Energy in 2019: Breaking the Chains

It can be hard to break habits, particularly those that have served us well. Behaviour is a learned activity, and we are wired to repeat actions that reward us. It is only when our outside environment changes, or we uncover new information, that we are forced into change, and there is, unfortunately, no change without pain. 

The energy industry has seen both change and pain in recent years, through the separate but overlapping waves of disruption which began in 2005. The first began gently, with subsidy driven investments in renewables, and over the following ten years left century old utilities devastated in its wake, left in an aftermath of impairments, mothballing, and closures, with even the most resilient utilities finding their strategic responses late in catching the trend; decisions to cut costs, transform operations and diversify into the wave of new technologies being little more than raincoats in the ocean. As the industry struggled to react, the next wave began. In 2012, led by a convergence of smarter investments, technological advancements, and changes in consumer demand to greater proactivity and control, the seeds were sown for a paradigm shift which when finished, will have left no participant untouched. 

2019: Moving Beyond the Tipping Points

Most industry advisers agree that we are now on a journey, from the traditional energy landscape to a system that will be defined by new changed market and technological conditions.  Knowing this is easy, however, and over the past few years reacting has become a theatre rather than an accountable activity in utilities. Innovation hubs dedicated to understanding the possibilities have abounded, light touch pilots and limited partnerships have spotted the landscape, but all have occupied a space best described as outside the tent. We are now, however, out of time. In 2019, the expectation to mature will become a requirement to be, as two critical tipping points move from the medium to immediate term; the first, in 2021, will see distributed energy platforms such as batteries and solar reach cost parity with grid connected power, and the second, no later than 2025, will see electric vehicles reach parity with combustion engines. We expect S curve adoption of direct and related products and technologies to follow quickly thereafter. 

These tipping points will not be the starters gun, they will be the quickening, and when they hit we will already be dealing with the implications.  Meeting the peak will have become the new sport in a world dominated by renewables, and large scale storage will already be enabled by short term settlement arrangements in wholesale markets set to complement open cycle gas turbines and better ramp rates for conventional utilities to meet peaks. The nature and use of the distribution system will already have started to change, and load flow management will have become a network issue enabled by batteries and solar, with new business models becoming the norm for distribution companies looking to retain rates of return among a changing commercial landscape. Retail will be digital; scaled, responsive, and integrated. Those who were late will already have started to die. 

A Year of Action, Not Observation

2019 must be a year of action, not observation, as a challenge of both profit and relevance takes hold; utilities must now not only optimise their current performance, but transform themselves to take their optimal place in the future energy industry. There are three key trends emerging which we see as must-haves in strategic discussions in 2019:

1.      The evolution and increasing penetration of microgrids. As I wrote recently in relation to mining sites, there is an evolving integration and application of big data, machine learning, artificial intelligence and the internet of things (IoT) to energy use which is increasingly being pointed towards microgrids, and which utilities will have no choice but to respond to through partnerships, pilots and trials.  Corporate activism, deconstructivism and technology are colliding in an aggregated way to that which occurred with rooftop PVs, and we expect the same fervour that has driven corporate PPAs to push microgrids into the next generation;

2.      The rise of E-Mobility, in particular the increasing convergence between the automotive and energy sectors caused by the 2025 cross over point between electric and combustion engines. In a recent article, I suggested that 2019 will be the year that utilities and automotive companies begin to see themselves as competitors in micro segments of the market, particularly as vehicle sales begin to be bundled with charging stations, in home applications and electricity supply contracts for customers. As we move closer to the tipping point, we expect more and more convergence in this space, and a more active involvement by Government in enablement;  and

3.      The rise of data as a commodity and an enabler of new entrants, as the increasing prevalence of IoT enabled devices in the system begin to meaningfully contribute, through enabling algorithms, to the forecasts of demand and the penetration of new technologies into the system.  Forecasts of technology companies entering the utilities market over past years will be proved both right and wrong; right in that the energy market is a key target for tech, and wrong in its desired place in the supply chain.  Big tech companies may not ultimately retail, but as data, software and algoriths begin to drive supply, they will emerge as the glue that holds the new system together.

As well as growth and action, 2019 must also be a year of correction. The interplay between the slow decision making of utilities compared to the speed of technological advancement has seen a range of projects, programs, functions and activities being undertaken which are either so far behind the rapidly developing energy technologies sweeping the globe, or anticipated a trajectory of technological application which is no longer correct. These projects compete for resource, thought leadership and system time; and they weigh utilities down. To break a habit, one must not only look to the future but also remove the triggers and the cultures that betray us. Divestment and removal of old paths and activities is as important as embarking on new ones. 

2019 is upon us. It will be the year of utilities setting clear strategies, and knowing which buttons to press and which levers to pull, as financial engineering takes a distant second to deep sector expertise and system understanding. It will be a year of partnerships, investments and intrusions into microgrids and mass markets by new players using data and adjacent products. It will be a time for expertise, and for an educated understanding of how to match venture, growth and yield capital with the investment needs of the future energy market, and most importantly to shake off the behaviours, cultures and trajectories that are holding companies back from their full potential.   

It is time for utilities to break habits, to map the path forward and to alter the decisions and behaviours that hold us back from forming new habits, actions and investments. As Warren Buffett once said, the chains of habit are too light to be felt until they are too heavy to be broken. Disruption is not coming, it is here. Can we feel our chains?

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