Antonio Volpin, Director, McKinsey & Company, provides insights into the capabilities he believes are, and will be, necessary for the energy industry of today and the future.
Nowhere are the pace of change and the intersection of business and societal interests more evident than in the electric-power industry, where “the way electricity is produced, distributed, stored, marketed, and regulated is being transformed and a top-down, centralized system is devolving into one that is much more distributed and interactive (Norbert Schwieters and Tom Flaherty, A Strategist’s Guide to Power Industry Transformation, strategy+business, July 29, 2015).” Power consumers now have options for how the power they use is produced, delivered, stored, and managed.
First, the capabilities required to win will be very different from today’s, states Antonio Volpin, and not every company will be able to adapt. However, he continues, the winners will be much more diverse, innovative, and dynamic organizations than yesterday’s utilities.
Two capabilities that are fundamental to the energy industry today will continue to be so in the future, but in an expanded way. On the one hand, the ability to build and operate huge infrastructures safely, reliably, and efficiently will continue to be necessary. However, he notes, in addition, energy companies will have to learn how to build and install small-scale repeatable projects at low cost – the skills necessary to be a great solar installer are very different from the skills necessary to build a giant coal plant. On the other hand, developing and maintaining good relationships with regulators and governments will remain very important, particularly as more and more utility revenues become regulated. In addition, though, concludes Antonio Volpin, utilities will need to understand and deal effectively with public opinion in order to anticipate trends beyond regulatory rules.
May the force be with you: Energy goes personal
Volpin reveals that alongside these existing capabilities, there are five fundamentally new capabilities that energy companies will need to develop. The first of these is that companies must understand users’ needs in order to build customized solutions. The widespread diffusion of distributed generation, storage, and demand-management devices means that customers will want customized solutions for specific energy needs, states Volpin, and most of the value will be created around the consumer. For example, customers with rooftop solar panels may be better served by on-site storage, rather than getting the additional power from the grid. Utilities will have to be able to manage supply- and demand-side resources together versus supply only, as is the case today.
Riding the big data wave
According to Antonio Volpin, a fundamental skill that is going to be a source of competitive advantage, if not a “ticket to play” in the industry, will be the ability to analyze data in order to make better decisions. According to McKinsey research, utilities could own the largest sets of data about their customers and their infrastructure, but currently they are among the ones that extract the least value from those data. This, insists Volpin, needs to change.
Hooked up to the bigger picture
In an industry that is becoming more global and more regulated at the same time, understanding and continuously monitoring macroeconomic risk will become absolutely instrumental. This will help utilities anticipate regulatory shocks, like the retroactive cuts of incentives to renewables that happened in Europe after the economic crisis hit the financial resources of governments and taxpayers, states Volpin.
Switching on, switching off – at short notice
Willingness to launch new businesses and technologies, he continues, even when cannibalizing existing businesses (e.g., solar versus large generation, or storage versus just about anything) will be essential. A necessary precondition for this, he insists, is the constant reallocation of capital across opportunities and geographies. Gone are the days of decades’ long strategic plans. Nowadays energy companies have to review their choices on a continuous basis and be prepared to shift resources at very short notice.
Let there be money; and there was light
Financial skills will become a source of distinctiveness. Financing will increasingly become a key success factor in winning both new customers, for example to provide capital at affordable cost to finance solar panels, and big tenders to build new infrastructure.
The energy landscape is changing in a totally unprecedented way, concludes Antonio Volpin. In the energy sector of the future, consumption and production will blur with each other, and there will be much less investment in huge centralized infrastructure and more in small-scale assets and data management.
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