It feels odd to say that utilities have not yet faced disruption. After all, we have just lived through a decade of profound change in the power sector. The costs of clean energy have plummeted, and wind and solar have reached 1 terawatt in global installations and are now increasingly spreading without subsidies. Battery storage costs are down 85% since 2010 and installations are accelerating rapidly. Electric vehicles are starting to penetrate the mass market, with about two million sold in 2018 and Tesla’s Model 3 is now one of the bestselling saloon cars in the US. Distributed energy resources, small-scale photovoltaic, batteries, demand response and smart electric vehicle (EV) charging, are starting to contribute meaningfully to the power mix.
All of this adds up to a lot of change in a short period of time. Yet, despite some turmoil and reorganisation in the industry, the leading lights remain largely unchanged. If you looked at a list of the top ten western European utilities by market capitalisation in 2008, you would find that six of those companies are still leading the way today, or seven if you include RWE’s Innogy, which has taken the place of its parent company. The picture is similar in the US and other parts of the world, where incumbents have proven, perhaps surprisingly, resilient and adaptable.
Of course, the energy transition is only just getting started. According to BNEF’s New Energy Outlook, Europe can economically achieve almost 90% renewable power by 2050, up from about 40% today, with the majority of progress made before 2030. This would entail massive investments in generation and flexibility, primarily energy storage, and a continuing rethink of how power markets reward investors. It would also involve a massive move towards decentralisation, with distributed energy resources playing a large role, probably via local markets for energy and flexibility.
How should we think about disruption as these changes play out? The short answer is that it is about competencies. Clayton Christensen in his original book on disruption, The Innovator’s Dilemma, draws an important distinction between “disruptive” and “sustaining” innovations. Sustaining innovations are new technologies that are most logically adopted by existing players and integrated into their businesses. Disruptive innovations, in contrast, radically alter the basis of competition, with two implications, in my words, not his:
Disruptive innovations, therefore, require companies to develop totally new competencies in areas where they may be starting at a disadvantage and prioritise these areas above their existing, generally large and successful, businesses.
I would argue that large-scale renewables are a sustaining innovation for energy companies. They threaten existing fossil-fuelled assets, and some utilities have paid the price for moving too slowly, but the basis of competition is largely unchanged. You can win in renewables if you are good at engineering and project management, can navigate national policy, regulation and power markets, have direct or indirect access to customers, are good at procuring equipment and have a low cost of capital. There will of course be winners and losers in the renewable transition, especially considering the mix of legacy assets held by each company, but utilities and independent power producers as a group are at least as strong in these competencies as anyone else.
Will e-mobility be disruptive or sustaining for power companies? The conventional thinking is that greater power demand from EVs can only be a good thing for utilities. This is probably true, but there are legitimate questions about who will capture value from EV charging demand and infrastructure. If you believe that public and rapid charging will be critical, then what matters might be how good you are at managing retail sites where motorists pause for a break, some coffee and casual shopping. In this case, EV infrastructure could be a sustaining innovation for the downstream businesses of the oil majors. There may also be an opportunity for carmakers and telecoms companies to use charging infrastructure as a bridge to play a greater role in the power sector. While the default outcome is probably for power utilities to benefit most from transport electrification, there is still plenty to play for.
On the other hand, the decentralisation of the power sector is likely to be a disruptive innovation. If power is generated in millions of kilowatt-scale plants owned by different users, rather than dozens of gigawatt-scale plants, then the basis of competition will surely have shifted. Power will have been massively democratised, in a similar vein to Uber or Airbnb. The new thing that matters will be software for managing virtual power plants made up of millions of assets, the Internet of Things and connectivity technologies, and artificial intelligence for forecasting and optimisation, in short, digital technologies. It is not obvious that utilities have any structural advantage in these areas of competence. Even with decentralisation, though, there is a counter-argument: that the thing that matters is still a deep understanding of power markets, flexibility, trading and grid management, all areas where utilities hold sway.
Predicting the timing and speed of industry transformation is difficult, as is predicting which innovations will be disruptive or sustaining. Even after a decade of change, the energy transition is only now hitting its stride. We are just entering the steepest phase of the transition that will get us to a decarbonised, decentralised and digitalised power sector. As utilities look to the future, they will be sensibly asking themselves three questions:
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