Three Opportunities for Utilities in 2024

Despite an ever-evolving energy landscape, three core priorities remain for U.S. utilities: providing reliable, affordable, and sustainable energy. In 2024, utilities are balancing traditional and novel funding approaches to progress these priorities. In fact, utility executives are better positioned than ever before to confidently make the transformational decisions needed to progress the energy transition. 

To start, utilities should focus on three key opportunities:

Strengthen the balance sheet to support investment strategies that will create lasting value for stakeholders.

Maximize newly available capital — such as funding through grants and tax credits — to accelerate the energy transition.

Modernize technology to progress the business.

Trey Thornton: At the center of utility strategies is an investment in foundational capabilities – both infrastructure and systems – that will underpin the broader industry transformation.

While there is a clear route for success, the operating environment continues to produce hurdles. For example, reliability is threatened by severe weather, aging infrastructure, the risks of cyberattacks in an increasingly geopolitically fraught environment, and even trends in energy transition, such as increasing electrification and deployment of distributed energy resources.

Meanwhile, rising capital costs and continued high inflation threaten the affordability of energy. Simultaneously, though the demand for renewables and electrification continues to grow, infrastructure and technology delays, along with competing priorities, threaten the progress toward sustainability.

These challenges will continue to test the focus of utility leadership, making long-term strategic planning more difficult but more important. Ultimately, the pathway to overcoming these hurdles to enable reliable, affordable, and sustainable energy will require transformation in multiple areas.

Step 1: Strengthen the Balance Sheet to Support Investment Strategies that Will Create Lasting Value for Stakeholders.

In a challenging economic environment, utilities will continue divesting both non-core assets and even portions of their transmission and distribution portfolios, strengthening the balance sheet for future investments.

Jeff Miller: Rather than seeking IIJA grants or IRA tax benefits piecemeal, utilities should first determine which opportunities align with their long-term strategy

As the industry reshapes itself around new business models and strategies, these types of asset shifts can play a major role in helping companies build capital, streamline their operations, reduce overhead, create new partnerships, and sharply refocus their efforts on more value-added areas of the marketplace where they choose to participate.

It's also a time to be creative about operations and maintenance costs. While many utilities have launched broad cost-reduction efforts, one approach increasingly being considered is the adoption of managed services structures, in which support functions are utilized in a flexible, on-demand way. Managed services, especially in back-office functions like finance, procurement, tax and cyber, can help utilities drive innovation and reshape spending to better manage through the energy transition.

As companies streamline, they are investing with a more forward-looking lens, evidenced by several hundred alternative and renewable energy projects announced and at least a hundred seventy thousand new clean energy jobs created in the U.S. since the Inflation Reduction Act of 2022.

Step 2: Maximize Newly Available Capital — Such as Funding Through Grants and Tax Credits — to Accelerate the Energy Transition.

Utilities are consistently in the position of prioritizing capital investments, given the need for resiliency-related infrastructure investments and the implications for customer affordability. However, groundbreaking legislative changes during 2021-22 at both the federal and state levels are unlocking funding and financing for the sector.

Omar Al-Juburi: The rapid growth and acceptance of AI is an opportunity – and a risk – that every utility should be exploring today.

For example, the 2021 Infrastructure Investment and Jobs Act and the IRA of 2022 will eventually deliver ninety-seven billion in funding to companies researching, developing, and deploying clean energy projects and technologies.

As 2023 came to an end, the first grants were awarded from the Department of Energy — including three and a half billion earmarked for fifty-eight projects designed to expand capacity for wind and solar, harden power lines against extreme weather and develop microgrids. 

Another seven billion in grants was announced for the creation of hydrogen hubs across the country. The opportunity is far from over; clean energy grants will continue for at least five years, and the tax benefits will likely extend further.

The availability of federally funded capital for these types of groundbreaking investments should give utility executives the confidence and ability to make CapEx decisions today that will deliver significant value for years to come — especially considering that rising interest rates have made many forms of private financing more expensive.

Utilities can turn to other sources of capital, too. The last few years have seen record-setting rate case requests, but state regulators are generally willing to allow utilities to raise revenues for needed and prudent grid investments. 

Cost takeout can also help free up cash for investment and can actually lead to transformational outcomes, especially when utilities implement creative models that deliver meaningful benefits to customers around affordability and service levels. And utilities that receive grants and tax subsidies to help with grid buildouts or hardening can redeploy the capital originally planned for those activities into different projects. 

Additionally, the strategy driving capital allocations should not be overlooked. Rather than seeking IIJA grants or IRA tax benefits piecemeal, utilities should first determine which opportunities align with their long-term strategy.

Step 3: Modernize Technology to Progress the Business.

Newly available funding and financing can be leveraged to improve field and customer operations, optimize the back office, and protect the enterprise holistically, which will in turn optimize utility service.

The IIJA grants announced in late 2023 included millions of dollars for utilities to integrate distributed energy resource management systems and advanced distribution management systems that are needed for grid modernization (such as supporting interconnections of rooftop solar panels and electric vehicles) and will provide data-driven insights needed to forecast, aggregate and dispatch customer-generated electricity. 

Those needs aren't the only areas ripe for technological modernization. As utilities receive funds to enable distribution improvements, they should also evaluate how to shift funds previously earmarked for grid modernization toward other priorities across their organizations.

For example, utilities lag their peers in other industries with implementing state-of-the-art enterprise resource planning platforms and customer information systems. For years, product vendors have pushed utilities to upgrade their systems and move to cloud and managed services to increase efficiency, improve resiliency, and provide much-needed security of data and grid reliability. But adoption has been slow, primarily due to cost issues and regulatory resistance.

Those delays in modernization mean that utilities today often find themselves overwhelmed with choices and the sheer magnitude of potential investments. Trying to do too much too soon can have negative impacts on both finances and performance and make developing a workable roadmap trickier.

One major opportunity is the introduction of tools that utilize artificial intelligence (AI) to enhance the operating environment. These emerging tools are particularly relevant for customer-facing technologies that make it easier and more beneficial for consumers to understand, predict and adjust their usage.

The rapid growth and acceptance of AI is an opportunity — and a risk — that every utility should be exploring today. It can help utilities improve their efficiency, accuracy, and ability to process and analyze huge amounts of data seamlessly.

Summary

Utilities can find and implement lasting solutions to address the energy trilemma of reliability, affordability, and sustainability. At the center of utility strategies is an investment in foundational capabilities — both infrastructure and systems — that will underpin the broader industry transformation. These capabilities include managing a complex portfolio of suppliers and partners, leading with digital, adopting renewables and emerging technology at scale, building flexibility into the energy system, and putting customers and employees first.

The views reflected in this article are the views of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.