, utilities need to develop a strategy for how and where they will 'place their bets.' These strategic next steps including the following:

1) Evaluate disrupted markets and learn from their evolution

Other disrupted industries give clues about how to face declining demand in core businesses, protect revenues and ultimately grow.

Surette and Durocher pointed to telecom as a prime example. Cellular was once a cost-driven marketplace, but disruption has shifted the industry to focus more on the value provided.

Today, said Durocher, “They don't sell phone services. They sell connectivity, data - the experience, like watching YouTube videos or using Waze for real-time road traffic conditions. And that's where this industry is moving.”

Meanwhile, the electrification of vehicles will have a profound effect not only on the auto industry but on energy, manufacturing and countless other industries as well. Surette said that many of his utility clients are looking beyond the near-term impact of electric vehicles to understand how, as distribution companies, they can drive revenues and growth off this disruption.

2) Invest in pilots and implementation of new enabling technologies

Utilities should pursue projects leveraging artificial intelligence (AI), blockchain and other technologies.

AI, for example, can help optimize power usage in an increasingly complex environment that includes peer-to-peer energy delivery, Durocher said.

“We're not talking about thousands of points, we're talking about settling markets with billions of devices and points,” he said. “With machine learning, no longer do we have to have a big control room with operators looking at the grid and trying to manage it. We're now at a place where the system needs to be automated and it needs to learn.”

While financial services has dominated the conversation around blockchain technology, Surette said, companies like Power Ledger are putting the technology to work in the energy industry for settlement, microgrid management, and more. Meanwhile, there are approximately 30-40 live blockchain pilots in the industry today.

Consider investing alongside other companies and participating in consortiums, Durocher added, referring to one effort that's pooling the resources of 10 utilities to further explore blockchain. 

Ted giving presentation

3) Work with regulators

Regardless of any prior bad blood, utilities need good relationships with regulators to facilitate the rate restructuring that will enable customer choice for renewables, storage, load sharing and other new developments.

“We need to partner,” Durocher said. “It's not about a specific rate case, it's about the framework that enables us to adapt as all these changes happen, and not take five to 10 years every time we need to create a new structure.” For their part, the regulators should give incentives for utilities to invest in innovation and meet customer demands.

Surette pointed to Australia where power distributors working together on a roadmap for 2027 also brought in the regulators to discuss how government can help utilities adapt and achieve their goals. 

“With this level of change, if you can't get together and start planning and bring everybody to the table, Elon Musk or somebody else is going to come in and change your market for you, because he isn't held by the same restrictions,” Durocher said.

4) Define and invest in a unique strategy roadmap

Utility middle management and below often struggle to articulate how their projects tie back to an overall strategy. That messaging needs to come from the top. 

“We need that strategy, we need that vision, so that we know what to invest in and what to prioritize,” Durocher said.

Finally, the industry also needs to change customer perceptions that utilities are just providing commodities. 

“What's our new market, who are our customers, and what are the new brand promises and value that we can offer?” Durocher asked. “Ancillary services, new products, enablement - all those things add value, which increase profits and revenues. It's not about preservation, keeping the lights on, and living through this. It's now about how we grow and better engage with customers.” 

Added Surette, “I think it's key to see we're not talking about small changes. It's time to adapt and change business models as well.”

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