Combatting The “Culture of Caution” in Regulated Utilities Industry

by Salem Baer

The utilities industry is not known for its innovation and risk-taking. While historically, the maximum that an electric utility in the United States would spend on R&D is 1% of its revenue, in reality, most investor-owned utilities spend 0%. None of this is very surprising. As Advanced Energy Economy (AEE) Sr. VP Steve Chadim describes, there is a “culture of caution” in the industry in response to limits imposed by regulators, policymakers, laws, and consumer advocates. However, recently, top companies have been combating the 100-year-old culture of caution with de-risking tactics inspired from startups.

“There is a natural tendency for regulators to be cautious because they don’t want utilities experimenting with ratepayer dollars,” says Chadim,“But that is a foreign idea to anybody in the private sector. They take risks every day.” The challenge for utilities is to begin seeing their ratepayers as customers. This shift in view is pushing companies to really understand what their customers want (something many utilities don’t know, according to Xcel Energy executive and current Center for Energy and Environment Policy and Communications Director Mike Bull).

Several utilities are investing in startups to varying degrees in order to tap into the competitive advantage younger companies have in certain technologies. American Electric Power has partnered with the venture capital firm, Braemar Energy Ventures, and National Grid, Southern Company, and Xcel Energy have partnered with VC firm Energy Impact Partners to exchange information, perform joint due diligence, and co-invest in promising ventures. In addition, a handful of utilities have formed their own venture capital arms, such as Exelon’s Constellation Technology Ventures (CTV).

However, even inside organizations with startup partnerships, internal incubators, and budgets dedicated to innovation work, the culture of caution remains one of the greatest barriers to innovative work. That’s why it’s critical that utilities recruit and encourage internal innovation champions, or intrapreneurs, capable of applying constant pressure against initiatives. In such a risk-adverse industry, typically any new business plan or product concept brought forward will be calculated as too risky by a company’s risk analysis team. As a result, utilities need someone dedicated to asking the question, “How might we overcome this challenge?” There will rarely ever be a clear path to success, as a result, to be successful in this type of intrapreneur role, one has to be persistent and have the bandwidth to continuously come up with new solutions.

Utilities can lower the risk and cost of innovation initiatives by offering services on a pilot basis and testing new products with a minimum viable product (MVP) model first. More and more, historically risk-averse industries such as utilities, insurance, and healthcare are kickstarting new product concepts with Google-Venture inspired Design Sprint: a week-long process in which a team defines and unpacks a core problem, then rapidly crafts a high-fidelity, polished, clickable prototype of the digital solution. The Sprint allows companies to “fast-forward” into the future to see their idea as a finished product that they can then use to test with customers or pitch to higher up stakeholders. This approach is allowing large organizations in well-established industries to tap into design thinking to empathize and better understand what their customers want—in a matter of days instead of months.

Electricity is still largely being delivered the same way it was when it was invented. However, massive developments in energy storage, IoT, smart cities, and big data—as well changes in customer demands around energy— are forcing the utilities industry to pay attention to their ratepayers as paying customers and innovate accordingly. Companies investing in startup technologies, fostering and enabling their internal changemakers, and embracing lean startup techniques are well positioned to ride the wave of disruption.

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