Cost Insights
by PowerAdvocate

Intelligence for energy companies seeking a data-driven approach to cost management

Utility Update: 5 Things to Watch in 2019

January 10, 2019 at 3:45 PM / by PowerAdvocate

Utilities are in the thick of an industry transformation driven by technological and competitive forces. 2019 shows no signs of slowing down. We have highlighted 5 key trends to stay ahead of in the coming year, so utilities can continue to position themselves for success.

 1

 1

Global Trade Uncertainties

Global trade will continue to keep energy companies on their toes in 2019 with tariffs, trade wars, and ongoing negotiations.

What is happening?

In 2018, the US government consistently escalated trade pressure on foreign partners by introducing new tariffs (particularly against China), and renegotiating long-standing trade agreements like NAFTA.

Further, many of these issues remain unresolved: the USMCA, the NAFTA replacement, has yet to be finalized and the Trump administration is actively negotiating Section 301 Tariffs with China, which could escalate or deescalate at any point.

How to stay ahead:

All utilities need to monitor the markets, given the high level of ambiguity in American trade policy, however, simply monitoring is insufficient. Utilities should also determine the magnitude of the risk they are exposed to if, for example, unfinished steel prices climb a marginal 10%. Cost models that analyze exposure to specific raw materials are the most efficient way to monitor risk. Without understanding your exposure, it’s impossible to develop and execute risk-shielding initiatives such as negotiating index-based contracts, identifying alternate sourcing strategies, or vetting a list of alternative domestic-based suppliers.

 

2

Increased Frequency and Intensity of Catastrophic Events

The California Wildfires, Hurricane Florence, Hurricane Michael, and the New England Bomb Cyclone (winter hurricane) are just a few of the natural disasters to impact utilities seriously in 2018.

What is happening?

2018 is shaping up to be the 4th hottest year on record and scientists have demonstrated a clear correlation between rising global temperatures and more frequent, catastrophic natural disasters.

How to stay ahead:

Recovering from storms is not a new challenge for utilities, but the frequency and intensity of these storms is: they pose higher costs and longer recovery timelines, which causes tension with customers (see item 5). The resultant impact is twofold: Utilities must invest in grid hardening, while also improving disaster response. All utilities face this threat simultaneously, they are rapidly absorbing supplier capacity to support these efforts. Many suppliers are not prepared for larger orders of higher-quality materials.

Grid hardening requires buy-in from internal stakeholders, regulatory support, strategic plans driven by data-based insights, and a supplier base poised to meet increased demand. In 2019, utilities must work with stakeholders and their supplier base in order to plan investments wisely to mitigate destruction from catastrophic events.

 

3

Regulators Push to Lower Costs and Limit Non-Renewable Projects

 What is happening?

Capital investment continues to increase throughout North America for all power assets. Investment in transmission assets alone have more than doubled in the last decade. However, regulators continue to push for lower costs and many are limiting investment in non-renewable projects. This shift is a result of ratepayers placing increasing emphasis on investments in affordable green generation and its supporting infrastructure. 

How to stay ahead:

Utilities taking the initiative to seek out cost reduction opportunities and proactively leverage market data to benchmark their performance are delivering value in three ways:

  1. Identifying cost savings, so they more wisely allocate shareholder and ratepayer money
  2. Benchmarking equipment prices, installation costs, lead times and supplier performance against the market, so they more effectively target opportunities, and separate real value opportunities from false positives
  3. Leveraging market data such as commodity prices and asset cost models, so they create sustainable monitoring programs in order to drive continuous improvement as they pursue a leaner and more value accretive capital program

 

4

Continued Merger and Acquisition Activity

Market pressures and commercial opportunities will continue to provide a platform for mergers and acquisitions.

What is happening?

In the past 10 years the total number of US investor owned utilities has dropped by 30% primarily due to mergers and acquisitions. Growth strategies, ongoing cost pressures, as well as the opportunity for increased economies of scale with suppliers and capital projects, have driven this trend. In addition, as cost pressures and regulatory scrutiny in the industry increase, utilities are seeking scale in their distribution lines with the combined pricing power of a merged supply chain. As a result, even the most independent, nimble, and efficient utilities may be acquisition targets.

How to stay ahead:

The most powerful levers a supply chain can bring to a transaction rich environment is a clear understanding of expenses (operating and capital) from suppliers. This strength is supplemented by proactive ideas about identifying and driving value from transactions. Investing in an agile supply chain with strong data analytics capabilities enables an organization to identify opportunities, estimate the increased leverage of the merged enterprise, adapt to the new environment quickly, and set achievable goals.

 

5

Louder and More Sophisticated Consumer Voices

The formerly silent ratepayer has found a voice: electricity consumers are expressing their opinions on electricity generation, changing their consumption patterns, and many are demanding a green revolution.

What is happening?

For some utilities, the challenges today feel like an affront from all sides: ratepayers and regulators demand lower costs and higher reliability, consumers have drastically changed their consumption patterns and usage preferences, commercial and industrial businesses are choosing to leave the grid and the falling costs of green technologies are disrupting legacy generation costs. Many of these challenges are directly in conflict: a consumer may want ‘green, local energy’, but technology does not yet exist to meet that need.

Many utility executives acknowledge these challenges, and agree that these business stresses are only increasing, but there is little consensus on how to best address this issue.

How to stay ahead:

The utilities that can think strategically, understand public demands, marry those needs with true technological innovation, and keep a cap on costs, are the ones who will not only weather the next decade, but will also find innovative ways to grow.

Not only do utilities have to quickly catch up to the consumer game, they must do so while balancing other competing priorities:

  1. transitioning to a new way of thinking about consumer data, preferences, and other tools
  2. making high-stakes bets on new technology investments; and
  3. maintaining their existing regulated asset base as cost-effectively as possible.

In short, utilities must shepherd their existing resources wisely while evolving their approach on new technology investments, and completely overhauling their customer approach towards a customer-centric model.

With the right information, smart utilities are able to analyze their customer base, understand customer preferences, and present their customers with real, viable, and long-term alternatives that will keep consumers connected to the grid. Utilities who can anticipate and shape consumer preferences will succeed in this new world.

Learn how your company can stay ahead in the new year and... 

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