Will 2018 be the year of utilities transformation?

As stockbrokers like to say, past performance is no guarantee of future results. But trends such as utility business model reforms, changing fuel mix, energy battery storage, grid modernization, technology disruption, and electrification of transport offer several clues as to what is to come as we welcome in 2018.

Here are some of the highlights that are expected and areas that utilities should prioritize.

1. Getting on the “tech” wave

Last year we saw an increasing focus by utilities in new technology with numerous acquisitions in electric vehicles (EVs) and battery storage businesses, as power and utility organizations continue to diagnose their capital agenda. Increased sector convergence has become more prevalent – as utilities look to expand their focus in digital and behind-the-meter opportunities, they are increasingly finding competition from non-traditional players, such as oil and gas companies, start-ups, and technology players.

But we are yet to see a truly disruptive player enter the market. Will 2018 be the year when one of the big tech "FAMGA" companies starts to play? Any new market with big potential that takes large amounts of capital and technical expertise is ripe for domination by a notable tech player. Consider artificial intelligence (AI) for process automation and pre-emptive maintenance, self-driving electric cars, augmented and virtual reality to build the workforce of the future, and online customer experience.

So what for utilities?

More needs to be done on the road to business model, innovation and cultural transformation. Integrating new and hot technologies in the complex utilities context requires discipline, pragmatism and organization. To be successful, utility executives should define and design a strategy and operating model for innovation; manage the innovation process emphasising defined KPIs, process discipline and self-awareness; and take advantage of the innovators and build the capabilities to do this effectively. Utilities need to learn to fail, something that traditional risk averse models and regulators do not necessarily accommodate.

2. Renewables will continue to gain market share

The past year has seen significant policy changes in the power sector in major economies, especially in the shift away from coal toward renewables. Policy and market frameworks continue to play a critical role in the success of renewables, as auction schemes gain global prominence. Some 70 countries now use auctions, delivering contracted prices for solar for as little as $30/MWh in some regions. Offshore wind auctions have delivered projects without the need for external support. And prices for wind and solar energy are undercutting coal, nuclear and new gas in wholesale markets. At a residential level solar and wind prices are approaching levels where mass adoption is becoming economically viable for all.

Despite some near-term policy uncertainty – US tax reform, potential new duties on imported solar panels and policies that encourage a bigger reliance on fossil fuels (subsequently quashed by the US regulator) – the outlook for renewables remains favourable. Europe has committed to a 27% renewables share of its energy mix by 2030. Even in the US, where thirty states (red and blue) currently have a renewable portfolio standard, or renewables target, the growth in renewables can’t be ignored. Demand growth may slow in mature markets and there may be some policy bumps along the way, but decarbonisation, the electrification of transport, strong demand from multiple business sectors and an increased focus on grid resiliency suggest renewable energy is well-entrenched.

So what for utilities?

Renewables are becoming increasingly accessible. Utilities will need to operate in an increasingly complex market balancing the needs of renewable developers, regulators, system operators and a rising proportion of consumers looking at self-generation.

3. Finding value in energy storage

It’s getting harder to separate solar from storage. As solar and intermittent generation grow, so too is the growing need to find ways to store it. In response there has been a considerable effort to understand how storage works and where it will bring the most benefit with a number of trial projects and demonstrations across the US, the UK and Australia to name but a few.

As energy storage costs drop, the ability to absorb excess supply at times when it’s cheap and share it when it is more valuable is becoming more attractive. This is putting pressure on regulators to help solve the complex issue of change in the utility business model to accommodate flexible energy. Utility-based systems are expected to be the primary provider of stored energy in 2018, but home-based storage systems using lithium batteries to store solar power are likely to be the focus of more non-traditional energy companies moving into the utility space. We do not expect a huge boom in home battery/storage until the EV boom incepts on a mass scale.

So what for utilities?

Energy storage as a service is the first step toward the grid of the future, and will enable a host of other transformative technologies that will ease the transition to more sustainable, resilient operations. Unlocking the potential for the industry requires assigning value to the services delivered, and being prepared to enter into new business models and partnerships where utilities own and rent a fleet of decentralized assets.

4. Technology disrupting the energy sector

While cloud computing, social media and customer mobility have been around a while, the big game changer is the ability to bring these together with technologies like the Internet of Things (IoT), big data, machine learning and virtual reality. In my mind, AI is just going to keep getting bigger. We will see AI being used to better forecast renewables output or to determine consumer behavior, and predict peaks in demand and supply.

It will also be used to manage and predict the performance of the equipment on the grid. As drones change the way electricity networks are monitored, AI-enabled analysis is being used to recognize patterns in machine behaviour, informing field service workers of asset performance and suggesting pre-emptive measures. This human/machine collaboration can reduce asset and inspection costs, streamline workflows and maintenance process. Drones and AI technology will become mainstays to digitizing utility operations in 2018.

So what for utilities?

Digitalization is enabling smoother renewable energy integration. It will become a requirement to embed AI with cloud technology and advanced analytics. The key to success is automation to drive significant reductions in grid maintenance costs.

5. The rise of the digital grid

In this increased decentralized energy market, technology innovation is needed to immediately balance a multitude of distributed generation resources. This makes the digital grid architecture the single most important factor in the success of renewables. As the network transitions to a two-way system, grid edge visibility, sensors, smart inverters and data analytics will be critical to optimizing the network. Demand response programs that aggregate customers willing to let their load be ramped up and down or shifted in time, distributed generation, batteries and “time-of-use-pricing” – which varies the price of electricity throughout the day to encourage demand shifting – offer huge opportunities to lower peak consumption and lower operating costs

Active network management that tracks the amount of intermittent power that is being generated, in real time, plus the coordination of storage and smart home devices, will be big focus areas in 2018. New communications standards, smart controls and contracts will need to feature as we move toward the future digital grid.

So what for utilities?

There will be no regrets in accelerating digital grid investments, including smart meter installations, beyond the meter energy management, grid automation and grid modernization. Utilities must focus on deploying fast and cheaply at scale.

6. Electric vehicles are approaching a tipping point

With 2017 being such a huge breakthrough year in the transition to EVs, 2018 vehicle demand will grow faster than 2017 – driven by Europe, Brazil, Russia and other emerging markets. Battery prices continue to decrease, new models have lit-up customer interest, and last year saw strong supportive policy statements from the UK, France, India and China. Other country or city announcements are expected although the US will not be one of them. 2018 will see more announcements from EV manufacturers and oil and gas companies will continue to look for opportunities in charging schemes.

EVs will create a game-changing second “tipping point” in the evolution of the energy system (see our 3 tipping points in my blog, “Countdown to utilities’ digital reinvention”) that will require significant investment in new infrastructure. Utilities need to recognize that EVs will mean more to utilities than just increased electricity sales. Millions of EVs amount to millions of batteries that could be integrated into the system, providing more opportunities to integrate renewables, manage and optimize the grid.

So what for utilities?

Assess new business model opportunities, such as owning or servicing batteries and opportunities to expand EV charging infrastructure. Start thinking now about how EVs can be integrated into current strategy and investment decisions.

7. Emergence of the digital utility and “prosumers”

Embracing transformation requires a new way of doing business and a different cultural mindset. A growing number of utilities have set up, or will set up, new business units or a separate company, to speed up innovation and business transformation. With a desire to develop new use cases that improve the customer experience, integrate distributed energy resources, and make more informed decisions, many power companies have already taken the first steps toward digital transformation.

With the customer central to the utility service model, utilities need to re-evaluate current systems and processes to ensure they can deliver on the customer of the future's rising expectations. With the steady growth of data produced by the IoT, businesses will be turning to machine learning to process, trend, and analyze the information. Future value will be in the data-driven insights.

So what for utilities?

Utilities need a clear strategy and an associated digital strategy. Data-driven solutions, investment in digital channels, and personalized services are stages on the journey from traditional monitoring to intelligence and active control.

History has taught us that nothing is constant but change, and 2018 will be no different. I look forward to hearing from you and your key priorities for the year ahead. Happy 2018!

Please continue to let me know your thoughts and take part in the debate @EY_PowerUtility / #EYEnergy.

For more perspectives on the energy future, visit Energy Reimagined. For more EY insights on the power and utilities sector, visit ey.com/connected