Energy network providers have traditionally operated in a stable environment of steady returns – this era is coming to an end. The network is moving from centralised and regulated, to decentralised and customer driven. This means that utilities companies must reconsider and redefine their role in this new landscape. Rather than remaining passive, long term investors in their network, network providers must proactively steer the network towards a sustainable future.

The four major drivers disrupting Australia’s energy network are:

• Technology lowering the cost and improving the scalability of alternative electricity production and grid systems
• Customers having greater power and control over how they use and consume energy
• Economic forces diminishing the value of legacy energy infrastructure
• Policy settings reacting to and driving change.

These shifts are well known to network providers. However, an ultimate vision for the network is less clear, making it difficult for leaders in the sector to know the immediate steps to take.

Nous’ view is that the best approach is to act early and effectively to shape the future and be well positioned to succeed.

Prepare for three successive transitions

Our 20 year vision for the network is semi-decentralised. Change is happening fast, however a fully decentralized grid is unlikely, and grid demand for peak times, emergency situations and industrial customers will remain.

In this future, network providers will find that there is greater deregulation, more network components to compete in and new revenue models to pursue. Energy retailers are already moving quickly to extend their services and invest considerable earnings in growth initiatives. Network providers must move from their current state as an asset manager to meet its future roles. These are illustrated below:

The five major implications for energy network providers

To continue to thrive in this changing environment, network providers must consider:

1. Reinventing value propositions and service offerings

Consumers with more power in the marketplace and greater consciousness of energy will expect new products and services from utilities providers. This will require a shift to downstream components of the value chain where there are exciting opportunities to be realised. Network providers must shift towards orienting the business around customers. This means running a business that is driven by consumer demand and stepping out of the traditional, regulated role.

2. Establishing a finer and more agile capital allocation model

As providers transition to become network platform managers, business operations will become less capital intensive and more flexible due to the emergence of micro-grids and power generators. Network providers will benefit from establishing a new capital allocation model that allows the reconsideration of typical long investment horizons, which have until now been driven by assets such as electrical substations and long distance distribution lines.

A finer resource allocation model better fits this new network design as it:

• provides greater resource fluidity through the rapid reassignment of capital to teams and projects
• focusses on greater investment in uncertain projects that prepare for a range of future scenarios
• achieves a more granular view of assets for ongoing maintenance and investment
• favours shorter investment horizons (7-10 years) which better aligns with the pace of change
• rebalances capital to operating assets with flexibility to respond to technology and consumer needs.

There is an imperative for network providers to act now, as current plans under the traditional investment model may be already outdated.

3. Redeploying capabilities to support a customer-focussed organisation

To reorientate from a regulator-focus to a customer-focus, providers should consider how internal capabilities are deployed. For example, knowledge and data capabilities should shift their focus from managing assets to understanding customer demand. This will in turn generate insights that will shape product and service, and inform strategic and operational planning decisions.

Network providers will also need new activities and skillsets to thrive in the new environment. External scanning to obtain market insight; intellectual property development and management; research and development; and customer data collection, aggregation and analysis, will all be essential capabilities.

Other competencies will also become more valuable to network providers than they have been in the past. Marketing; sales; customer relationship management; and brand management are non-negotiables for a contemporary, customer-centric organisation. Similarly, new technologies need to be supported by well managed interfaces, to avoid ineffective coordination of the electricity network.

4. Shifting culture towards network advocacy

Network providers are in a unique position, at the confluence of the old and new networks. All providers have the opportunity to shape the future network and ensure that all the moving parts form into an effective ecosystem.

To capitalise on this opportunity, providers must evolve from a culture that is compliance driven and risk-avoidant, to one that supports advocacy and experimentation, risk-taking, collaboration, flexibility and autonomy, including capability to influence regulators and governments to do the same. This will help your business shape and respond to the rapidly changing operating environment, and be well positioned to face the inevitably uncertain future.

5. Balancing investment in new and existing assets

Infrastructure is necessary to support operations in a two-way smart grid, and the associated new suite of products and services. Providers will need to upgrade core assets to integrate distributed generation and storage systems into the network. Now is the time to evaluate existing assets and consider investment in assets that are appropriate to meet future needs.

Technological assets will become more important. To be a smart network, the grids need to be logically reconfigurable, such that they have the flexibility to be reprogrammed to handle emergency events, and drive system change. Technological assets in terms of communication, cloud storage, and data and analytics software will be necessary for the networks to deliver their services and automate decision making.

Start now and shape the future

Network providers are already aware of the need for change, but inertia and barriers can hold back action. The current regulatory environment and the burden of legacy assets pose investment risk, and the prospect of negative return gives appeal to a ‘wait and see’ approach.

Acting early and effectively to shape the future will minimise the threat of the declining value of the network. Network providers who act now have the opportunity to reduce uncertainty and gain competitive advantage by leading the new network.

Get in contact with our utilities experts to explore what you can do to act early and effectively.

This article was co-authored by Michael Kron.