The Utility Innovator’s Dilemma – Part 1


[Matt Lecar][July 16, 2006]

It’s not easy to innovate in the electric utility environment. Don’t just take my word for it.  Ask any vendor who has tried to introduce a piece of new technology, no matter how proven or useful, and you’ll hear the same refrain: it’s easy to get a pilot, hard to get a volume purchase. Even with a strong internal champion, countless gatekeepers hinder adoption.

If we understand why this situation exists, then we can formulate a plan to improve it.

Understanding the innovation challenge

In his 1997 classic The Innovator’s Dilemma, Harvard Professor Clay Christensen explored why corporations – healthy, well managed, resource rich corporations full of smart people – often lose their footing when confronted with technology innovation.  Successful companies, by their very nature, have a culture to ensure that employees do what helped the company succeed in the first place. Large corporations earn the best returns by listening to existing customers and meeting known needs. They cannot afford to be distracted by small niche markets or low margin side ventures – precisely where disruptive innovations inevitably begin. 

As a regulated monopoly with inherent economies of scale, the electric utility industry has so far resisted the “attack from below” of new entrants like distributed generation. The very pattern Christensen identified represents a barrier, even for the internal innovations utility managers and regulators and customers would like to see.

Barriers arise from the nature of the utility business

The imperatives of running a utility create and reinforce conservative business processes and cultures that inhibit technology innovation. These imperatives include:

  • The scale and slow turnover of capital infrastructure
  • The complex, non-linear, interconnected nature of the grid
  • Very high reliability requirements (99.999% and up)
  • A historical lack of competition that has inhibited the development of internal capacity for marketing and commercialization
  • The dampening effect of utility regulation (limited upside benefits, exaggerated downside risks for shareholders)
  • Conflicting and shifting public policy agendas

As a result, utilities have no clear “ownership” over innovation. R&D has either been downsized or walled off from operations.  Engineers performing pilots are many layers removed from financial decision-makers who can budget for full-scale deployments. And, crucially, none of these parties alone has the tools to build the business case: to quantify and capture the potential benefits that accrue to all the divisions within the utility. When it comes to the Smart Grid, those benefits include improved operational performance, avoided outages, delayed capacity expansion, improved customer satisfaction, and reduced procurement costs.

So what’s an innovator to do?

Christensen identifies one strategy that has allowed a few corporations to maintain a leadership edge even as the technology sands shifted beneath them: setting up a separate small business unit, outside of the corporate headquarters location, with its own profit center, to focus exclusively on the new technology opportunity and, if necessary, to compete with and cannibalize the core business.

In a future column, I’ll talk about how such an innovation “skunkworks” approach might work within the utility business and share some war stories from my time at Easenergy, the North American satellite arm of Electricité de France. In the meantime, please feel free to contact me with comments, questions, or war stories of your own.