Decreasing oil and natural gas prices, regulatory transformation and technological disruption means an increase in demand for innovative utility consultants ready to help clients meet the demands of a new energy consumer.
Forty-dollar oil. LNG exports. Solar PV. Rate-based EV-charging station projects. Energy storage advancements. Duck curves. Retirement waves. Pro-sumers. New regulatory models. Innovative financing mechanisms…
Given the disruptions roiling the energy and utilities industries, it’s tempting to describe the current moment as the most transformative in the past 50 years. But this superlative is inaccurate. The spread of air conditioning in the 1960s, the fuel crises of the early 70s and electric utility deregulation each trumps the present era when it comes to magnitude of change and challenges—at least for now.
What sets the present energy-evolution moment apart is the sheer number of disruptions, most of which stem from technological advances. “Change is happening on far more fronts than it has in the past,” says Bob Zabors, Founder and CEO of Enovation Partners. “If this were a chess game, there would be many more pieces on the board—the board might even be three-dimensional… There are a series of changes that are all enabled by technology, and they’re all happening at the same time.”
As energy and utilities consultants struggle to put words to the current state of the industry, they are happily struggling to keep up with soaring customer demand for their expertise. None of these forces are creating more changes, challenges and opportunities than the oil and natural gas drilling technology that has driven the cost of those precious resources to new lows. The effects of this price swoon are rippling throughout the energy and utility industries.
“Although the development of non-traditional oil and nature gas reservoirs certainly has been discussed extensively, it would be a mis-prioritization to talk about it as old news when it still exerts such a fundamental influence on the economics of power generation,” says John McCue, vice chairman and the U.S. Energy & Resources leader at Deloitte.
Price Pressures Permeate
The sheer volume of natural gas and oil reserves that have been discovered in the U.S. combined with the relatively low cost to develop these resources has translated to lower oil and natural gas prices. These lower prices have a host of implications.
In the utilities industry, more natural gas is being used in power generation, which is in turn lowering the cost of electricity and creating economic stress on traditional lower-cost generation sources (coal and nuclear). In the oil and gas industry, lower prices are hitting bottom lines and driving new waves of consolidation, cost-reduction efforts and even retirements (see “Crew Change and Cultural Change,” opposite page).
“The price of oil is having the biggest impact on the industry,” says Teri Mendelovitz, North Highland’s Vice President and Global Energy and Utilities lead. Among oil and gas companies, the severity of this impact varies across the value chain. Oil field services companies are being “hammered pretty hard right now,” Mendelovitz notes. Further downstream, however, low prices present refining and chemical companies additional opportunities thanks to less expensive feedstock. “Overall, though,” Mendelovitz continues, “You would say that the price of oil is having a big impact, and it’s forcing a lot of the companies to look at their cost basis. They’re looking at operational efficiencies, and I also expect to see more merger activity.”
A New Oil and Gas Playbook
Although cost-cutting and consolidation represent typical responses to price drops in a highly cyclical industry, there is a growing sense among oil and gas companies that the traditional playbook will not suffice this time. John England, Vice Chairman, U.S. Oil & Gas leader for Deloitte, explains that traditional cost-reduction forms amounted to reducing a workforce by 20 percent and then having the remaining staff handle 100 percent of the previous workload.
“That’s not a sustainable cost reduction because you often wind up having to rehire those people again later,” England says. “What we’d rather do is use innovation and technology more so that they’ll get sustainable reductions. That’s one of the things we really focus our efforts on as consultants: finding innovative ways to do things better rather than just cutting heads.”
While advancements in data analytics, drilling and production technology and asset management technology give oil and gas companies exciting new efficiency-improvement alternatives to layoffs, the economics of shale extraction also are forcing companies to alter traditional cost-reduction plays.
It can take as little as 90 days or less for companies to reap returns on the capital needed to produce oil from shale; that’s significantly quicker than the three years (and billions of dollars) necessary to gain returns from deep-water drilling off-shore. As oil prices climb, companies will be able to redeploy capital to increase shale production. That’s why England and other oil and gas consulting veterans expect more of a U-shaped recovery in oil prices as opposed to a V-shaped recovery.
To take advantage of oil prices that range from, say, $50 per barrel to $70 per barrel, companies will need to keep costs down—and agility up—for a longer period of time. “I think it forces them really to take a sustained view of how they’re going to reduce costs for the long term,” England notes. Cost-reduction/operational efficiency features most prominently among the following challenges and opportunities that oil and gas companies are asking their consulting partners for help with:
• Operational Improvements
These opportunities—which are driven by technological advancements (e.g., data analytics) and a need to lower costs—exist throughout the enterprise. “This is really about the data that the company is capturing,” Mendelovitz says. “The data has to be standardized, reliable and visible at the right levels within the company so that it can be turned into information that allows you to make better decisions.”
Many of these decisions focus on making operations safer and more efficient. “So much data is now available to our clients,” says England. “If you look at upstream operations, there exists a tremendous amount of data concerning where they’re producing and the various costs that go into the production process. By applying better analytics to this data, we can help them see where they’re most efficient and where they’re experiencing pockets of inefficiency.” England reports that similar analytics can help companies reduce their asset maintenance costs while achieving higher asset uptime and reliability.
• Cyber Security
As oil and gas clients increase their reliance on data and analytics, their cyber-security risk also increases. “There is just so much data being moved around—and a lot of it is coming from remote locations—that we’re seeing more [information] security issues,” England explains. “We think cyber security is a top-of-mind issue for everybody right now.”
Consolidation activity, which often requires consulting expertise, has increased amid the industry-wide drive for greater cost efficiency. In the coming months, more enterprises (especially upstream companies) that have failed to notch those efficiencies will be ripe for acquisition at attractive prices. “I think we’ll see more distressed companies get acquired in the next six months or so,” England observes.
• Regulatory and Reputational Risk Management
Oil and gas companies remain hungry for assistance implementing and improving regulatory compliance frameworks that address industry-specific compliance requirements as well as broader business regulations, like the Foreign Corrupt Practices Act. Compliance represents another cost variable these companies need to manage from an internal efficiency perspective. The nature of regulatory risk also is changing as public perceptions of the industry fluctuate. “What we see now when there is a safety incident is a little bit different than what we saw in the past,” Mendelovitz explains. “In the past, the company that had the incident received negative publicity. Today, a single incident can spark a response against the entire industry.” When this form of reputational risk effectively targets the entire industry, the odds of an ensuing regulatory response increase. “This means that [oil and gas] companies have to come together and figure out how to rise above these challenges together,” Mendelovitz adds.
A New Utilities Customer
When James Bales, Vice President, partner—IBM Global Business Services, Energy and Utility Industry leader, has dinner with one of his utility clients, the executive pulls out his smartphone, taps an app and shows Bales his latest home energy usage levels. The client is proud of his net-zero house, electric vehicle (EV) and the fact that his energy “usage” earns him a few dollars a day. “Yes, he’s a little bit ahead of the game right now,” Bales says, “but that’s where it’s going.”
By “it,” Bales means the power and influence consumers increasingly have over their energy usage, monitoring and storage. Many utilities are scrambling to keep up with their rapidly changing customers—who, thanks to technological advances—represent one of the most important challenges and opportunities confronting utilities today. Many utilities have begun providing their customers with smartphone applications that help them track their electricity usages. Most of these apps offer relatively limited functionality, but McCue says they are more notable for what they portend (the democratization of technology) than what they currently deliver.
“The nature of customer interactions and the level of customers’ control over their interactions are changing in many industries,” McCue notes. “These technologies are starting to appear in the customer interface with power companies. There still is a way to go, but these technologies are exponential. As the power of smartphones combines with well-engineered software applications that interact with data available through energy suppliers, this information will unlock an exponential change in how customers work with their utilities.” This, of course, is far from the only change utilities consultants and their clients are working together to address; others include:
• Advancement in Storage Technology
Bales describes affordable battery-technology storage as “the ultimate game changer in the energy value chain.” The technology promises to remove the uncertainty associated with wind and solar-generated electricity. “You can start storing power affordably at a utility or you can put a battery on the side of the house,” Bales says. “People can use the power that they generate when they want to even when the weather is not cooperating.” Consumers, like Bales client, can become “pro-sumers” who produce more energy than they use. “That really changes everything,” Bales says, “and it’s not that far away.” Consulting on storage-related opportunities, Zabors notes, is complex and differs from traditional forms of utilities consulting. “To a large degree, it’s about helping people build new companies, new ventures or new business models,” he says.
• Cost Pressure
As more consumers reduce their electricity usage, or leave the grid altogether, utility revenues will decline. “Everybody is struggling with cost pressures,” says Bales. “Everybody has seen the challenge of flatter, declining revenue.” As a result, utilities need help pruning expenses while simultaneously investing in new products and services. “It’s a challenge now,” Bales adds, “but it’s going to get worse if more people opt out of the grid.”
• Regulatory Transformation
Regulatory challenges have always confronted utility companies. Today, many of these challenges are beginning to look dramatically different and increasingly uncertain. State regulations are rapidly increasing. New York is one of many states (including Hawaii and Texas) significantly revamping how it regulates utilities. The Empire State’s “Reforming the Energy Vision” (REV) strategy centers on driving clean energy innovation and “promoting more efficient use of energy, deeper penetration of renewable energy resources such as wind and solar, wider deployment of ‘distributed’ energy resources, such as micro grids, roof-top solar and other on-site power supplies, and storage.” These changes, the REV document indicates are designed to empower customers. “There is a proliferation of new and different regulatory models,” Zabors notes.
• More Data
In addition to amassing more customer data, utilities are also collecting more data from within their four walls that can be harvested to produce improvements in efficiency and reliability. As utilities embed more micro-processor-based intelligence throughout their operations, this information can help them improve asset maintenance programs, make the grid more resilient and also identify areas of efficiency and inefficiency throughout their operations. Of course, utilities need help “taking all of this information, making sense out of it and then using it to make decisions to drive results,” McCue notes. “We are working with our clients today to pull together pilot projects and test cases for how they can rapidly deploy analytical tools to take advantage of all of that information.”
• New Competitors
New and agile market entrants continue to appear. Many of these new competitors “are not bound by the limitations of traditional, regulated utilities,” Bales says. “They’re out there encouraging customers to disconnect from the grid while putting very interesting financial and business propositions in front of them.”
McCue believes that traditional utility companies can go toe-to-toe with these innovative upstarts. “I really do think that utilities have the fundamentals in place to actually be the disruptors,” he says. “They just need to change how they think about their business. They have all the fundamental advantages there, but right now they are letting others take first-mover advantage.”
Despite the rapid march of technological change, there is still time for utilities to think and behave in a more disruptive, innovative fashion. Returning to his chess analogy, Zabors stresses that the current period of energy industry upheaval has room to run. “This is not the opening game, and it’s not the end game,” he says. “It’s the middle game.”
Sidebar: Crew Change and Cultural Change
The decline in oil prices has stimulated an increase in retirements throughout the energy industry. The retirement wave is most pronounced in the oil and gas sector, where retirement-aged employees are choosing to leave the workforce rather than soldier through cost-reduction and operational efficiency efforts. This long-anticipated workforce shift is referred to as “crew change.”
“More people are moving up their retirements, so there is a need to move less senior employees up to that same level of expertise,” says Teri Mendelovitz, North Highland’s Vice President and Global Energy and Utilities lead. “And that creates a slew of challenges.” These include the need for new training and development programs, stronger leadership development and succession planning capabilities, and better knowledge management and transfer capabilities, to name a few. Most of these activities need to be reshaped in ways that are more relevant to millennials.
This likely requires more than injections of social media technology. Mendelovitz believes that energy companies will need to focus more on the “human experience” of all of their stakeholders; this includes developing ways to have more meaningful interactions with current and future millennial employees.
Utility companies are also contending with a significant wave of retirements, and a need to resonate more with millennials.
“The new generation of workers expects to work in an open-minded and proactive business culture that is looking to evolve and even to solve societal problems,” notes John McCue, a vice chairman and the U.S. Energy & Resources leader at Deloitte. “Utilities have not, traditionally, been thought of that way… I believe that the perception of utilities needs to change through their actions in order to be an attractive destination for the next generation of workers that we will need to manage the industry’s technology transformation.” —E.K.
Sidebar: New Business, and Consulting, Models Energize Utilities
There was more electricity in the air than usual during Edison Electric Institute’s annual conference this June. The event was crackling with talk of the industry’s evolution, alternative energy (rarely a hot discussion topic among the country’s largest utilities) and even some brainstorming about new business models. Heck, Telsa Motors Founder and CEO Elon Musk was given a keynote speaking slot to share his views on the industry’s future (his take: lots more distributed generation and lots more solar generation).
“We’re starting to see more and more of senior executives of utilities talking about the need for the industry to evolve and about being well-positioned to take the lead in the industry’s transition,” observes John McCue, a vice chairman and the U.S. Energy & Resources leader at Deloitte.
This was not always the case.
For decades, a portion of the utility industry viewed change and disruption as forces to defend against, rather than to mine for opportunities. The industry’s default mode of strategic planning often consisted of getting the right regulation in place to ensure a fair return and to prevent any upstart competitors from gaining ground.
While regulatory activities remain as important as ever, a host of technological and economic changes are putting more utilities on the offensive. Micro grids, smart appliances and related Internet of Things (IoT) breakthroughs, dramatically different customer expectations, progress in renewables-related technology and exciting advances in storage technology are forcing utilities to rethink their traditional playbooks.
“We’re seeing genuinely different business models being considered, both for utilities and new entrants,” says James Bales, vice president, Partner—IBM Global Business Services, Energy and Utility Industry leader, “and that’s creating some pretty interesting dynamics.”
It’s also creating new and interesting energy-consulting opportunities—some of which require new consulting models.
Consider the opportunities around advancements in battery storage, which have already turned a small number of electricity consumers into “pro-sumers” who create more energy than they use.
“You can argue that storage is the next extension of a broader move toward distributed energy resources,” says Bob Zabors, founder and CEO of Enovation Partners, a new energy and infrastructure consultancy. “The challenge from a consulting standpoint is that the existing consulting models aren’t really built to support this shift.”
That’s why Zabors, whose 25-plus years in the energy sector includes founding Bridge Strategy Group and working at Renaissance Worldwide and Booz & Company, started Enovation Partners two years ago. The firm’s approach is to bring in seasoned consultants who possess deep expertise and unique perspectives across utilities, technology, financing, regulations and other dimensions currently colliding in ways that produce complicated challenges that cry out for innovative solutions.
“The other issue with storage, from a consulting standpoint, is that it is more complex than solar,” Zabors adds, “Storage is not a single technology.” Nor was it a consistently defined technology, until Zabors’ firm, with some notable external partners, created a basis for discussing the costs and benefits of energy storage. Enovation is currently working with global investment bank Lazard (creator of the Levelized Cost of Energy Analysis) to establish a “Levelized Cost of Storage (LCOS)” standard to help utilities make informed, apples-to-apples decisions about potential storage technology investments.
Enovation Partners consultants are tracking down storage use cases, putting on energy storage workshops for utilities, constantly talking to new market entrants, conducting research, and speaking at industry conferences to ultimately “help management teams define a coherent storage strategy and decide where and when to invest” in storage, Zabors adds. “You learn a lot by being a part of the process. We’re helping early-stage companies understand the market and grow their companies, and we’re helping the incumbents figure out which technologies to use.” —E.K.