Tom Flaherty is a partner with Strategy&, part of the PwC network, with over forty years of consulting experience. Most recently, he has led assignments related to standing up innovation programs and capabilities within utilities.
Articles, conferences, executive meetings and board of director discussions all celebrate innovation as the new big thing for utilities. But the quest for embedding innovation throughout these companies causes utility management teams to ask themselves how they can do this effectively and quickly.
The promise of building new businesses and deploying emerging technologies is certainly compelling and alluring. But it is also accompanied by the real challenge of execution from what is largely a standing start for most companies.
Companies have long focused on system expansion and infrastructure modernization investment. They have been less disposed toward spending on traditional research and development.
U.S. industrial, consumer and pharma companies outpace their world counterparts in research and development spending at five percent of annual revenues. But the energy sector lags at only one percent, and utility spending is almost negligible.
Some utilities have been conducting research and development going back to the World War II era. However, this effort was typically narrower and focused more on the generation business than on the network or behind the meter.
How does a utility overcome this lack of historical focus on innovation in an evolving future market and technology environment? Likely not at its own pace and not just organically.
For utilities to ultimately position themselves for innovation, success will require that they build distinct internal capabilities combined with parallel, directed future investment. However, they will supplement this activity simultaneously with external leverage through venture capitalists, start-ups, OEMs, partners and acquisitions.
This formula is already being followed by a number of companies that have been leading the sector in formalizing innovation as a capability.
Several utilities have been early industry activists in innovation and have looked over the horizon to gauge where the market is headed and what different or unique capabilities they need to succeed.
A number of these larger companies quickly adopted inorganic strategies through acquisition as a strategic lever to accelerate their positioning. Some companies have actually made serial acquisitions to acknowledge the breadth of the capabilities that are needed.
These acquisitions have expanded existing capabilities into the areas of clean energy financing, solar development, energy services, software development, energy consulting and demand response, among other areas.
The addition of distinctive capabilities from these companies offers utilities quick market entry through the leverage of existing reputation, product and service lines, channels to market, and general market savvy.
Even more utilities have taken another parallel inorganic step, directly investing in existing or emerging companies to short-cut market entry and minimize the market, technology and financial risks of ownership.
Some companies have established internal investment funds that they control to canvass the market for participation possibilities. These companies include both large- and medium-sized entities that have not fully decided where and how to participate in specific technologies and markets.
Other companies have elected