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Shaping the future of Canada’s power and utilities sector

John Samkoe Director, Strategy&, PwC Canada 19 October, 2021

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Accelerating trends will require companies to evolve faster than ever

The landscape is changing for Canadian utility companies, creating not only challenges but also new opportunities to fundamentally rethink their strategies, business models and operations as several disruptive forces reshape the industry.

We see four broad trends at the heart of this disruption: decarbonization, decentralization, disaggregation and digitization:

Number one

Decarbonization: Canada has continued to advance plans to reduce greenhouse gas emissions further and faster than previously anticipated. In April 2021, the Government of Canada increased its 2030 targets to reduce emissions by up to 45% over 2005 levels from its prior goal of reductions ranging from 32% to 40%. The government has also moved towards greater accountability for and reporting on its climate change ambitions with the passage of the Canadian Net-Zero Emissions Accountability Act, which received Royal Assent this summer. Beyond targets like Canada’s 2050 goal to reach net-zero emissions, economic factors continue to move in favour of decarbonization as falling costs of renewable power generation and batteries, as well as rising carbon prices, shift utilities away from carbon-intensive fuel sources. We can see further evidence of this transition in the accelerating growth of Canada’s electric vehicles market, which only adds to the decarbonization imperative for utilities.

Number two

Decentralization: Helped by some of the same economic factors favouring decarbonization, our traditionally centralized electricity landscape is seeing the growth of more distributed assets featuring smaller-scale energy solutions located on the premises of industrial, commercial and residential customers. While this gives people more control over their power usage, it also opens up new revenue streams for utilities as customers seek expanded solutions to their energy challenges.

Number three

Disaggregation: Traditional boundaries continue to blur between utilities and other players across the value chain. Oil and gas companies, for example, are increasingly moving into power generation and distribution as part of their net-zero agendas, while utilities are playing a greater role in consumer energy services, like electric vehicle charging networks and rooftop solar programs, as natural extensions of their existing businesses and as part of efforts to grow outside of traditional regulated frameworks. As new entrants create greater competition for utilities than in the past, they’ll face increased pressure to define what their role will be in this changing market and how they can best meet rising expectations and engage with customers in a more complex and data-driven environment.

Number four

Digitization: This shifting environment will require utilities to double down on innovation and digitizing their operations, especially given their roles as enablers in a more decentralized and disaggregated landscape and the ongoing rise of smart grids. Executives clearly recognize this: according to our CEO Survey, 78% of global utilities CEOs are planning to increase investments in digital transformation. We see key opportunities for utilities in areas including core operations and capacity and load management. Improved data analytics and customer relationship management platforms will also be critical to growing and preserving revenue in a more customer-focused environment.

Embracing the utility of the future

These four trends are giving yet more momentum for utilities to evolve faster than ever before. The utility of the future will need to have a sharper understanding of and focus on the customer, be an even more efficient and effective operator to support the energy transition and better use its existing asset base to make the most of emerging growth opportunities. 

Canada’s utilities face some challenges in funding the investments required for this transition:

  • Canadian energy costs are low compared to many other countries;

  • utilities face complex reviews of their investment plans under their regulated rate frameworks, which require them to link their proposals to customer value but may not fully reflect all of the implications of the energy transition; and

  • regulators are increasingly expecting utilities to demonstrate efficiencies when applying for rate increases to pay for investments.

While utilities can make new investments and pursue innovation outside of the regulated rate framework, this doesn’t offer the guaranteed returns they prefer. So how can utilities, which have tended to have a low tolerance for risk, evolve at the pace required by a quickly changing business landscape?

A strategic road map to change and transformation

A key step is to prepare for an environment that will be much more dynamic in which utilities will build on their traditional strengths in managing wires and large generating assets to adopt an expanded role of connecting and integrating the more diverse range of players involved in the system. An excellent place to start is by revisiting your strategy to articulate your growth agenda for succeeding in this new landscape.

This will be critical to identifying the most promising investment opportunities, including the top priorities for your capital portfolio and the tradeoffs you’ll have to make as a result. To make sure you have the resources and capacity to make the investments required, you’ll also need to focus on becoming even more efficient and effective operators in an increasingly competitive business environment. Key elements of this transformation include:  

1. Building industry-leading capabilities: What are the core, differentiated capabilities you’ll need to develop? The answer will often lie in digital investments, such as cloud-based solutions, upgraded customer relationship management platforms, operational technologies and data analytics capabilities that give you a more complete picture of who your customers are so you can better anticipate their needs. These solutions can also help you engage with customers by giving them real-time information about issues like energy usage and power outages.

2. Optimizing your cost structure: Utilities have a significant opportunity to fund transformation activities, including the digital investments and new services planned, by improving their cost structures. A good approach is to develop a cross-organizational cost agenda that includes further opportunities to accelerate digitization aimed at improving efficiencies in areas like maintenance and operations.

3. Reorganizing your operating model: Implement an operating model that unlocks even more growth by streamlining processes, automating lower-value tasks and embedding technology from the front to back office.

It’s also important to consider organizational culture and workforce transformation. With an aging workforce and the COVID-19 pandemic highlighting the potential for technology-enabled improvements by utilities in areas like operations, efficiency, communication, safety and customer experience, companies will need to focus on the skills and talent they’ll need in this new environment. Organizational culture will be also critical as utilities renew their focus on innovation and shift away from an asset-based, engineering-centred approach to a more decentralized environment in which value is shifting closer to the customer. This will require them to embed change within their organizational cultures as they embrace a more digitally enabled future.

A time to look beyond for new opportunities to win in the market

To succeed, utilities will need to not only look inwards but also to other players that can support their transformation. As governments look to fund initiatives to accelerate the net-zero transition, utilities will need to build the case for investing in their projects by showing how they’ll benefit their customers and stakeholders, the overall value created and the link to public policy objectives.

Utilities will also need to embrace partnerships to supplement their internal capabilities. While partnerships with technology companies are a common example, there are exciting possibilities in other sectors as well. For example, utility companies could work with automotive manufacturers to offer electricity charging plans to customers buying electric vehicles. 

Mergers and acquisitions will be another strategy for utilities looking to navigate a shifting market, with many pursuing deals to gain access to a target’s idea, people, capabilities or customers.

The path forward for Canadian utilities

Whatever the path forward might be for your organization, the focus needs to be on moving quickly. A large-scale transition like this will take time and, as we’ve seen with early adopters of digitization during the COVID-19 pandemic, organizations that get a head start on their transformation journeys will be in the best position to successfully navigate change. Now is the time to accelerate the journey by mapping your path forward in the years ahead. For those wanting to learn more about the exciting possibilities, read some of our other thought leadership on the utilities industry, including a recent report on their role in the circular economy. You can also contact us any time to discuss opportunities to secure the future of your organization.

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Geoff Hill

Geoff Hill

Partner, National Power & Utilities Leader, Iconic Accounts Leader, PwC Canada

Tel: +1 403 560 1047

John Samkoe

John Samkoe

Director, Strategy&, PwC Canada

Tel: +1 416 815 5118

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