Innovation and the Next Generation Utility

Embracing the New Energy Ecosystem

Faced with rapidly-evolving markets and incentives, electric utilities today have an unprecedented opportunity to develop new, innovative ways of structuring their businesses.

In the past, utilities were driven by two simple goals: to expand generation and grid infrastructure and to improve operational efficiencies. That model is changing. Competitive distributed energy technologies and analytics tools are opening up new markets, shifting the economics of infrastructure development, creating new statutory obligations, and offering the potential to grow utility earnings. Third-party challengers are also competing to serve customers with rooftop solar, batteries and energy management tools.

The dominant utility business model – a supply-only strategy designed to bring steady rate base growth with careful management of operating expenses – is being challenged. The new opportunity lies in figuring out how to harness the technologies and service models at the grid edge. Harnessing that opportunity requires a targeted innovation management strategy.

While changes in the electric sector have been underway for years, most utilities have not developed holistic strategies around managing and defining innovation. As a result, they may not be prepared to harness the coming market evolution. As the industry moves toward what we term “Dynamic Energy,” innovation will become necessary to sustain growth. Those that fail to establish innovation strategies will continue to be boxed in by regulators and traditional rate cases, and will continue to see long-term erosion to corporate earnings.

Since the late 1980s, regulators have tightened regulated return on equity (ROE) due to low interest rates, adequate access to capital, and a poor public appetite to fund utility earnings. Investors have accepted this decline due to how low-risk utility investment is compared to the market. However, any future interest rate growth may squeeze utilities due to regulatory lag and leave operating companies under earning.