Navigant Research Blog

Make Sure You Have a Strategy before Asking Whether You Need a CDO

— March 1, 2018

Before recruiting high level staff to drive digital transformation, it is worth remembering that staff alone—regardless of their skills—are not a guarantee of success. Digitization is an enabler for business transformation. Business transformation requires a solid strategy roadmap backed by C-suite executives.

Late last year, Strategy+Business published an article that asked whether utilities need a chief digital officer (CDO). It discussed how the industry is undergoing a rapid transition that is underpinned by the digitization of previously analogue processes. The value of a utility’s enterprise data is soaring. Data is central to the energy transition. All the new business models currently being discussed—such as smart EV charging, automated demand response, advanced distribution management, and many more—rely on connected devices spitting out ever-increasing volumes of data. Data is also central to the efforts to improve the efficiency of business processes across the entire value chain. The old maxim “you can’t manage what you can’t monitor” still rings true.

Are CIOs Poorly Suited for Digital Innovation?

Strategy+Business correctly discussed how the traditional CIO role is unsuited to adopt the mantle of a CDO. CIOs have historically been in charge of large-scale IT deployments and an organization’s digital transformation can often be, somewhat naively, regarded as a simple extension to a CIO’s current job description. However, digitization is far from a standard IT project.

Digitization is the fundamental enabler of strategic change. It dramatically changes a utility’s go-to-market and relies on the convergence of business units with IT. Unfortunately, CIOs can be too heavily invested in the old ways of doing things. In my experience, a CIO’s intransigence is one of the most often cited barriers to analytics and digitization projects. The article states, “The reality is that leading digitization will require an executive—regardless of the title he or she holds—with skills and roles that depart from those of the CIO.” It goes on to list a bunch of skills that set a CDO apart from CIOs.

Job Descriptions Are All Well and Good; Just Don’t Forget the Underlying Strategy

While there is no arguing with the piece’s sentiment, I believe that the article missed the most fundamental requirement: the need for an enterprisewide analytics strategy. I am not alone in writing extensively on the gaping chasm between the executive board’s proclamations regarding a digitization strategy, and what is being done on the shop floor to effect the digital transformation. Teradata’s David Socha’s blog from 2017 is another great resource.

A CDO is a pivotal role within a company’s digitization, bringing skills—Strategy+Business lists skills including strategic thought, experience of transformation, execution, and experience with data—that many CIOs will lack. However, these will come to naught if there is no CEO-backed, companywide strategy that drives the digitization project. Who leads the digital transformation is a side issue. No one will lead it if they lack the ammunition to effect change.

Enterprisewide Strategy Must Define a Utility’s Digitization

Utilities first and foremost need a plan to guide themselves through the digital transformation. Digitization is just an enabler for wider strategic objectives. Therefore, utility executives must identify the products and services they could (not should or will) deliver in the future. They must then identify what technologies will be required to support these services, how these services will evolve over time, and the changing requirements in underlying technology.

These strategic goals will help define the roadmap that a CDO—or anyone else, for that matter—will implement. Simply recruiting someone with an impressive CV backed up with vague pronouncements from on high will take a company exactly nowhere.

 

Are Smart Devices Too Smart for Their Own Good?

— February 22, 2018

There is so much promise around how smart devices will make our lives more comfortable, convenient, efficient, and automated. These devices are supposed to learn from our lifestyle patterns, analyze this information in real-time, and perform tasks seamlessly in the background, without it even occurring to the user that all of this smart stuff is happening. I have bought into this promise, having adopted several digital assistant-enabled devices and connected products, because I can see a future when all of this tech comes together to create truly smart homes. And I’m not the only one—these futuristic ideas about tech seamlessly, automatically operating in the background of our lives can be seen in popular media like Black Mirror and Her. This future is imaginable, lingering on the horizon.

The Problem with “Smarts”

However, we are still at the precipice of the technology revolution supporting the future scenarios as seen in pop culture. Don’t get me wrong, technologies emerging today really are smart, and are already making our lives significantly better. But at this time, many these devices are not actually delivering on their promise, and they don’t work that well in our everyday lives. For example, my colleague, who is also an early adopter of smart technology, has been having issues with his ecobee3 lite. His smart thermostat has started preheating at such early hours of the morning that he wakes up before his alarm clock, sweating. ecobee customer support has suggested that the problem may be because he likes to sleep cold, at 60°F, and wake up warm, at 70°F, and that the large variance in setpoint means the thermostat must kick on the heating system well in advance to make up the difference in temperature by the time my colleague is awake. The issue makes sense logically, but ultimately my colleague shouldn’t have to compromise on his desired temperatures. A smart thermostat should be smart enough to figure it out. And his Nest isn’t any better—when the cooling season comes around, his Nest sends him alerts that it is unable to activate his cooling system, when his home doesn’t even have a cooling system. I’ve heard countless stories of people tearing smart thermostats out of the wall to replace them with programmable thermostats, never opening the digital assistant device they got for Christmas because they don’t really know what smart things it can do, and returning smart plugs for plugs with a simple timer.

As a consumer, these examples have put doubts in my mind about how smart these products really are. As a research analyst, when I attend shows like CES where some of the most impressive and innovative products are on display, it makes me skeptical about how these devices will actually perform in the home. These devices are peddled to consumers as seamless, automatic, and easy to use, but sometimes it seems we are spending more time managing them than they are managing our lives. Perhaps these devices are too smart for their own good, and consumers are not ready for how advanced these products can be—we just want the old, dumb devices that we know will work. The learning curve for smart technology is steep and we are still in an early stage of piloting and innovation, but as these technologies reach the hands of mainstream consumers, vendors need to ensure that their smart products are delivering on their promises of being smart.

 

European Utilities Will Never Tame Enterprise Data, but That’s Okay

— February 22, 2018

The last decade bore witness to the beginning of the energy transition. In 2018, the European energy transition is well underway. Without doubt, the next decade will be the most disruptive in the industry’s history. Investment in innovation is running at unprecedented levels as incumbent energy suppliers seek out the business models that will serve the 21st century customer. It is now commonplace for utilities to acquire technology companies; 10 years ago, this would have been largely unheard of. In addition, startups are bringing new products and services to market at a pace which the industry has never experienced. While the energy transition is concerned with decentralization, decarbonization, customer centricity, and increased competition, none of this will be possible without a concomitant digital transformation.

Energy Supply and Distribution Operation Will Significantly Transform

In Defining the Digital Future of Utilities, Navigant Research discussed what future business models could look like in 2030. European utilities are leading this transformation. The old utility supply businesses are rapidly shifting focus to energy services, based on a decentralized energy value chain. Many European utilities are already shifting focus away from traditional supply, recognizing that future value lies in helping customers reduce energy consumption, become greener, become more responsible for their own power needs, and create community-based business models for power generation and consumption. In the future, energy service providers will also help maximize economic returns on customers’ investments made into demand energy resources (DER). This will be done either by aggregating customers’ loads and supply to offer large-scale grid services, or by providing a platform for customers to buy and sell electricity with whomever they want.

Managing future distribution networks gets much harder with high concentrations of DER. Consequently, distribution network operators (DNOs) are undergoing their own transition to distribution system operators (DSOs), shifting focus from managing assets to active network management and the provision of distribution platforms that will be the mainstay of new energy services. This transition is essentially digital: the first step must be to improve visibility into distribution networks. Once a DSO has visibility, it can then improve control. Flexibility markets will be increasingly important in the future and their data demands are even greater. If flexibility markets expand into residential loads and supply, the DSO must allocate a time-sensitive value to each of these assets. This is not an easy task, and requires the integration of existing grid management applications, plus additional functionality not yet in existence.

Digitization Requires a Pragmatic Approach to Data Management

Neither the energy service provider nor DSO business model is viable without data. Data is critical to the energy transition and data flows are critical to electrons. European suppliers and DNOs must prepare for the energy transition by undergoing a digital transformation. While most understand the benefits, few fully understand the requirements for digital transformation, the full costs involved, or the enormity of the task.

The exponential growth of connected devices with relevance to the energy transition (devices like smart grid monitoring and control and in-home smart thermostats) create an exponential increase in data. Few, if any, utilities will ever tame this data; however, the smartest utilities will create IT infrastructure to maximize the value derived from this data. They will invest in platforms that are sufficiently flexible to stack increasingly sophisticated use cases, rather than reinvent technologies whenever requirements change.

However, this investment in platforms must be matched by more prosaic investments in data management. A digital platform is only as useful as the quality and completeness of the data on which it relies, and the analytics algorithms that provide insights.

 

Old McDonald Had a Grid, EIA AEO

— February 15, 2018

The US Energy Information Administration (EIA) released its 2018 Annual Energy Outlook (AEO) on February 6. Several short- and long-term trends warrant highlighting as follows:

  • US net energy exports occur over the projection period to 2050 in most scenarios that are modeled.
  • The US becomes a net energy exporter by 2022 in reference case, due to strong domestic production and relatively flat demand.
  • The fuel mix of energy consumption changes significantly over time, with natural gas and renewables growing while coal, nuclear, and oil decrease.

Energy Consumption by Source (Reference Case) – Quadrillion British Thermal Units

(Source: US Energy Information Administration, Annual Energy Outlook)

GDP Outpaces Energy Consumption

Residential and commercial sectors will likely have increased energy efficiency offsets growth in energy demand in residential and commercial sectors. Energy consumption grows about 0.4% per year on average, while GDP is expected to average 2.0% annual growth to 2050 in the reference case, showing a decoupling between economic expansion and energy use. Lighting displays the largest drop in both sectors due to the increasing penetration of LEDs.

On the residential side, all types of appliances are expected to become more efficient, water heating shows a sizable decrease due to heat pumps, among other reasons, while cooling actually has an increase resulting from a continued population shift to warmer parts of the US, lower heating demand, and increase cooling demand. However, increased adoption of electronic devices contributes to growth in residential use of electricity.

Electricity used for commercial HVAC equipment is likely to drop by more than one-third from 2017 to 2050 in the reference case because of increases in energy efficiency and a continued population shift toward warmer parts of the country in the South and West. Although the US has no federally-mandated commercial building energy code, state and local-level building codes reduce energy used for heating and cooling.

Use of Purchased Electricity per Household (Reference Case) – Thousand Kilowatt-Hour per Household

(Source: US Energy Information Administration, Annual Energy Outlook)

Use of Purchased Electricity per Square Foot of Commercial Floor Space (Reference Case) – Thousand Kilowatt-Hour per Square Foot

(Source: US Energy Information Administration, Annual Energy Outlook)

Natural Gas or Renewables Take the Lead

Most new electricity generation capacity will likely be natural gas or renewables after 2022 (per the reference case), as a result of low natural gas prices, declining renewables technology costs, and supportive policies, mostly at the state level. These findings lineup with Navigant Research’s recent forecasts in its Global DER Deployment Forecast Database report, which expects distributed energy resources capacity additions to outpace centralized generation going forward.

Annual Electricity Generating Capacity Additions and Retirements (Reference Case) – Gigawatts

(Source: US Energy Information Administration, Annual Energy Outlook)

Light duty vehicle fuel economy will likely improve as sales of more fuel-efficient cars grow and as electrified powertrains gain market share, but gasoline vehicles remain the dominant vehicle type through 2050 in the reference case. Combined sales of new EVs, plug-in hybrid EVs, and hybrid vehicles are likely grow in market share from 4% in 2017 to 19% in 2050.

Light Duty Vehicle Sales by Fuel Type – Millions

(Source: US Energy Information Administration, Annual Energy Outlook)

During the press conference where these results were reported, there were audience questions that challenged some of the AEO’s assumptions about renewable energy and energy efficiency growth. Such concerns have also been raised after reading the report as well. The AEO does include a number of high and low cases to try to represent the range of potential outcomes. It is important to consider the AEO as a point of reference, but not take it as gospel. As a professional market research analyst, my goal is for my analysis and forecasts to reflect the general trends in the industry and spark intelligent debate.

 

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