Forward-thinking service providers to utility network operators do not want to just be hole-diggers and pipe-layers. They want to be innovators of solutions and technologies that really help their customers. Utilities are generally risk averse, so the key for innovative service providers is to offer them new ways that are proven to produce results.
In particular, more accurate asset management data has become vital for networks to enable them to confidently submit their business plans for the likes of PR14 and RIIO. This is driving supply chain innovation.
Here is just one example of what is happening out on the field as a result. Aircraft drones similar to those used in war zones such as Afghanistan are being used to monitor and examine electricity lines for vegetation management, insulator damage and ground clearance in a fraction of the time of traditional methods.
More widely, forward-thinking service providers will invest in a strong IT function, providing data integration and giving a powerful, incisive view into the current condition of the network. We are seeing that already, for example:
· highly intuitive maps of infrastructure (GIS) with high resolution images of towers, conductors and substations backed up with video and detailed attribute information;
· work schedule and dispatch software developed into innovative systems for collating data in an easy way;
· CCTV pipe monitoring in the water industry, linked to the company’s GIS, enabling staff to click on to any length of pipe on the system and be told when it was last inspected and what action – if any – is needed. Work can be prioritised and focused, again leading to less waste and more savings;
· use of real-time data to pinpoint leaks and boost efficient water use.
As technology develops, as service providers deliver ever more sophisticated offerings, and as utilities get better and better information on which to base their investment decisions, we will see a more collaborative relationship between utility network operators and their supply chains.
David Owens is chief executive of the EnServe Group. He was formerly chief executive of Thames Water and founding chief executive of 24 Seven Utility Services, the joint venture between Eastern and London Electricity.
Reintegration innovation?
Is it time to put the power utility value chain back together again? Integration can offer significant benefits: a broader customer base, less exposure to market volatility and access to shifting profit pools. However, this is not always the case. Analysis by Bain & Company shows that the benefits of vertical integration are frequently less than executives think.
Each opportunity needs to be evaluated on its own merits. The three key criteria are:
Avoiding transaction costs. Utilities that own generation and retail businesses can avoid some transaction costs, but these savings contribute only a little to the overall value – around 5 per cent to net present value for upstream integration (buying a power plant).
Hedging against volatility. Retailers face short-term increases when demand spikes – for example, in hot weather. Meanwhile too much wind or sun boosts supply and depresses electricity prices where renewables are considerable. But frequently, it is cheaper to purchase hedges against price volatility than to own the physical assets, particularly in markets where there is ample supply of electricity against peak loads.
Tapping different profit pools. Since boom and bust cycles happen at different times along the value chain, integrated utilities can use the profit available in one segment to fund lean times in another.
One North American retail utility considered these three factors and decided that upstream integration did not make economic sense. Low natural gas prices meant there was little incentive to reduce sourcing or transaction costs. On hedging, the utility’s analyses showed that it was cheaper to use options than to incur the costs of physical ownership, even in the riskiest markets it looked at.
Downstream integration, on the other hand, may be a smart strategic move where retail is rapidly deregulating. In Germany, power generation remains profitable but pressures are rising. Regulators are pushing for more power from renewables, and increased energy efficiency is dampening demand. Some utilities with large generation plants are using the current profits from that business to enter the retail end of the market, which could be more promising for the future.
Deciding whether, when and how to integrate is part of the development of a long-term strategy for every utility. Understanding the economic trade-offs should help them make smarter strategic decisions.
Mark Gottfredson, partner and Julian Critchlow, global utilities practice lead,Bain & Company
This article first appeared in Utility Week’s print edition of 2nd August July 2013.
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