Executive Summary: ISG Provider Lens™ Power and Utilities - Services and Solutions - North America 2023
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Energy transition and digital transformation shaping the utilities of future
North American power and utilities industry may not drive global headlines but faces considerable headwinds such as increasing clean energy adoption (decarbonization), ensuring grid and service reliability and resiliency, improving infrastructure security, and optimizing costs.
Growth in distributed energy resources (DER), together with the prosumer revolution, creates challenges for power and utilities companies in terms of demand, quality of power, and reliability of assets and grid. Thus, integrating DER resources into the grid will help ensure effective demand response and reliability quality metrics. Furthermore, owing to the bi-directional flow of energy with increasing prosumers, distributed energy resources management system (DERMS) and advanced distribution management system (ADMS) will continue to grow and become more complex.
The focus on energy transition will gain further momentum in 2023 and beyond as the adoption of clean energy technologies grows. Per Bloomberg NEF (BNEF), global investment in the low-carbon energy transition totaled $1.1 trillion in 2022 compared to $849 billion in 2021. Furthermore, the focus of energy transition is global, and utilities can benefit by sharing and collaborating.
As an advisor that has helped several world’s leading utilities navigate their digital transformations, ISG believes that building a successful, competitive and future-proof utility requires strengthening the technical and digital foundation, transforming grid operations, continuously improving cybersecurity, digitally enabling the workforce and improving CX through digital channels.
ISG sees the following trends in the global power and utilities industry:
Geopolitics affecting prices
As the war between Russia and Ukraine drags on, global energy and utilities markets will continue to be affected by the volatility in oil and gas prices. This will drive the need to diversify energy supplies to ensure energy security. Current geo-political events cause energy security challenges, resulting in the continued need for traditional energy sources (coal and gas), while driving the rapid adoption of new energy sources (renewables and hydrogen)..
Nuclear as a key energy source
After the Fukushima disaster in Japan, many countries went slow on nuclear energy and some like Germany even ordered the shutdown of nuclear power plants by 2022. However, the Ukraine war has made the countries and its policy makers reconsider nuclear as the source of clean energy. North America, particularly the U.S., must consider nuclear energy to ease the burden on traditional energy sources. However, significant construction costs in terms of time, money and regulatory reviews make the transition complex. In April, the U.S. got its first nuclear power plant in Georgia since 1996 — the Vogtle expansion project. It took $34 billion and 17 years to get it running.
While transitioning to decarbonization, it is necessary to consider the risks associated with middle- and low-income groups’ energy affordability. With a large amount of investment required to drive energy transition, incremental grid investments will be a recurring annual burden for the foreseeable future. With continued energy security challenges and an increase in supply chain costs, utilities are faced with the challenge of keeping costs low and customer bills reasonable. To mitigate the rising costs, utilities develop multiple programs to ensure that the energy burden on the average household does not compromise their ability to support their basic needs while ensuring that there are alternative sources for uninterrupted supply. The low-income households in the U.S. use more than 30 percent of the electricity consumed in the U.S. and face an energy burden three times higher than other households.
Mobility and electrification
With the growing adoption of electric vehicles (EVs), there is an urgent need to increase investments in expanding charging infrastructure, grid integration and billing systems. Passenger EV sales in the U.S. grew 54.5 percent YoY in 2022, according to Counterpoint Research. The shift toward EVs will provide a new revenue stream for utilities, while it will require investments in new technologies such as advanced sensors, smart inverters, energy storage systems, upgrades to existing grid infrastructure and EV charging station management systems.
Digitization of the energy sector
Utilities must shift to a digital operating model as the complexity across the value chain increases. From a technology standpoint, there needs to be an integration between operational technologies (OT), such as supervisory control and data acquisition (SCADA) systems, distributed control systems (DCSs), and programmable logic controllers (PLCs), and IT such as AI and cloud, which will become the core to support assets and operations. Providers with deep engineering and OT capabilities will be preferred by utilities to maintain the IT/OT balance. Advances in digitization have led to new revenue streams, business models and market players for utilities. Large players are under pressure from regulators to keep energy prices low, while they lose market share to nimble, asset-light players. This has an impact on the profitability of their business. Utilities should adapt to these changes to survive and succeed against innovative, digital-native third-party providers. An important element of change management is involved, which requires an alignment between business and IT.
Growth in battery storage
Energy storage systems are an intrinsic part of today’s modern renewable energy infrastructure. With solar and wind energy becoming the drivers of the energy transition, battery energy storage systems (BESSs) become critical for the optimization of energy output to the grid. Energy storage systems can store excess electricity generated by renewable sources and release it back into the grid when needed. Despite being hit with supply chain and material issues, battery storage growth continues to rise in 2023.
Need for grid and asset resiliency
Financial damages caused by weather-related disasters increase every year, and utilities get increasingly exposed to litigation risks related to asset and infrastructure damage. The U.S. witnessed more than 15 weather-related disasters, with an average loss of $1 billion in 2022. This has led the utilities to focus on grid resiliency, disaster readiness, grid and asset reliability, and aging assets. In addition, the need to drive energy transition causes disturbances more than ever before. Providers can help utilities with solutions around emergency response, asset health monitoring, work planning, risk modeling and vegetation management. Companies such as National Grid plan to invest heavily ($15 billion in New York over the next five years) to make the grid more resilient and prepare for electrification of cars and buildings. Furthermore, the aging U.S. electric transmission and distribution (T&D) infrastructure needs to be significantly upgraded as the industry faces challenges around energy transition, EV adoption, sustainability and net-zero initiatives, and changes in customer preferences and regulations. Players invest in upgrading the grid, metering, tech infrastructure and workforce through digital solutions that leverage cloud, IoT and AI and ML.
Decarbonization of the energy mix
Utilities are shifting from traditional energy sources to wind, solar and other green sources. These changes are coupled with an increasing shift toward distributed energy and the resulting disruption of energy production patterns it creates. Per International Energy Agency’s (IEA) forecasts, global renewable capacity is expected to increase by almost 2,400 GW or 75 percent between 2022 and 2027 driven by rising fuel and electricity prices and the ongoing Russia–Ukraine conflict.
Aging workforce and the need for digital workforce
North America’s power and utilities industry faces the aging workforce issue and the need to attract/retain new talent. Over the next decade, the power and utilities industry will witness the retirement of more than 50 percent of its current workforce. The industry’s challenge in attracting talent and competing against large tech firms is overwhelming. There is a shortage of qualified talent for new jobs, many of which require competencies around AI and ML, robotics and advanced analytics.
Changing customer preferences
Today’s utilities need to shift from an infrastructure provider to a service provider. In North America, customers changing utility companies leads to a high churn rate and thus engaging with the consumer across various platforms and channels (omnichannel) is the need of the hour. They need to address challenges associated with customer transformation through revamped UI/UX portals, enhanced self-service features and responsive contact centers. Furthermore, utilities need to leverage data insights to respond to customers’ changing needs rapidly and transparently.
Data and cloud-driven business
Utilities need to realize the full potential of data by addressing issues around access to data, data insights, data governance and quality, and cross-functional analytics. The need to derive value from data for asset maintenance, weather-related warnings, customer preference, etc., drives the adoption of cloud and IoT platforms. Many industries are moving toward cloud-based solutions for key workloads, which can enable greater resiliency, faster innovation and better customer service. However, utilities run into unique challenges around adopting cloud-based solutions. Providers should focus on helping utilities capitalize their cloud investments by creating transformational assets, comprising cloud subscriptions and transformation services supported by regulatory review and approval. CIOs should not wait on others to address this issue.
Growing cybersecurity concerns
Digitalization threatens security. Rising connectivity through digitalization and proliferation of decentralized energy resources require holistic and complex energy networks. The rise of intelligent grids brings higher vulnerability to cyber threats. Strategic and operational security in utilities is therefore critical at an enterprise level. These companies should proactively run risk assessments and cybersecurity programs and share intelligence to prevent cyber and physical attacks on grids. There is a strong market trend to separately address cybersecurity when constructing managed service strategies.
Legislation and regulatory changes
Recent policy changes and developments continue to influence homeowners, utilities and new technology areas such as energy storage. The most notable new policies include the U.S. Inflation Reduction Act, signed into law in August 2022, which provides more than $369 billion in funding for clean technologies. The act may further help U.S. utilities fast-track their emission reduction plans.
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