The drive to decarbonize poses the biggest challenge of this “3D transformation” because it demands a radical shift to cleaner energy sources at the same time that everything from transportation to home appliances to heavy manufacturing shifts from fossil fuels to electricity. Though electric appliances and equipment produce less emissions than ones that run on fossil fuels, making that electricity generates a dauntingly large share of emissions. Electric power utilities account for roughly 32% of US energy-related CO2 emissions today,2 and demand for electricity is expected to rise to 5.2K terawatt hours by 2050 (up 29% from 2021 levels).3 As constrained as the sources of emission-free electricity are, its supply will need to rise dramatically.
While most utility leaders understand the magnitude of the transformation ahead of them and can paint an impressionist view of the ideal grid in 2050, fewer are on track to achieve it. Regulatory strictures inhibit the pace of action; environmental impact statements can take years to complete, and restrictions on power generation, storage, and high-voltage direct current transmission limit the potential of solutions.4
Leaders face significant financial hurdles as well. Rate increases must be staged at a “reasonable” pace, investors expect steady returns, and the limitations on where they can invest within the ecosystems they serve make it that much harder to capture value.
Given the bold aspirations for the future, and the scope of changes required, utility companies will likely find that traditional strategy-setting processes are insufficient to the task. Such processes are typically developed in “present-forward” fashion, meaning they use the present circumstances as a base and build on it incrementally, continuously refining and improving what they are currently doing today, often resulting in “better sameness.”
Developing a Vision for the Future
To meet the 3D transformation challenge, utilities are better served by a “future-back” approach to strategy. This means developing a view of the new and different world ahead and then walking it back to a portfolio of initiatives that can be progressed today. This approach is helpful for a range of strategic challenges, for example, reinventing the core business, developing a disruptive solution, or addressing macro-trends like de-carbonization and digital. It allows leaders to untether themselves from many of the fixed assumptions they are anchored to that prevent them from recognizing new possibilities.
Future-back strategy allows leaders to untether themselves from many of the fixed assumptions they are anchored to that prevent them from recognizing new possibilities.
Most utility leaders are generally aligned on the future environment. Where things often break down is their envisioned future state. Largely, we see two different archetypes and much divergence across leadership teams around which they are pursuing. Archetype I advocates for maintaining their current role in the value chain with a focus on upgrading the grid to enable higher-efficiency transmission and distribution of more sustainably-sourced electricity.
Archetype II advocates a more expansive and catalytic role for the utility in which, instead of simply sending electrons through wires from a central location, the utility plays a broader role in energy management and captures value created from an increasing shift to distributed generation – an envisioned future in which renewable energy sources like solar panels and windfarms are located closer to customers, who increasingly generate their own electricity and sell it back to the utility.
Where a company lands on the future-state identity question entails very different areas of strategic focus, so the importance of resolving this big question cannot be overstated. It is only with a clear destination in mind that the utility can assess the degree of transformation it will need, and the new ways of working and partnerships that will be necessary.
Creating the Strategic Roadmap
Having defined and aligned on their vision, leaders then turn their attention to translating that vision to strategy. This first entails defining the discrete portfolio of strategic opportunity areas that the utility will pursue, for instance, building and offering 24/7 renewable products, then moves to defining a strategic roadmap to pursue those opportunities. This strategic roadmap should not only articulate the path itself, but also surface challenges and bottlenecks that can inhibit progress.
This process requires a shift in mindset, from storyteller to engineer, that is accomplished by delineating and systemizing a set of business choices and trade-offs. This is done by “walking back” an organization’s future state to the present, setting milestones at roughly two- to three- year intervals.
For example, if the envisioned end state for a utility company is an emissions-free grid in 2050, leaders must ask themselves what will have to be true in 2047 to reach their goal in three years. What new capabilities need to be in place? How mature must each initiative be? How close to becoming self-supporting are they? Then they move back three more years and ask the same questions, and so on, until they arrive at the present, where the goals for the next three-years are simpler—proof of concept achieved, partnerships developed, key talent hired, programs launched.
Most utilities’ long-term planning processes are designed around decisions with relatively high certainty: historically, forecasting aggregated demand has been fairly predictable and there have been well-trodden paths to increase supply. Looking forward, demand is becoming less predictable and planning for new, renewable supply sources comes with a host of path-dependencies—supply constraints for wind/solar; approvals for land use; battery technology development and costs—that are more opaque. Strategic roadmaps built using traditional planning tools often assume a higher degree of certainty than leaders actually feel, leaving them with well-articulated plans that they question the feasibility of achieving.
Instead of ascribing a false sense of certainty to low-confidence assumptions, future-back planners bring them to the surface and interrogate them. As the adage says, “If you can’t fix it, feature it.” The conversations utility teams have about the future should be sobering, given the many challenges ahead, among them the sourcing of raw materials for renewables, the cost of the grid upgrades that will be needed to handle two-way electron flow (and customer resistance to the rate increases that could pay for them); NIMBY protests about wind and solar farms; regulations that ring-fence where utilities can play, and more. These are big, but not insurmountable, obstacles. However, unless they are acknowledged, they can’t be broken down systematically and planned for.
To illustrate the power of this approach, consider two examples. Innosight advised an auto company that was developing a long-term growth strategy, one pillar of which was electric vehicles. At the time, the business case for electric vehicles hinged on one key factor: the capabilities and costs of the battery. The company articulated their assumptions around the expected pace of battery technology advancement and developed a plan to accelerate it. As a result, the company has emerged as a well-positioned player in EVs, poised to capture serious growth as the market is becoming mainstream. This example is analogous, as a major path dependency on the road to a more renewable future is being able to incorporate utility-scale battery installations into the grid in a cost-effective manner.
In the utilities sector, Innosight worked with a large investor-owned utility to define their renewables strategy. A significant factor limiting the pace of the renewables transition was around the up-front investment and consequent rate increases. One of the actions this utility was taking to accelerate their clean energy transition was in offering voluntary green power options, renewable electricity products that customers could opt into and pay a surcharge to receive. We worked with the team to interview customers, design new product offerings, and develop a roadmap and forecast designed to scale with customer demand. This is one example of systematically identifying bottlenecks and deploying solutions that overcome them to accelerate progress in the energy transition.
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Creating a vision, translating it into a strategy, and then programming and implementing it systematically should not be a discrete event within an organization’s life. There is always more future ahead of us – more opportunities and more disruptions. So when companies embed future-back thinking into leadership mindsets, planning processes, and organizational cultures, they are positioned to anticipate and seize what the future brings.
About the Authors
Rob Bell is a Partner at Innosight. rbell@innosight.com
Ned Calder is a Senior Partner at Innosight. ncalder@innosight.com
Anna Veatch is a Partner at Innosight. aveatch@innosight.com
Conor Carlucci is a Senior Associate at Innosight. ccarlucci@innosight.com
Simar Grewal is a Managing Director at Huron.
Endnotes
