A short diversion today from the mechanics and problems of the actual utility transformation. It is important to think about how we plan utility transformation. We can’t just “let it happen”. There will be far too much disruption in electricity supplies, unacceptable to our economy and our lifestyle. So planning is fundamentally critical, non-trivial, and difficult. Let’s explore a couple of analogues from outside the utility world for planning complex situations with many unknowns.
Right, this has nothing to do with utility planning, but it has everything to do with “charting a course” through an enormous number of variables. It was not long ago that this was considered far too complex a problem to solve, but now, I simply enter my current location and where I want to go. It then calculates a few million routes (depending on distance) and charts the “best” route for me.
A friend recently told me that internally what happens in any mapping software is that the program figures out the “cost” of each route (how many discrete node points are touched along the route, with each point of lesser or greater “value” based on derived factors). Then the least “cost” route is provided. Of course, you need to know where you’re going in order to get a map. But we all have had the experience of navigating to “somewhere close” to where we want to go. We believe that as we get closer, we will gather new information and then be able to refine our end point. Such is true for utilities. As I indicated in the last post, I believe the end point is “100% renewable energy, focus on distributed generation”. But perhaps a utility puts in some “way-points” such as 50% and 80% to help guide them.
Or, as I put it, looking at the Good, the Bad, the Ugly, and the WTF. Much more traditionally used in business, the goal is to craft a business plan which allows progress on the chosen path while protecting against the less favorable external factors. Again, a utility needs to have an overall direction, a long term goal of what it wants to be. The goal does not need to be a final stage, but needs to be far enough along a path as to create optionality.
In planning I often speak of “book-ending” the study. What is the worst/most extreme negative case, what is the best / most extreme positive case? Everything has some kind of natural bounds, and often it is possible to greatly reduce the complexity of a plan by throwing out everything beyond the bookends. For instance, people in Kansas will not buy all the electric cars made, so there is a natural limit on how fast electric car adoption can occur for that utility. Or the population and use patterns of Maryland are not going to change by more than a few percentage points per year overall. (Neighborhoods may change faster, but that is a different level of planning than we are looking at.)
Scenario planning is useful to find common denominators that either will happen or can be done under all, or most of the scenarios. This can remove the “we don’t know where we’re going so we can’t do anything” excuse. Actually, even without knowing where you’re going, you can do a lot.
I apologize for the length of this, but I want to complete the discussion of “transformation methodology” and back into discussion of utility transformation itself. So bear with me please!
Example of utility transformation planning
Let’s try the Google Maps planning version for a quick example of how a utility transformation might be planned.
- Figure out where you are. When planning a route, the hardest part is often figuring out how to get on the main road. Understanding precisely where you start makes this stage far more efficient.
- Where are you? What assets does the utility have right now? This is all the generating plants, transmission, distribution, and other hard assets. Added to the physical assets are the knowledge and skills in the company. And added to that are the regulatory assets and impediments which partially govern operations.
- Then consider the capital structure of the company. Is it public power or investor owned? Does it have direct access to the markets, or is it inside a holding company? Are there unregulated subsidiaries below or next to the company?
- Where are the customers (your passengers), and what assets and liabilities do they bring to you? What do other stakeholders bring?
- Determine if you are going to break new ground or follow someone else’s map. There are advantages to both, but we all know that when we follow someone else on a trip, we do not always get to go where we want to along the way, or even at the end. When a trip really matters, doing the planning and deciding the end point is critical to a successful trip.
- Are you charting a new course or following an existing one? This is pretty easy to answer right now, since no one has made the transformation. However, parts of some strategies are becoming visible, and these should be reviewed, along with analogues from other industries (not limited to telecom!). Understanding emerging regulatory frameworks in New York, Hawaii, and California provides insight to potential areas you will pass through. Reviewing published strategies from NRG, Green Mountain Power, and others may allow fast learning from early successes and failures. No course is 100% new, but understanding the corporate risk appetite is essential. Traditionally extremely risk averse, utilities are now in a situation where “business as usual” carries more risks than many other paths forward. In light of this, the corporate risk appetite may be very different than it was.
- Where are you going? For a long trip, this is actually not the most important question. So long as the general direction is correct, the specifics don’t matter. If I know I’m traveling 4000 miles, I know I’ve got some time to figure out the last 500 miles.
- As with a real journey, any destination is temporary. Given the degree of change which the energy industry will undergo, any destination selected will be a stop on a longer voyage. As such, picking the initial destinations is not as critical. Really we just need to pick a substantially different business than the current utility model. This is not to overly downplay the importance of direction in planning. It is critical. But too often strategies are not developed because a company does not know where to aim. Taking some of the pressure off of this decision enables the entire process to move forward, and potentially (probably) iterate. We know the next temporary end point is going to have utilities substantially more involved in renewable generation. There is a growing understanding of the role that micro-grids will play. We know that poles and wires will become far more intelligent and flexible. We know enough to create a target destination.
- What possible obstacles are you going to encounter on this trip? Snow storms or other extreme weather? Flat tires? Disease? Best to think of contingencies and bring the right gear to overcome known hurdles, and some additional gear to help with the unknown, but certain, additional problems
- The industry is in transformation because little of the current business model appears to remain static. This has been caused by technology disruptions as well as a growing awareness of climate impacts. Preparing for the transformation must accommodate additional changes and disruptions. Planning for a potential cost of carbon, decreasing renewable energy costs, and a radically changed regulatory environment are critical. Preparing and accommodating increased weather-related disasters is prudent. It is realistic to prepare for a competitive environment, even in regulated geographies.
- Think about who you are bringing with you, and what you’re packing in your bags. Do you really need the extra tie and pair of shoes? Are all the existing pieces of the business going to “go on the trip”? Some pieces might only go part way, and you might pick up others along the way. Will the regulatory bodies be on the trip at the same time, or are they ahead of you or behind you?
- Every piece of the business is included at the start of the corporate transformation. At the start, some divisions will know that they will not make it to the end of the journey. The exact path of the transformation and outside influences will decide other divestments and acquisitions. Keeping the goals in mind, while remembering that the purpose of any division is to assist in making the journey continue, will allow proper continuous review of the business organization and structure, including what divisions are divested, shuttered, organically added or acquired. This will vary significantly in different geographies due to physical as well as regulatory and cultural constraints.
- Most likely some of your customers will not be along for the entire journey. Either by their choice or by yours, customers will move to other sources for electricity, on or off grid.
- Figure out what kind of vehicle(s) you need. Can you get where you’re going in a car, SUV, train, boat, plane or a combination? What kind of vehicle can you reasonably get? This is not a quick trip, and we certainly will need a sturdy vehicle!
- The consideration of whether to be regulated or unregulated is important without immediately obvious answers, but fundamental to a final position. Depending on the final outcome desired, each has attractive attributes, but very different strategies. However, it is also true that the decision does not necessarily need to be made at the initial stage. Retaining whatever structure currently exists, while pursuing strategies allowed within that framework, can not only buy some time, but also allow an initial corporate restructuring in a safer environment. The decision should be revisited at each significant stage.
- Apart from the decision on regulated versus unregulated, decisions on the breadth and content of the corporate portfolio are required. Selecting from the menu of existing options (distribution, generation, services) is the starting point, but not sufficient for the initial strategy. The corporate vehicle, regulated or unregulated, needs to be designed so that it can take in (or shed) products, services, and entire business areas most smoothly. A flattened organizational structure, transparent P&L responsibility at deep levels, and strong communication both inward and outward, are all required.
- How long do you have to get there?
- Even the fastest transformation is measured in years. What are the advantages to getting there faster or slower, ahead of, with, or behind others?
- Start the journey. Planning always continues throughout a journey, but the journey needs to start, sooner rather than later.
- If you work in utility planning, and you have read this, then you have started. Congratulations!
Back to the options and opportunities for transformation of utilities next time.