Does Your Strategy Add Up?

There is no greater need for careful and deliberate strategy setting and execution than in the utilities industry today. Technology is changing the nature of markets, the way they are being settled, and the way in which the customer is interacting. It is a time of great opportunity, and of existential risk. $800M has been raised in private equity markets by companies seeking to disrupt the utilities value chain. The three big disruptors of microgrids, e-mobility and the power of data are upon us. Not everyone will make this through this next phase of transformation.  It is critical for utilities to know where they are heading, and how they are going to get there. 

Losing the Past, Optimising the Present and Blueprinting the Future

Mapping an alternative future is an organisational, functional and cultural odyssey, and one which often requires a transactional pathway to execute. This is because sound management of any company requires optimisation of the present, reshaping for the future, and elimination of those decisions made in the past which are no longer relevant. Businesses which are no longer working for the vision must be sold, and new businesses acquired to provide either the seeds for future innovation for utilities or, has been seen in the case of German electricity companies, a complete structural pivot. 

Embarking on this path requires hard work and a serious bout of numerical self reflection. It means avoiding the preference of humanity for gut, rather than data based, decision making and the impacts on business outcomes that are consequent.  In the world of strategy, data is more than a friend, it is the framework upon which a strategy is built. 

The Time for Reactivity is Over

Electricity markets are changing – by 2030 the world will have shifted from a linear coal/lignite based model with monopoly transmission companies, peak-demand driven distribution companies and margin based retailing to an entirely new architecture. For generation, it is now essential to understand the range of profit and loss scenarios in a 2040 40% renewables scenario combined with ranges of EV and decentralised virtual power plant penetration scenarios. For transmission, it is now essential to understand the trajectory of revenue from regulated and non-regulated services, and factoring in the range of margin compression scenarios that are derived from new competition in transmission construction. For distribution, it is essential to understand the trajectories of capital expenditure outcomes in a reduced peak network, and the range and impact of asset impairments caused by widespread post tipping point decentralised energy installations, and in retail, we must anticipate the range of customer interfaces, and competitors, that will exist in the new energy world, and the range of profit and loss scenarios consequent to both success and failure. 

These are not reactive decisions. They require careful, well reasoned choices made from a heavy base of analysis, the cornerstone of which is research. This is the piece most often ignored amid the more convenient option of committee based strategy session, and is more often than not the biggest obstacle to success. 

Using Data to Set a Strategy for Success

Choosing what to invest in next is as difficult as deciding what to sell, and means understanding possible outcomes numerically before charting a course. While this places a heavier burden on the organisation up front, it in turn alters the nature and the pathway for strategy setting, and requires more honesty in understanding not what needs to be achieved, but the cultural, functional, funding and organisational barriers to achieving it. It is also requires a system 2 approach to identifying and truly understanding the drift, under each scenario, of value and profit to utilities; a low, methodical placement of options, understanding of the basis upon which choices will be decided, and the precise benefits and costs arising. Digesting these outcomes fuels the identification of both ideas and redundancies; questions of why don’t we do this, but also why are we still doing that.  From this, the list of possibilities can be drawn both of new opportunities to be pursued and those functions, businesses, and services that can be let go.

The process of evaluation of options takes time, with commercial analysis and research best applied, per opportunity, high-level implementation options (partnerships, capability development etc) considered, and the large number of prioritisation dimensions considered; across attractiveness and ability to compete, strategic fit, size of the prize, investment, risk, and speed to scale. The quality of the answer must be allowed to match the intensity of the question, when the potential threats to an organisation are nothing short of existential. Only when such a process has been done should companies consider the options of organic growth, acquisition or sale.  By 2025, we will have hit two tipping points; virtual power plants will have reached grid parity; and electric vehicles will be equivalent to combustion vehicles. It is no longer enough to set strategy by consultation. 

At EY, we specialise in an intensive data rich approach to defining and setting strategy for a changing utilities world, across electricity, gas, water and transportation. Message me for more information or to arrange a meeting.