Energy transformation is radically changing the business environment for power & utilities companies
Today’s CEOs in every industry faces a business environment that’s becoming increasingly complicated to read and adapt to.
Worries about a range of factors, from over-regulation and geopolitical uncertainty to the availability of key skills are on the rise. Power & utilities CEOs have many of the same concerns, but they are magnified by the immense changes sweeping the industry. As the energy market becomes increasingly digital, decentralised, and technology-disrupted, it’s becoming more difficult to guarantee growth. That poses very real risks – but there are real opportunities to redefine the business too. That’s reflected in power and utilities CEOs’ views on how the market has changed over the past three years; 68% say there are more threats, but 62% see more opportunities.
It is striking to note that CEOs’ level of concern around both the speed of technological change and shifts in consumer spending and behaviours has risen sharply since 2013. That reflects the importance of two factors – the changing role of the customer and technological advances – which together with regulation are re-shaping the industry’s future.
The future of power and utilities affects everyone and it’s very uncertain
That future has a far-reaching, long-term impact. Power and utilities companies are different from most other types of businesses, in that their fundamental purpose has an enormous enabling effect for the entire economy, as well as a significant impact on daily life. As Jean-Bernard Lévy, CEO and Chairman, EDF, puts it: “…we're very aware that we're at a turning point in the energy industry. The industry is changing very fast, and we need to change with it. That's motivating! It's an exciting area, where daily life, the economy, geostrategic considerations, regulations, etc., intersect. It's the world's future. Providing everyone with electricity is a very fulfilling mission.”
Power and utilities companies are in business for the long haul: 93% say they focus on long-term profitability, rather than short-term gains – that’s more than any other industry sector.
Power and utilities CEOs are more optimistic about the global economy than their peers in other industries – 39% expect it to improve, versus just 27% of CEOs overall. That’s not translating into higher confidence levels, though. Just over a quarter of power & utilities CEOs (28%) say they are very confident of revenue growth over the next twelve months, compared to 35% of CEOs overall. And while 41% are confident of growth over three years, that still lags behind 49% of CEOs across industries.
As we’ve shown in other research, many power utility companies are now operating in conditions where the traditional core revenue stream is much more uncertain. For the first time ever, the potential for a power utility company’s business model to become eclipsed and left stranded is a real one.
Regulation and government actions will profoundly influence the industry’s future
The power and utilities industry is facing a wide range of threats, but sector CEOs are particularly concerned about over-regulation –86% say it could threaten growth – as well as government responses to debt and deficits (71%) and an increasing tax burden (67%).
Government ownership is still the norm in many countries; one-third of the power and utilities companies we surveyed have some form of government-backing. And the industry remains highly regulated in most countries. So it’s not surprising that stakeholder most likely to influence power and utilities’ companies business strategies are governments and regulators, and that this percentage is much higher than for CEOs across our sample (84% vs. 69% overall).
Compared to other industries, power and utilities CEOs are also more likely to say that their strategy is influenced by local communities. Jean-Bernard Lévy describes how local communities are getting more involved in power generation and distribution: “Today, local communities want to consume and produce locally. They are forging alliances with large cities and connecting home energy systems to the power grid.”
Customers have become integral to power and utility company strategy and their expectations are changing dramatically
What may surprise those outside the industry itself is that customers are now nearly as influential as regulators – 83% of power and utilities CEOs say they have a high or very high impact on their organisation’s strategy. In the past, many sector companies were monopolies that didn’t interact closely with their end customer. That’s changed dramatically in recent years, as sector CEOs know. New technology and the evolution of the smart grid mean that customers will continue to have more reasons to communicate with their utility providers. At the same time, deregulation has armed customers with the power of choice – so keeping them satisfied is critical to keeping them engaged and loyal to a trusted energy supplier.
Anthony F. Earley Jr., Chairman, Chief Executive Officer and President, PG&E Corporation, explains: “The level of customer service has changed. People can go online and buy almost anything almost instantaneously, and they expect that kind of convenience when dealing with their utility. Fewer people either walk into a utility office to pay their bills or put a stamp on an envelope to mail them; they want real time access. They also want real time access to what’s going on with their system. What drives customers nuts is having an outage and not knowing the cause. We work hard to get them that information.”
Building customer relationships requires strong communications efforts. Power and utilities companies are concentrating most on improving how they get the word out on their environmental impact (62%) and the impact they have on wider communities (61%). Anthony F. Earley Jr. describes how his company handles outreach:
“We focus on how to better communicate with our customers so they understand the complexities of the US energy infrastructure. We’ve recently spent time talking about investments we are making in the grid, and not only from a big picture scale, but on a community scale. We advertise in communities and meet with community leaders about what we are doing. We’re proud of the sustainability report we publish, which catalogs different initiatives, including renewable energy, environmental programs, electric vehicles, and helping the agricultural sector deal with the drought in California.”
Finding the right “way to play” in the new, customer-focused energy marketplace
PwC’s Strategy& recently studied some of the world’s most successful companies, noting that a key part of their success was committing to an identity and aligning their entire organisation around that. This approach enables a business to define a compelling and distinctive customer value proposition that’s aligned with its purpose, a business strategy focused on that proposition, and an operating model and differentiated capabilities that can effectively deliver on the proposition.
For power and utilities companies, this means confronting energy transformation head-on and linking a coherent strategy for transforming the business with solid execution. We’ve discussed some options for how power and utilities companies can achieve this in very different future market models in our publication The road ahead: Gaining momentum from energy transformation. How power and utilities companies define their purpose and the capabilities needed to support it will be profoundly influenced by factors like the extent of competition and customer choice, access to fuel, the nature of existing infrastructure, the degree of electrification and degrees of interconnectedness or isolation from neighbouring territories. And, of course, a crucial factor will be the pace of global technological change.
Technology is radically changing the industry
From new energy storage technologies to the smart grid, power and utilities CEOs need to keep up -- 59% say their companies are making significant changes in how they use technology to help them assess wider stakeholder expectations and respond to them better (compared to 51% for all respondents). In some cases, that may even mean new business models.
Keeping up – and moving ahead -- takes a lot of people power. Jean Bernard Lévy told us that “To meet these new expectations, we're leveraging our R&D and our 2000 researchers, who are developing innovations for the smart grid, new energies, carbon storage, and more. We're also developing new offers, with household management services like the Linky metre, EDF & Moi and e-equilibre.”
Pressure to reduce reliance on fossil fuels and cut carbon and other types of emissions has fuelled a move towards alternative power generation. Technological advances have been an enabler for the shift, as grids become smarter and able to manage more distributed and variable sources of power. Anthony F. Earley Jr. sees his US-based company on the front lines of the shift: “California is on the leading edge of transforming the energy mix in this country. Today, over 50 percent of the electricity we generate comes from sources that emit no greenhouse gasses, including hydroelectric, solar, and nuclear, and that number continues to increase.”
Technology is also opening the door to new entrants, new partnerships, and new ways to reach stakeholders
Technology is also the enabler for some radical shifts happening in the industry. In our work on energy transformation, we’ve discussed few possible market scenarios for power and utilities companies. In some of these, new entrants could radically disrupt the energy market’s status quo. Industry CEOs are starting to take notice; 48% are concerned that new entrants could threaten growth, and 49% plan to make significant changes in how they partner and who they partner with to adapt to changing stakeholder expectations.
Connecting technologies will play an important part in reaching out as well, with customer relationship management (CRM) systems (61%) and R&D and innovation (58%) standing out. Big data analysis (55%) and social media communications and engagement (55%) are also popular ways for power and utilities CEOs to reach their stakeholders.
With so much digitalisation going on in the sector, data security is becoming more important than ever. Cybersecurity is on CEOs radar – 61% are concerned about cyberthreats. In our recent client roundtable on digital utility transformation, participants expressed concerns that the industry may still not be taking cybersecurity seriously enough.
Understanding risk and innovation better
There are a wide range of areas that companies are looking to measure more accurately, a critical first step in meeting stakeholder expectations. For power and utilities companies, the most important of these is risk. Today, risk is dynamic, spread over the globe (with little time to plan and prepare) and has greater, more far-reaching impact. As executives rush to develop new strategies, products and services—and implement structural changes to stay competitive—factoring in the implications and interdependencies of risk and regulation into decision-making can be daunting. CEOs need to balance risks with opportunities and maintain an overview of wide-ranging financial and non-financial data in order to measure and assess risk accurately.
Businesses must also have the controls and processes in place to be able to communicate dependable and consistent information and messaging across a huge range of channels.
We’ve already flagged the importance of technology in a changing sector, so it’s not surprising to see that innovation is another area that power and utilities CEOs want to measure better. Innovation is notoriously hard to measure. But with innovation becoming a core capability, power and utilities companies will need to get better.
Success means more than just profit.
Eighty-four percent of power and utilities CEOs say their company already reports on both financial and non-financial matters, more than across the sample as a whole (72%). In five years’ time, 87% think that the most successful organisations in their sector will be doing this. And 86% of power and utilities CEOs say that business success in the 21st century will be defined by more than just financial profit – again, that’s more than across the sample as a whole (72%) and reflects the importance of the sector to individuals, communities and entire economies.
Wilson Ferreira Jr., CEO, CFPL Energia, Brazil