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The On-Demand Utility

Sacha Meckler
Oct 21, 2016 · 4 min read

Utility organisations face an increasingly challenging environment. This author has recently published a white paper for Analysys Mason on the key strategy options that are available to executives as they move their organisations into an increasingly volatile future, the below article summarises the key aspects of the paper (a link to the full paper can be found at the end of this article).

All utility organisations will face a period of increasing change and uncertainty, though specific pressures will vary depending on the organisation’s particular characteristics. This is the result of the growing three-way tension between the need for security of supply, for prices to be kept at an affordable level, while ensuring environmental sustainability. Utility organisations that fail to balance these challenges (and their knock-on effects) are likely to see loss of equity/shareholder value and may be vulnerable to acquisition in a later consolidation phase of the industry. Those that succeed are likely to see significant gains in value and benefits to their local and regional economies. This success will need fundamental change in the operational and service models deployed by utility organisations, and will require novel approaches to embracing new technology. These organisations, which we are calling ‘on-demand utilities’, will need to re-align themselves to be flexible and to respond fluidly to anticipated and unexpected challenges. These changes are already being seen in the energy sector and in particular in electricity.

Utility companies tend to have distribution networks with more pronounced natural monopoly characteristics than the networks of telecoms companies, for instance. Energy systems in particular also generally have a more complex, and monolithic nature than other systems. This typically means that utility companies are either vertically integrated or have to work more closely and in concert with others to deliver services to consumers. Despite this, utilities can learn much from the recent transformations in the telecoms and computing industries. The complex nature of utility ecosystems means that there are significant lock-in challenges (where multiple facets in a system’s socio-technical paradigm may restrict/challenge changes being made to the system). These lock-in challenges may deter organisations from the scale or pace of change needed, to succeed in a changing world.

Utilities need to become more efficient and effective in dealing with a multitude of consumer, customer and stakeholder needs. Innovation and the ability to flexibly deploy services and technology are paramount. The operator will need to do this in response to customer needs, and in such a way that is both affordable and environmentally sustainable. Utility companies will have to become adept at optimising existing assets while flexibly and nimbly deploying new assets or capabilities.

The recommendation that is applicable to most utilities is to focus on one of two core competencies. Utility incumbents should either focus on the return on asset investment and management (the revenue defence strategy) or on service innovation and customer enablement (the revenue growth strategy). These options are illustrated in the figure below.

Strategic options for utility companies of the future [Source: Analysys Mason, 2016]

Utility organisations focusing on the revenue defence strategy will need to hand certain functions to their suppliers, surrendering some contact with customers, and with it a degree of influence and control over customer expectations and requirements. In this model, utility companies will still be responsible for significant elements of the service delivery. Those focusing on the revenue growth strategy, by contrast, will need to deepen their relationship with customers, offering them more value. To enable this closer relationship between utility companies and customers, many of the traditional utility competencies will need to be outsourced to the companies’ suppliers. Neither of this strategies should be seen as business-as-usual.

Utility companies will need to assess many factors before determining which strategy best suits their needs and market. In liberalised markets co-operation and co-ordination between utilities in different parts of the value chain will be needed to deliver maximum consumer benefit. In vertically integrated markets sanctioning such transformation will be more difficult, as will be the delivery and governance of the transformation. However, the benefits that accrue could also be greater.

Whichever approach utility organisations choose, they will face ongoing and mounting challenges in the future. In order to succeed they will need to re-align themselves to be flexible and to respond fluidly to anticipated and unexpected challenges. The ability to plan for uncertainty and to firmly instil flexibility will be critical. In this way, the on-demand utility of the future will be able to generate value for itself and its customers. This holds true whether the utility takes a conservative or innovative approach to the products and services it wishes to provide. The full paper with diagrams can be found at: http://www.analysysmason.com/the-on-demand-utility

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