Like a physician with her stethoscope at the outset of a check-up, astute shareholders and directors should use the level and trend of a utility’s market-to-book ratio (MtB) as one of the first...
Strategies for surviving the industry’s transition.
For all the possible smart-grid benefits to be realized, utilities must undertake significant changes. The smart grid will drive a shift from a predominantly asset focus to a more nuanced operating model where the customer figures more prominently. This requires greater inventiveness and ease with change than utilities traditionally have demonstrated.
Utilities wanting to exploit the potential of the smart grid to create new sources of revenue and to improve operations need to overcome three specific barriers. They need to be able to integrate information and operations in different ways, demonstrate an ability to be more adaptable, and modify some cultural tendencies.
This requires significant transformation, but there are models from successful utility change programs that can be leveraged. Utility companies face barriers in these endeavors, but there are actions they can take that have proven successful. In the end, however, the question utilities will need to answer is whether they will serve the new market they are creating with smart grids or defer to other, more nimble organizations.
Arguably, the smart grid represents a change that will be truly transformational in nature. When utilities started out as declining marginal-cost operations and prices were steadily falling, operational effectiveness was less important than was increasing loads that were driving economies. This naturally emphasized asset strategies, driven by cost-based marketing incentives that could be shared with customers.
Then, when the economics flipped and new loads fueled rising marginal costs, operational effectiveness became critical. This further intensified the focus on assets and the need to optimize hardware investments. During this period, many utilities were compelled by regulators to encourage conservation, and marketing strategies evolved into energy-reduction programs. Still, rates for residential customers remained stable, though often using inverted rate structures to incent energy reductions.
But the smart grid changes all of this by exposing customers to a potential level of volatility, and exposing utilities to new operating complexities unknown in the electricity industry to date. Two-way information flows will enable customers to make more informed consumption decisions, but will expose them to less-stable pricing. Likewise, utilities will be able to use demand response to better manage supply and distribution resources, but this presumes customers can be recruited as trusting partners in the process.
However the operating models evolve, these changes will have profound implications both inside and outside of utilities.
On the customer side, there will be a fundamental change in the value proposition in the relationship with their utilities. Provided they can overcome privacy reservations associated with sharing more consumption data, customers will expect greater value from information that utilities collect and maintain on their usage and behaviors. They also will expect utilities to help them make better (or at least more informed) consumption decisions. This all requires a greater sense of partnership, collaboration and responsiveness than traditionally has characterized the utility-customer relationship.
On the utility side, there are complexities associated with accommodating