FIVE TRENDS WILL REDEFINE UTILITIES IN 2020
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- Jan 27, 2020 6:06 pm GMT
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Two words come to mind when characterizing the utilities industry over the past decade: disruption and transformation. Essentially, the unprecedented disruption in the market required significant transformation by utilities to adapt to changing demands and new ways of operating.
Looking ahead, I believe the defining mantras for 2020 and beyond will be opportunity and purpose. Companies’ pursuit of opportunity and demonstration of purpose will take shape in the form of five major trends. Some of these trends are not new, but they will continue to reshape the industry in 2020 and in the rest of the decade to come.
1. Putting people first.
Disagreements on policies - from the Paris Agreement to the COP25 to the EU New Green Deal - have impeded coordinated global efforts to address climate change. The result has been a growing decentralization of the move to decarbonization. Instead of national governments, people, cities, states, corporations and other entities have been setting emission reduction goals to reach 100% renewable use over the next 20-30 years.
This shift will only accelerate as younger generations – along with activist investors, non-governmental organizations and the sustainable investment community -- put pressure on utilities to reduce emissions. Younger consumers expect more from their utilities in terms of greener options, a broader array of products and services, interoperability with smart home tech, support for electric vehicles and other offerings. All of this means that utilities will need to demonstrate greater responsiveness to increasingly environmentally conscious consumers.
2. Dealing with industry shifts.
Industries shift with time and pressure. Utilities have long had their industry to themselves, with the benefits of monopoly status, high barriers to entry and often generous governmental support. But a new ecosystem has formed, driven largely by the need to transition toward cleaner energy. Players from many industries, including energy management, automotive, and oil and gas, are crowding into this space.
Energy majors, pressured by ever-mounting environmental concerns from governments, activists and others, will continue to look for opportunities in the utilities space in efforts to decarbonize their portfolios. Over the past couple of years, energy majors have been busy acquiring positions in renewables, electric vehicles and retail energy. In Spain, Repsol has been capturing 600 retail energy customers a day for a year – more than all utility players combined – by leveraging its petrol station network to offer bundled deals. The year 2020 may be the tipping point when majors start to make a meaningful impact on the utilities industry.
3. Increasing flexibility to keep pace with customers.
There have been significant improvements over the past hundred-plus years in how electrical grids operate, but the fundamentals have changed very little. Utilities face the challenge of integrating increasing amounts of renewables, energy storage and electric vehicles into a network that was never designed to be flexible.
Flexibility – in mindset and in action -- will be critical for efficiently and effectively operating a grid to maintain safety and reliability, but also to remain relevant with customers. Energy-as-a-service offerings will expand, as players from outside the traditional utility market push utilities to evolve their traditional approaches to serving commercial, industrial and municipal customers. These end users seek, among other things, greener power supplies, greater reliability and more give and take on pricing.
4. Energizing storage capabilities.
The rapid decline in battery costs is making effective power storage a reality, enabling utilities to eliminate renewable intermittency, increase reliability during outages, and power electric vehicles more effectively. The past year showed that batteries will play a critical role in the industry going forward, as several U.S. states announced storage installation goals. Large-scale renewable projects, along with end-user photovoltaic systems, are now being planned in tandem with storage capabilities.
In 2020, we are likely to see further gains in storage as customers demand greater reliability and more protection from shut-offs. Electric vehicles, which are essentially batteries on wheels, will be a major factor behind lower-cost battery manufacturing and advances in technology. Future-minded utilities will embrace EVs not only as a new source of revenue but as a distributed network of flexible storage, one that can be utilized to maintain reliability and aid in the decarbonization of grids.
5. Tapping into hydrogen.
Non-fossil-based fuels have long been used in a variety of specialized applications. Now, market forces are drawing attention to renewable gases, particularly hydrogen, which is often portrayed as an attractive alternative to fossil fuels. This is especially important as it is becoming increasingly evident that renewables alone will not be enough to meet decarbonization goals. Electrifying transportation has been at the center of decarbonization efforts, but natural gas is becoming the next target for emission reduction. Gas use in commercial, industrial and residential buildings, and, increasingly, in power plants, is coming under scrutiny, and several cities already have instituted rules to ban gas use in new construction.
Advances in bio-methane collection from refuse and agriculture have created a viable new resource, while excess capacity from solar and wind assets could be used to produce hydrogen through electrolysis. Best of all, these gases can be transported through existing gas infrastructure and can be mixed with conventional gases for use in power generation, heating and industrial processes with only minor equipment modifications. Several European gas giants have already identified hydrogen as a key component of their energy strategies.
As we start the new year and embark on the next decade, these and other changes will take place quickly. There is ample opportunity for both incumbent and new players to capitalize on the trends shaping the utilities industry, but success requires a proactive approach and a purpose-driven agenda. Successful utilities will adopt new business models that address the concerns of their customers, shareholders, employees and other stakeholders while working toward ambitious sustainability goals.