U.S. Utility Outlook: 2018 and Beyond

Today’s utility executives are being asked to confront change—and a lot of it. The sheer magnitude of technology disruption can feel overwhelming. The push-pull between running today’s utility while simultaneously transforming into a utility of the future feels like you have one foot on the dock and one foot in the boat. 

With so many facets of the business shifting at once, that’s a profound challenge. The U.S. utility model is grappling with how to address distributed energy resources, changing consumer expectations, regulatory uncertainty, and an aging workforce. To thrive amid such change, utility executives need clear direction on how not to fall in the water as they place two feet in the boat and row forward. 

At West Monroe, we work alongside utilities every day. From our observations, we have concluded that focusing on an organization’s increasingly digital operating foundation is the surest way to gain alignment among the many facets of change and drive toward becoming a utility of the future both productively and swiftly. In the short term, this digital foundation itself creates some challenges, but over time it holds the key to addressing the most critical problems utilities face. 

The 6 areas of focus for utilities

The professional consultants in our Energy & Utilities practice have identified six interdependent issues driving change in utilities today. Each of these issues is further explored throughout this paper. 

1. Managing the exponential increase in data 

2. Connecting customers to the company’s digital foundation 

3. Introducing DERs effectively – and setting the stage for future operating models 

4. Dealing with regulatory uncertainty and aging infrastructure 

5. Leveraging digital solutions to generate meaningful operational improvements 

6. Securing rapidly evolving data and operations 

A utility’s success in addressing these issues is tied to its capability to collect and use data. This is a challenge on its own, as utilities struggle to capture, move, store, and secure the wealth of data becoming available. Utilities that are proactive and give sufficient attention to these issues should find themselves positioned to not only strengthen their current infrastructure but also develop their operating model for the future.

The challenge: Most utilities don’t yet have the people, processes, technologies, or strategies to manage or leverage large volumes of new data. Utilities continue to rely on disparate, fragmented data sources, inadequate management tools, and insufficient connectivity, even amid the proliferation of cloud-based solutions and analytics capabilities that enable access and use of that data. As a result, they are making little progress improving in areas such as billing accuracy and outage management—areas that need attention to influence customer behavior. 

So-called big data is key to improving agility, operations, reliability, and customer engagement. But that brings with it the new tasks of digitizing, moving, storing, and generating insight from large volumes of data. 

Taking action: The first step is digitizing the information and data that has traditionally been manually collected, stored, and managed in organizational silos. That transition is accelerating: The two-way communication that flows through smart meters and behind-the-meter devices is increasing the volume of customer-usage data exponentially, and distribution automation is adding significant digital data about grid activity. 

Utilities will also need to be able to store data in a centralized repository, combine data with other pieces of customer and ecosystem information, and then analyze it to generate the insights that have never been available before. 

Just as importantly, utilities will need to initiate cultural change—specifically, shift away from a functional mindset to a cross-department, customer-centric process view. This change in thinking must occur before a utility can use its data to transform the way it manages outages, assets, its workforce, and ultimately, customer interactions. 

The challenge: Customers’ expectations and behavior are evolving as they get smart on conservation and governments promote policy goals. 

Some utilities have started to get comfortable using digital technologies and data to transform their own operations. Now, utilities that want to thrive must also begin to extend those same digital technology benefits to their customers who are hungry for digital experiences. Speed of information flow, integration of data, and communication of activity status can all improve experiences for customers who are tuning in to their energy footprint. Service starts, outage experiences, and billing inquiries are all touch points along the customer journey. As the digital transformation progresses, utilities will increasingly need the data and tools to plan, build, and run new customer-centric programs. 

Taking action: To introduce new services, engagement strategies, and channels of interaction successfully, utilities must leverage their newfound troves of data to forge stronger connections with their customers. 

While the industry remains in the early stages of converting customer services to digital platforms, it is moving rapidly toward offering personalized experiences and customer information self-service. Mobile and real-time technologies are increasingly integral to providing customers with the experiences they want, through their channels of choice. 

To take full advantage of all existing and future channels, including mobile apps, chat bots, and interactive voice response systems to match the new customer expectations, a utility should integrate customer initiatives with its digital foundation and analytics. The most effective organizations will take full advantage of machine learning to influence the customer experience and share new data collected through interactions to support ongoing improvements. 

Extending digital solutions across internal and external systems is also essential to engaging customers as utilities’ service models evolve—for example, to influence energy usage or adoption of new products. A digital foundation will be key to understanding how certain customer segments behave to influence behavior in different parts of the grid—and at different times of the day—to boost efficiency and stability. Using advanced data analysis to predict and influence the sales and enrollment cycle will help steer customers to the right energy efficiency programs. 

It will also drive more effective distribution planning, an important prerequisite for introducing distributed energy resources effectively into the service model, which an increasing number of customers are demanding.  

The challenge: Whether they like it or not, utilities play a significant role in encouraging customers to be more mindful of energy usage and adopt more recyclable and renewable energies. Unfortunately, the 

U.S. electric distribution system was not designed for two-way power flow or intermittent output, which means that integrating these resources has presented a major challenge for grid operations. 

Grid operations, of course, must ensure that generation and load remain in constant balance without compromising power quality, reliability, and safety. But utilities must locate and utilize DER technology for grid operations and control processes in an environment as part of a broader shift away from simple utility-to- customer energy transmission. 

Meanwhile, more states are looking to integrate DERs—such as energy storage, demand response, solar photovoltaics, and electric vehicle charging stations—to address resiliency and climate issues. And investment in DERs and related resources has tripled in North America since 2010, with more than $1 billion in investment in 2016. Much of that is driven by the realized benefits (e.g., flexibility and reliability), heightened consumer preference for renewable energy, decreasing technology costs, and better-defined regulatory structures. 

Taking action: Utilities must consider several factors and strategies when preparing for DERs integration, not the least of which is redesigning markets and regulatory constructs. However, aside from these rather exogenous variables, they need the technological capability to integrate DERs with the increasingly digital foundation. This will be critical to the ability to offer the right products to the right customers. 

Utility solution providers are promoting the development of distributed energy resource management systems (DERMs) that integrate the needs of the utility grid operators with the capabilities of flexible demand-side energy resources at the edge of the grid. Typically, these systems are organized, top-down extensions of utility grid operator controls out of customer endpoints, or bottoms-up aggregations of customer loads into grid energy markets. But most technology companies have yet to develop the capabilities that constitute a true DERMS product. The software environment requires a perspective that incorporates both legacy and new systems to support the eventual platform of the future. Much of this uncertainty is the result of the disparate nature—or overall lack of—protocols that require many bits and pieces to tie together in a homogenized solution. 

As with any technology evolution, there will be winners and losers. Just look at the battle between VHS and Beta— companies succeeded or died based on choices. Winning can be the result of placing the right bets, or it can be the result of simply being in the right place at the right time. For the near term, risk aversion will influence utilities to vet DER vendors carefully to ensure these providers have the necessary credibility, flexibility, viability, and integration capability to deliver DER solutions. 

The challenge: Utilities are under increasing pressure to modernize aging infrastructure so they can meet the needs of digital platforms—and this challenge is coupled with a presidential administration that is reprioritizing the U.S. Department of Energy’s budget and eliminating U.S. Environmental Protection Agency regulations. While the need for infrastructure investment grows, so does the uncertainty of a return on any given investment. 

Investing in infrastructure was once the exclusive domain of utilities. But with utility “cost-of-service” project pricing competing against market-based and price-competitive alternatives, capital investment now requires the support of regulators. While the technology exists to enable a dynamic and resilient grid, the question about who will lead, invest, and control these operational assets remains to be answered. New regulatory constructs will become necessary to support and incentivize the risk of investing to support customer-centric innovation. Additionally, new capital structures will likely emerge under which regulators provide rates of return for different asset categories (e.g., cloud applications) or treat existing capital and new capital differently (e.g., 7-year depreciation for AMI meter versus 25 years). 

We are at a point where utilities see and want to pursue the positive impact of investing to improve customer experience. In effect, the floodgates have opened, and momentum is accelerating to build the digital foundation that will run the utility of the future. The current regulatory paradigm creates some reason for pause; but waiting for clarity will set an organization back significantly in its quest for transformation. 

Taking action: To survive, traditional utilities must adapt and change to a new regulatory paradigm that considers the rise of customer-centric thinking. Successful utilities will not sit idly waiting to react to tomorrow’s regulatory changes—they will begin developing a proactive, strategic stakeholder management approach that includes forming alliances, preparing formal filings, and employing lobbying. 

Many utilities still have significant work to do to replace infrastructure (telecom, back-office, equipment) mostly due to technological obsolescence. 

The challenge: Utilities are more focused than ever on operational excellence in response to regulatory and competitive trends. Take for example the functions that the industry considers operationally critical (e.g., outage management, mobile work dispatch) or routine and handled by the back office (e.g., knowledge sharing, employee communications, collaboration, dashboards, and data visualization). These two categories are lagging compared to those of true digital innovators such as Amazon and Apple. 

The digital age will force utilities to upgrade legacy tools and systems to keep up with rising customer expectations. They will also need to upgrade skills. A utility’s technology choices and decisions to go digital will not only determine how efficient and effective it can become, but also whether it can draw the right talent for the future. 

Taking action: Given the magnitude of change, utilities need to think pragmatically about how they use their evolving digital foundations to move toward the future. Focusing on improving operational excellence today is a good place to start. For example, utilities should look for ways to use their digital foundations to automate manual processes and produce deeper insight regarding their infrastructures, operations, employees, and customers. Utilities often focus on build but not necessarily on optimization. Progressive concepts such as machine learning and internal transaction processing have potential application within a utility environment—for example, by removing manual touches for adjustments from the billing function. 

Another more pragmatic example is using intelligent, real-time machine analytics to achieve longer asset life at a lower cost to the utility and its customers. By leveraging data from predictive asset analytics solutions, utilities can spend less time identifying potential issues and more time transforming their maintenance strategies and taking actions to gain the greatest return on every single asset. 

In summary, there is a lot of buzz when it comes to digital, machine learning and AI. But innovating for the sake of innovation is not sensible. Leading companies know all too well that digital technologies alone will not deliver value. Utilities should look at digital as less of a “thing” and more of a way of doing things. By building a pervasive digital DNA throughout the organization, a utility can enable today’s business strategy as well as tomorrow’s new strategies. 

The challenge: Clearly, new technologies are required to address the myriad issues facing the industry. But these technologies also introduce additional security vulnerabilities, especially for utilities—leading to a whole host of concerns. 

Just as the emergence of smart meters and connected devices provides many new entry points for hackers and cyber terrorists, evolving processes for handling and using volumes of digital data also increase security risks. For example, digital transformation is accelerating the convergence of IT and OT systems. While this collaboration and integration is essential to improving operations and reliability across an increasingly digital grid, it also increases security risks. In a recent West Monroe survey, utility executives cited cybersecurity of OT systems and devices as their top concern related to managing converged IT and OT systems. 

Resources and skills are a key part of the issue. While utilities are prioritizing security, risk, and resilience mitigation with solutions that encompass both physical and digital security, the addition of unique login sets—from smart devices to firewalls installed within substations—exceeds the capabilities that a security engineer can handle alone. Ensuring that their security operators and engineers have the requisite knowledge and skill is a major challenge for utilities. 

Taking action: To protect data and operations as the digital foundation grows, utilities must take a stronger stance on security. Advanced analytics and improved intelligence that highlight anomalous behavior will be critical for helping strained resources sort through the massive and increasing amounts of digital data that utilities are collecting and sending to centralized operations centers. But strengthened security will require more than tools—it will require a multi-faceted approach that includes recruiting and coordinating skilled resources, managing conflicting departmental objectives, and securing proper funding for security- related initiatives. 

Moreover, utilities will need to promote security- focused cultures that foster collaboration on security and compliance-focused initiatives across the entire organization. This end-to-end visibility is necessary to provide a clear picture of real-time network operations and the security impact of any business-related decision. Merging a utility’s OT and IT functions strengthens the business case for greater security protection, but it’s important to consider and properly measure the risk and cost before undertaking any major organizational or process changes. For example, utility OT/IT teams generally do a good job of identifying a vulnerability that represents a risk to the operations, and following up with mitigation initiatives. But they will need to improve their abilities to assess how those risks impact the overall business (e.g., brand, profitability, stakeholder trust). Similarly, security leaders must hone their skills in quantifying and articulating business impact so they can lobby for the funding they need.  

Business and OT systems are not created equally, and a utility should not attempt to control them in the same way. Each has a very different risk profile. 

Attack vectors change regularly and require ongoing assessment and monitoring. Keeping pace with rapidly evolving cybersecurity threats to large, complex, and increasingly digital electric power systems requires an effective combination and layering of multiple security components across the physical, IT, and OT domains.

Social, economic, and even political forces will continue to shape the future, and the role utilities play in it. But even as uncertainties proliferate, digital transformation represents a common thread running through the critical issues facing utilities. Thriving in the era of disruption and change will undoubtedly require a solid digital foundation. 

Utilities can deploy evolving digital innovations to manage disruption head-on and explore new areas of opportunity while maintaining a relentless focus on operational excellence. Focusing on both today and tomorrow will drive a compelling value proposition that improves customer service, optimizes operations, safeguards infrastructure, secures information, and attracts and retains talent. 

Embedding digital DNA into an organization’s culture requires transforming its people, processes, and technology. This begins with foundational investments in AMI, distribution automation, and customer portals that digitize previously manual information. It also requires communication capabilities for moving that data, centralized data storage, and then data analytics capabilities that uncover insights in the data. 

From there, the utility can begin using its digital foundation to optimize existing processes and manage high-risk business areas, such as grid operations. Only then will it be positioned to introduce customer-centric strategies that respond to evolving expectations and unleash new opportunities in value creation.