The largest utilities around the globe are placing their bets on winning strategies and capabilities.
The vast and vital global power and utilities industry is undergoing a significant transformation. Over the past 30 years, electricity and gas markets have been radically reshaped, thanks to newly opened markets, disruptive competitors and technologies, and the evolution of customers from passive consumers to active participants with high expectations.
The power and utilities sector, which underpins every other industry, has traditionally focused on long-lived assets and gradual policy shifts. As a result, it has adopted changes in a piecemeal, deliberate, and sometimes regulatory-constrained fashion and is not accustomed to an accelerated pace of change. But decarbonization, decentralization, and digitization are creating a new three-dimensional challenge — and impelling faster evolution. Amid rising market uncertainty and increasing pressure on traditional fossil fuel generation, the world’s largest utilities are shifting investments from large-scale power supply into the network. New value pools are forming in areas as diverse as energy management, electric car charging, and home automation. And instead of simply charging a fixed price to deliver electricity, utilities are rolling out pricing models and services more closely associated with consumer goods and industrial companies.
The result? The industry is in the midst of extraordinary strategic ferment, as companies evaluate how they will compete in the future. Some global utilities have already dramatically diverged from their former identities.
To provide a snapshot of peer strategies and an overview of strategic actions and common challenges, we conducted a detailed analysis of the 40 largest utilities by market capitalization in North America, Europe, and Asia-Pacific, a group we call the Global Top 40 (see “The GT40,” below). We have fortified our analysis of elements such as financial capacity, organizational adaptability, market positioning, and innovation adoption with a survey of leaders and managers at more than 100 utilities, and through interviews with several chief executive officers of GT40 member companies. The results illuminate the ways in which utilities are navigating the road ahead and forging a new industry.
These organizations are also highlighting the ways in which the basis for competition is changing. Utilities historically received a valuation multiple premium for the quality of their regulatory environment, management reputation, or financial acumen. Tomorrow, the quality of their strategies may allow utilities to monetize their distinctive positioning into a higher valuation. If utilities are to be successful, their strategies need to be intentional, aggressive, and consequential despite uncertainty over industry outcomes.
Advances in power and gas market structures and disruptive technologies are causing traditional approaches to strategy design to fall short. Meanwhile, utility strategists are coping with a new systemic factor: the encroachment of competitors from adjacent (or nonadjacent) markets that incorporate energy into their market proposition. Technology OEMs, for example, are well placed to compete, and they already produce assets or equipment that customers actively use, such as Nest programmable thermostats or industrial equipment monitors. Software developers, similarly well positioned, offer an expertise-based product not replicable by utilities. And infotainment vendors, oil companies, or electric vehicle OEMs could also easily integrate energy into a larger customer value proposition. These companies bring global reach, financial strength, economies of scale, and mass-market experience to bear to capture market share in the new energy economy.
As a result, developing thoughtful strategies to preserve and extend a utility’s competitive position requires an understanding of how nontraditional competitors approach contested or emergent markets. Utilities, in fact, must fundamentally change the way they approach the development and execution of strategy. Although utilities historically thought about commercialization in windows of three to five years, industrial and consumer companies focus on the next one to two years. Strategy development now likewise needs to emphasize near-term readiness and offerings over long-term preparation and piloting. “We have stopped thinking about growth investments that take more than three years to go live,” said Francesco Starace, chief executive officer of Enel. “In light of the technological transformation, three years seemed to be…long enough to observe a drastic change in the surrounding circumstances.”