The Innovation Imperative

All over the U.S., utilities are facing flattening load growth, asset and workforce retirement cliffs, and grid reliability issues. Innovation has been the catalyst for all this change, but it is also the solution to stay ahead of it. The following essay explores the impact of innovation on energy markets, and demonstrates how utilities can adopt an innovation agenda for long-term competitive advantage.

How Did We Get Here?

The market changes currently underway in the U.S., including baseload plants retiring early, extreme pressure on the grid and shrinking customer margins to name but a few, are not new phenomena. They are a natural continuation of a transitioning energy world.

See Figure One.

Europe has been experiencing similar market shifts since the early 2000s, sped by progressive political agendas and regulatory change. Though it's not a one-to-one formula, the lessons learned in Europe can provide a blueprint for U.S. executives navigating the energy frontier.

One of the most important: there simply are no independent electricity markets. For example, when Germany changed its generation through adopting subsidized renewables en-masse, neighboring countries were impacted by higher price volatilities. Some neighboring countries seriously considered cutting grid interconnectors to be spared the ramifications of Germany's Energiewende, or energy transition.

Figure 1 - Innovation And Transformation Go Hand In Hand

In the adapt or get left behind business environment today, seeing the forest beyond the trees can be difficult. Harnessing innovation without high costs and significant risks can seem next to impossible. But it is possible; it is also necessary.

Business models based on vertically integrated value chains are losing traction. More companies are embracing renewable and distributed generation. Micro-grids and electric vehicles are being loaded onto an already-loaded grid. Both business-to-customer and business-to-business utility clients now expect customizable, digital solutions.

Now, there is a tremendous opportunity to prepare for whatever tomorrow brings by integrating proven innovation methods into your operations. Let's look at the numerous ways to harness innovation as your utility's competitive advantage.

Purpose and Examples of Innovation in the Energy Industry

There are many reasons why utilities should be innovating.

Figure 2 - Chatbots Can Offer Better And Cheaper Services

A good many executives worry about whether their current business models and operations strategies will be profitable — or even exist — in the future. The question is how to take action and when, not if.

For some, calculated business model innovation can reveal investment opportunities or operational approaches to future-proof their companies, and support their long-term interests in pursuing new lines and opening new markets. For others, innovation activities should deliver short-term benefits, such as financial improvements from upgraded offerings or improved processes.

In short, innovation can benefit short-term and long-term interests alike. It can be low risk and high reward. The following adoption strategies represent the three most common ways to innovate.

First, product innovation, as commonly seen in the consumer goods sector. Second, process innovation, with the goal to either improve customer experience or reduce delivery costs. Third, business model innovation, entailing adapting or rebuilding core business models for sustained success.

Product innovation, sometimes referred to as product development, entails introducing an improved or new product to the market. Many utilities have started offering energy saving tips personalized to a customer's energy consumption patterns. That is a small but important innovation to increase customer value-add.

Alternatively, developing entirely new products is a viable way to leapfrog previously unavoidable hurdles in the customer experience. A couple of power players in the utility sector recently started experimenting with flat rates for electricity to solve the problem of retroactive payment spikes experienced by customers at the end of yearly billing cycles. The flat rates did away with a major customer concern: unexpected, compounded payments due all at once.

As developers in the consumer goods space know, the key benefit of product innovation is an improved customer experience. Today's upsurge in digital technologies and processing power is creating ample room for utilities to continuously refine product offerings around customer needs.

A timely example of tech-enabled product innovation is online retailing of buy-as-you-need-them energy packages. In our experience, energy packages have received very high and proven customer satisfaction ratings.

Figure 3 - The Different Types Of Innovation

What's the innovation? A new product built around customer needs for cost-effective electricity and a modern user experience. What is your takeaway? Modern energy consumers are tech-empowered, independent, and eager for transparency and choice when it comes to their energy purchases. Product innovation, large and small, can improve customer satisfaction and retention.

While product innovation is readily visible, process innovation is a behind-the-scenes undertaking, revealed in new services offered to customers or cost reductions achieved in delivery cycles.

Numerous forward-thinking utilities are rolling out chatbot systems to improve the quality of customer service while reducing costs. As we know, they can do just that when implemented correctly.

See Figure Two.

Oliver Riedel: What’s the innovation? Making the move from selling energy commodities to profiting from new revenue streams in adjacent industries.

What's the innovation? Providing high quality, high touch, automatic customer service that meets customers everywhere. What is your takeaway? Customer service improvements and cost reductions can go hand in hand.

Business model innovation entails re-engineering the way in which a company delivers value. In the context of a utility, business model innovation could mean shifting from the traditional sales of kilowatt-hours or grid services to diversifying revenue sources within the energy industry, or outside it. Though business model innovations typically require longer time horizons and significant top-level investment, the return comes in fortified operations for the future.

An increasingly popular business model innovation for utilities is a partnership with installation companies and energy consultancies to offer installation and efficiency solutions. This way, utilities can move away from selling commodities to selling services.

And a growing number of progressive utilities are disrupting their own business models and building business lines in verticals outside transmission, distribution, and generation. This trend is just unfolding. But it represents possibilities for making the move from electricity sales to adjacent industries, like electric vehicle charging station retailing or comprehensive urban mobility planning and services.

Figure 4 - Both Traditional As Well As New Methods Will Be Needed

What's the innovation? Making the move from selling energy commodities to profiting from new revenue streams in adjacent industries. What can you infer from that? Business model innovation requires proactively challenging the status quo. In this instance, your own utility's status quo.

Innovation at Work in U.S. Utilities

Recent initiatives led by power players in the U.S. utility industry serve as case studies for innovating across the value-chain.

S&C: The Chicago-based S&C Electric Company has been an industry player since 1911. Today, they proudly display the slogan, "Celebrating a Century of Innovation." Troy Miller, Director of Grid Solutions, says, "We have innovation woven into our DNA. We use innovative technology to solve customers' problems that didn't previously exist."

One of their latest initiatives entailed building a grid-scale energy storage solution. Starting in 2006, S&C partnered with industry leaders to develop an integrated storage solution. Their integrated battery storage systems help to maintain supply during peak loads or outages.

Figure 5 - Being Innovative Pays Off

The key takeaway: S&C constantly challenges their existing products and reviews how they perform with customers, while also looking ahead at what problems customers will require solutions for in the future.

HECO: Another striking example is Hawaiian Electric Company's (HECO) efforts to integrate its customers' rooftop solar systems into its grid. Given the company's isolated location and the need to respond to a regulator-driven renewable agenda, HECO's charge was simple: innovate, or get left behind. Colton Ching, Senior Vice President, Planning & Technology, says, "We had a clear objective driven by our customers' demands."

HECO adopted a two-tier strategy to meet integration and customer demands. First, they worked with partners such as SolarCity, the National Renewable Energy Laboratory and Emphase to develop and implement a solution that would enable accommodation of distributed generation without grid destabilization.

This approach allowed HECO to reduce their backlog of customer rooftop systems awaiting connection from four thousand to zero in a short period. "This experience of working with seasoned innovators helped our people to embrace the innovation mindset" elaborates Colton Ching.

Second, they developed a generation, transmission, and distribution plan to remodel the infrastructure. This was done in close partnership with their customers, who helped HECO understand current and future requirements for how customers use their energy.

The key takeaway: utilities seeking to emulate HECO's success should look for partners on infrastructure upgrade projects and involve the customer in the design process, to refine user-targeted product and service offerings.

How to Build and Embed Innovation

When Edison built the world's first coal-fired power plant in lower Manhattan, there were no customers that actively demanded electricity. However, Edison was an innovator of epic proportions: a pioneer in technological applications and an expert at identifying customer needs before customers were even aware that they had them.

It is this combination of unusual technological expertise and prescient human understanding that gave birth to the utility industry, and it's a formula that remains relevant today. Here are the key best practices to build and embed Edison-inspired innovation into your operations:

Organization: Making Space for Innovation

As Steve Jobs was developing the first iMac, he recruited a team of top engineers and situated them far away from Apple's corporate offices. Free from hierarchy and layers of approval, Jobs' move paid off in spades when his vision was built and brought to market: the iMac led the personalized computing revolution and jumpstarted Apple's business trajectory.

Many companies have recognized the value of moving their innovation activities away from their core business operations, literally and figuratively. This move is built on the finding that a company cannot disrupt itself.

Just like the human body, new elements that disrupt the organization will not be accepted but instead be fought off.

Naturally, innovation activities should be organized in line with the reason why you are innovating in the first place.

If your aim is to evolve your existing business and processes, innovation activities should be practiced within an organization, with an aim to reach every employee. Creating a separate innovation unit can increase impact, but is not a prerequisite. It is also an option to move innovation into existing business units or teams. You could utilize innovation ambassadors who provide input on dedicated projects parallel to their line responsibilities.

If you want to innovate with the aim of reinventing business models or product offerings, it's optimal to move innovation activities as far away from core business operations as possible, and even create a separate legal entity to house that innovation practice. Typically, the dedicated unit is sponsored and overseen by the CEO.

If you want to go for anything in-between, it may be time to revisit your priorities. We have observed that ambiguous innovation goals tend to yield mediocre results.

See Figure Three.

Commitment and Resources: The Framework for Success

If innovation seems like more of a 'nice to have' than a necessity, just look at Texas, where utilities are facing flat or declining margins and customer retention issues due to new market entrants.

The bottom line is this: without innovation, becoming the utility of the future is just a pipe dream. Here are a couple of key ingredients to successfully introducing and getting buy-in for an innovation agenda:

Top Level Commitment: Fostering innovation needs to be a board-level priority for ensuring organizational growth. After all, cascading innovation down into an organization requires sustained effort.

Dedicated Resources: In many cases, a Chief Innovation Officer is needed to steer internal innovation efforts, supported by a team of dedicated high performers. Often, utilities are better off hiring external experts to provide specialized capabilities, and to ensure the right balance between organizational independence and significant progress.

Making Innovation Business as Usual: Given many employees' natural aversion to risk, it pays to highlight and even incentivize innovation activities and resulting benefits. For example, new digital solutions can replace tedious processes and help employees spend more time on the more rewarding parts of their jobs.

Methodologies and Culture: Failure, Forgiveness and Success

Many of the current innovation methodologies stem from IT software development work. Whether it is SCRUM, design thinking, extreme programming, or sprints, a more agile way of working can be very different from traditional business practices. How and when does it make sense to apply these methodologies?

For the utilities of the future, it will be important to master a two-pronged project management approach, combining classical management philosophy and modern methodologies. When installing a solar PV farm or upgrading grid infrastructures, classic project management methodologies like waterfall plans, budgeting, and financial controlling make sense. However, innovation activities often benefit from a sprint or a design thinking approach to yield powerful and novel results.

See Figure Four.

This leads us to the culture of the future utility, where a similar duality should be at play. Failure is undesirable when it comes to generation. But when stepping into innovation, trial, error, failure, and learning from it should be embraced as part of the development process. This is to ensure that new products, processes, and even models meet demands, and deliver.

Promoting an innovation-friendly culture starts from the top. Here is what we recommend:

Train your staff in the newest tools, such as SCRUM. The results achieved when using these techniques can be way beyond the yields of traditional methodologies. Test your innovative solutions with real users early on, to detect which features are useful and should be refined.

Normalize failure as part of a growth agenda - and reward learning from it.

Conclusion - Actionable Takeaways

Ever since its inception, the utility industry has led countless innovations to make electricity ubiquitous. But in today's landscape of rapid upheaval, baseline improvements simply aren't enough to guarantee survival.

As Einstein said: "Change starts with us. What got you here, won't get you there." One thing is clear: now is the right time to make innovation the imperative at your utility. It can be done. More important, it pays dividends: the ten most innovative companies outperform their industry peers in EBITDA, revenue and market cap growth, according to the 2016 Global Innovation 1000 study.

See Figure Five.

Reflecting on various innovation endeavors that we have accompanied and managed over the last couple of years, here are some key steps to power-up innovation at your utility:

Invest people, time and budget to make visionary ideas pay off. Work with specialized partners and test early with customers to design user-targeted solutions. Think and invent outside the hierarchical box. Embrace and incentivize failure in innovation activities, as well as the learning that comes from it. Question and challenge everything, even your best running products and operations, to find your business of the future.