To be future-ready, utilities companies need to adopt distributed generation and renewable energy even in times of economic uncertainty.

The utilities industry is immune to downturns. Or so goes the conventional wisdom. Come rain or come shine, customers will need water, power and heat.

While the world may escape a downturn, we are certainly in the midst of something just as powerful: a generation-defining shift away from fossil fuels toward renewables. Coupled with economic uncertainty, we’re bound to see an acceleration of consumer habits that will force even regulated utilities to move quickly toward a future reliant on a resilient power grid, distributed power generation, and renewable energy sources.

Indeed, as Syama Sunder Peesapati, SBU Head, Manufacturing, Logistics, Energy, and Utilities at Cognizant, points out, the instability is multiplied by the many interconnected dynamics affecting the industry, including a failure to modernize grids; supply shocks on the wholesale energy market; and the looming net-zero imperative. “We’re also seeing an unexpected increase in nuclear and battery power investment as companies look to bring energy to the market at the right price and to meet evolving consumer demands,” Peesapati says.

To navigate this changing environment, utilities need to build greater flexibility and resilience by making rapid grid modernization their top investment priority. Leaders must look to digital technologies that allow them to clearly map out their assets to support vital initiatives, such as predictive maintenance—the use of sensors and data analysis to proactively service equipment in the field before it fails.

At the same time, though, utilities must remap processes and digital environments to support the ongoing drive to bring customers access to energy sources they crave, at a price point they can pay, and through models that may turn the traditional outflow-focused model of the past on its head.

Aging grids and rising expectations end an era of cheap, bountiful energy

The utilities industry faces a tough macroeconomic situation, and that’s putting it mildly. Energy shocks and the explosion in wholesale energy prices in 2022 caused nearly 30 utilities to collapse in the UK alone. US consumers, even with largely regulated markets and plentiful natural resources, also felt the pinch, with consumer prices for energy increasing throughout the year. These increases have ratcheted up the pressure on a sector committed to the incremental reduction of operating costs.

To keep those operations and maintenance costs low, some companies diverted resources to capital investment programs. Infrastructure became smarter, predicting fall-over rates accurately, using precision repair techniques and extending the life cycle of power assets approaching their end-of-life. But as Peesapati points out, the challenge is that aging infrastructure required billions of dollars be spent hardening grids. As far back as 2015, the US Department of Energy advised that 70% of power transformers were 25 years of age or older, 60% of circuit breakers were 30 or older, and 70% of transmission lines were 25 or older. That means these key infrastructure components are all past the halfway points of their expected useful lives—and that’s before you factor in heightened demand.

Those legacy grids are also falling short in the face of new customer expectations for renewable electricity. They are not equipped to handle the peaks and troughs of energy generation from renewable sources—solar intensity, for example, varies day by day and week by week. Wind speed presents similar challenges. Yet utilities must try to meet this demand.

Recent research underscores this shift in consumption; in a study by Escalent, more than 40% of consumers opted for renewable generation as a first or second choice, compared with just 25% five years ago. And 45% of the public say they’re willing to pay a higher utility bill to achieve 100% renewable energy. According to David Cox, who heads up Cognizant’s North American Energy and Utility Practice, this is where utility firms need to push their transformation roadmaps to prepare for life after a downturn. “We’re seeing new generations of customers coming through and asking for the energy they consume to come from renewable sources,” Cox says. “Moreover, they’re happy to pay a higher price for it.”

But how much higher is an open question, and a difficult one for utilities to navigate. Historically, consumers and governments alike have expected power costs to remain low regardless of challenges faced by the industry, including macroeconomic factors. Utilities are also increasingly under pressure to offer flexible pricing models that allow consumers to spread their costs over longer periods; accommodate missed payments; or even forgive debts entirely. People may say they want clean energy even if they have to pay for it—but the reality is that utilities face immense pressure to hold the line on pricing. So passing the cost of clean-energy investment on to consumers is a risky proposition.

Adding renewables demands greater investment (regardless of economic conditions)

Although switching the energy generation mix is feasible, the operational challenges involved in doing so are colossal. Consumers, who have grown accustomed to getting all the energy they want exactly when they need it, without considering its source, don’t always grasp this. Cox warns that “it’s not as simple as flipping a switch. You need to develop an offering to meet growing need, integrating systems and analyzing data to ensure the energy flowing to a household or industry is only generated from renewables. Pricing models need to evolve, surging where appropriate. And that demands a whole host of sensors, tools, automation, and new pricing algorithms.” And while companies may be reluctant to invest in new digital foundations during a period of uncertainty, this is when they need it most.

While it may be hard to believe that rapid shifts in consumer behavior can place new strains on an aging infrastructure, forcing them to approach failure, that’s exactly what happened during Christmas in the UK and US last year. Frustrated electric vehicle (EV) drivers queued for hours for limited charging stations—an issue compounded by the rapidly increasing numbers of EVs on the road.

Speaking of which: yes, EV charge points do provide a new revenue stream for utilities, but they also place new demands on a stretched infrastructure. Matthew Panszczyk, Senior Director in Cognizant’s Energy and Utilities practice, believes the increase in EVs on the road will continue to grow, but “the grid simply isn’t ready,” he notes. “And given some of the big incentives for consumers to shift to EVs, utilities don’t have a lot of time to adapt.”

Panszczyk points to provisions in the US’ Inflation Reduction Act that will drive up consumer adoption of EVs. Bloomberg predicts that more than half of all passenger cars sold in the US will be EVs by 2030, thanks in part to the act. For utilities, that calls for a scale-out of modern infrastructure—including the underlying technology stack. A modern grid needs new digital foundations, including Cloud, IoT, Analytics, AI, and a raft of other critical toolsets. The utilities willing to invest in these capabilities during a period of uncertainty will be the ones that emerge as leaders when demand and economic conditions pick up.

A new wave of micro-generation will add more pressure

New consumption habits aren’t the only thing straining legacy infrastructure. Consumers are becoming micro-generators, selling power back to the grid. According to The Pew Research Center, the number of American homes with solar panels continues to increase—a trend that will accelerate with new waves of government incentives to go solar.

Engineering national and citywide grids to enable energy to flow back in and be redistributed is, of course, far different from the traditional one-way model. Implementing an effective Distributed Energy Resource Management System (DERMS) is a critical step in managing flow and ensuring predictability. According to Panszczyk, if companies can nail this reliability, the impact to their strategy is enormous. “When building out their capital investment strategy, utilities today need to think about building new power stations,” he says. “But in the future, with reliable distributed resources—such as solar panels on homes—they can leverage these assets to power cities instead.”

The impact of DERMS requires a tremendous amount of planning from industry leaders and regulatory bodies. In fact, one silver lining from the prolonged uncertainty, according to Cox, is that consumer spending on EVs and solar panels may be delayed, giving the industry more time to prepare.

Looking ahead

In the past, the utilities sector playbook during tough economic times meant hunkering down, focusing on operational costs, and waiting for the upturn. But that won’t cut it anymore.

Today’s reality is that to be future-ready, building out the infrastructure to meet evolving consumer demands means utilities leaders must move towards distributed power generation, more renewables, and a far more resilient grid. And that’s true regardless of the economic climate.

Learn more about navigating uncertainty. Register now for our webinar The Urgent Path Toward Grid Modernization. You may also visit the Utilities section of our website, or contact us.

This article was written by Ollie O’Donoghue, Senior Director, Cognizant Research.