Why are utilities lagging behind on digitalisation?

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Why is the utility sector lagging behind other industries on digitalisation? What factors are driving utilities to digitalisation and what are some of the trends that will shape the market in the next few years? Anja Langer Jacquin, Chief Commercial Officer at technology firm depsys, shares her thoughts on the digital transformation of the energy sector.

Jacquin, who has many years of experience helping companies in various sectors to realise their digital transformation journeys, said although there have been a number of utility modernisation and technology rollout announcements, the speed at which utilities are deploying advanced solutions is slower than it should be. She said utilities are lagging behind on digitalisation.

Jacquin shared five reasons behind the lag. They include:

1. The regulated nature of the industry

According to Jacquin: “The regulated nature of the utility industry has slowed down the digitalisation of the sector because it limits competition.”

Where there is competition, Jacquin explained, utilities are bound to deploy digital technologies and innovate under efforts to improve operations and customer services.

Unlike the telecommunication industry which is deregulated, a development that has encouraged many players and investments in innovation to be made, the utility sector is still heavily regulated resulting in utilities being limited to make huge investments in digital technologies.

Although some markets, including Japan, the UK, the USA (only a dozen states), Australia, New Zealand, Chile, Argentina, El Salvador, Peru, Columbia, Brazil, and China, have deregulated their energy markets to a certain extent, there are still limitations hindering utilities’ digitalisation efforts.

“The ownership of the assets is still regulated in a way, and as such, there has not been a lot of commercial drive that can incentivize investments in innovation,” added Jacquin.

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2. Regulatory changes/regimes

Regulatory regimes avoid utilities from making smart investments, said Jacquin. An example of how regulatory regimes affect utilities’ digitalisation plans is the change in the US administration from the Trump to the Biden/Harris. For instance, utilities that filed to make investments in conventional energy projects under the Trump Administration were heavily impacted by the regime change when the Biden/Harris government (which filed an order to curb fossil fuel investments) was enacted.

3. Less appetite for advanced digital technologies

Utilities, especially in less developed economies, are only focusing on energy generation and distribution and there has been less appetite for advanced digital technologies, according to the CCO.

She said consumers in Africa, South East Asia, and the Middle East are not fully aware of smart services and as such are not demanding them from their retailers unlike in Europe, the US, Japan, and China. This has caused retailers to relax digital transformation programmes.

4. Unskilled and ageing workforce

As digitalisation is increasing, the pace at which the utility sector is equipping its workforce with new skills is behind the pace at which new technologies are being introduced, according to Jacquin. She said utilities are failing to “match technology changes with the workforce they have.

“The utility workforce is ageing. Forty per cent of the existing workforce will retire in the next 10 years and as such more workers with digital and computer science will need to be hired.”

However, the CCO warns that the sector will need to be innovative to make itself more attractive for these skilled professionals than other sectors.

5. Lack of financing

The lack of adequate funds to enable utilities to invest in new and innovative digital technologies continues to be an issue. However, Jacquin said access to funding for grid modernisation projects has improved in developed economies (Europe, North America, China, Japan, Singapore) but is still a huge constraint in developing countries.

Although multilateral banks are playing a significant role in helping accelerate utility digitalisation, more needs to be done to increase funding avenues. For instance, crowdfunding and the private sector can provide alternative funding mechanisms for the much-needed investments to increase the digitalisation of utility operations, one can argue.

Factors driving the utility sector to digitalisation

Jacquin said: “With western Europe expected to connect 70% of renewable energy resources with the grid in the coming years, utilities will need to adopt digital technologies to manage associated challenges.

“In addition, utilities can no longer rely on the way they used to run the grid in the past. Digitalisation enables them to capture real information data about what is going on in the grid environment to make informed decisions.”

She said utilities embarking on a digital transformation journey is because of a combination of factors but three points stand out:

  1. Congestion- Too high loads in a certain area resulting in energy congestion.
  2. Quality issues – Over or under high voltage issues which can harm the grid.
  3. Outage – Faults that cut connection.

Future trends

With the majority of utility investments in digital solutions directed towards the transmission sector over the past decades, Jacquin says she expects to see more projects being deployed within the energy distribution segment in the coming years.

Unlike the distribution sector where assets are of less value, she said the transmission sector is much more managed, and controlled using digital solutions because of the high value of the assets. A breakdown of a substation within the distribution line can affect the household level yet a fault within a transmission line can affect the whole country or region. As such utilities have seen the need to invest more in the transmission sector.

However, the need to ensure a stable supply of renewable energy is expected to drive utility investments in digital services including smart meters, demand response, and energy efficiency within the distribution sector. Moreover, more digitalised distribution segments are expected to help utilities to optimise their revenue collection and introduce new revenue streams such as electric vehicle charging tariffs as new business cases emerge owing to the transition to net-zero.

She said she expects net-zero emissions to be met, the decarbonisation of the energy sector and electrification of transport to become a reality but what remains a mystery is how fast.

According to Jacquin, utility adoption of digital technologies will determine how fast they will achieve their electrification and decarbonisation goals. Energy theft and congested grid networks will continue to pose challenges to utility operations. As such Jacquin urged energy companies to invest more in digital solutions, energy stakeholders to collaborate on research and development of solutions that can help address pressing challenges and regulators to enact supporting policies that can pave way for investments to be made.