Utilities, Climate Change and Digitization: Understanding Digital Disruption in Water Utilities (Part 1 of a three-part series)
The energy and utilities landscape is being disrupted by a multitude of technological, regulatory and climate-related forces. To survive if not thrive, these companies must embrace digital thinking and technology to create new operational efficiencies, while mitigating risk to their businesses — as well to all of humankind.
For an industry that has remained largely unchanged for decades, the electric and utilities industry is being disrupted at an unprecedented scale. The cascading impact of the slow but steady rise in global temperatures has resulted in a multitude of challenges that utilities worldwide must overcome; some, in fact, have made it their raison d'être.
Given the complex nature of climate change, the disruptive impact it has on utilities varies by geography and the nature of business. Water utilities, for example, face severe challenges caused by drought, increasing urban demand and the threat of contamination due to rising sea levels. Electric utilities, on the other hand, are seeing their hitherto unchanged landscape evolve into a distributed and smart power grid, enabled by digitization. Meanwhile, regulators and customers alike are pushing for a more sustainable future, requiring utilities to quickly adapt to these changing demands.
Part one of this three-part series explores the various challenges facing utilities as they try to mitigate the impact of climate change on their business. Parts 2 and 3 focus, respectively on the ongoing efforts to meet these challenges, and future challenges and solutions.
Factors Driving Disruption
Failure to Predict Impact of Climate Change
Cape Town’s growing water shortage has in short order emerged as an existential threat to South Africa’s primary port city. The nearly four million residents of the drought-ridden city are adjusting to a life of rationed water for daily use as even near-term solutions, such as establishing desalination plants, are works-in-progress.
For cities around the world, however, Cape Town is a warning of how things could go wrong. The city failed to predict how long the drought would last, pinning its hopes on yearly rains. Other cites cannot afford to do that. By 2030, according to a UN report, the number of cities with one to five million inhabitants is projected to grow to 559, and 731 cities will have between 500,000 and one million inhabitants. Domestic water use, meanwhile, has quadrupled over the last 60 years and is expected to increase another 80% by 2030.
These numbers point toward inevitable water distribution problems. One recent study identified more than 100 cities around the world that will face severe surface water shortage by 2050, including Los Angeles, San Diego and Phoenix. Increasing temperatures will lead to greater precipitation, resulting in water shortages and the need for new distribution infrastructures. And then there are coastal areas that face the extreme threat of rising sea levels, which threaten to contaminate the fresh water supply with salt water, and wreak havoc on underground power distribution systems. For instance, as witnessed in the aftermath of hurricane Sandy, where the utility Con Edison had to spend one billion dollars to fortify its distribution network. These include coastal areas of Florida, the Carolinas, south Louisiana, and several communities along the Jersey Shore. Water utilities will need to invest in new water treatment infrastructure such as desalination plants to counter this threat.
Renewables and Regulations Have Disrupted Old Business Models
More than 75% of the world’s energy supply is provided by nonrenewable resources such as coal, oil, and natural gas. But the growth of renewables, coupled with the rise of technologies such as the Internet of things (IoT), is beginning to overturn decades-old business models. The band-aid approach to grid maintenance of fixing infrastructure as problems occur is now history. Utility companies must rethink and overhaul their business models as the utilities landscape becomes increasingly digital.
Importantly, as more customers switch to solar and other renewables, incumbent utilities are caught between a rock and a hard place. With customers moving off the grid — while feeding their surplus into the grid — utilities are looking to increase grid fees as they are left with fewer customers to spread the cost across.
Governments too have realized the importance of renewables and are busy pushing green policies. These policies not only affect utility business models but also look to address the future needs of what could well become a renewables-dominated market. Regulatory changes across the U.S. include performance-based regulations that reward utilities that meet policy requirements; adopting technologies that make distribution more cost-effective; and encouraging utilities to include energy storage in their integrated resources planning.
Underpreparedness for Climate Change-related Challenges
When an industry wary of disruptive forces faces disruption, the transition becomes a challenge for incumbents. As they embrace new technologies with the goal of creating efficiencies, utilties are only now confronting the challenges involved in this transition. According to a report by Utility Dive, existing regulatory models were the biggest challenge for electric utilities (more so for investor-owned utilities), followed by integration of emerging technologies (see Figure 1). While industries such as banking and financial services have for years faced a similar combination of disruptive forces, utilities are just getting started on what could be a long, drawn-out transition.
Similarly, a survey by American Water Works Association found that although the number of utilities incorporating the impact of climate change in their planning processes has increased, only 41% of respondents indicated that their utilities are doing this (up from 37% in 2016). Given the threat posed by climate change, and the impact it has already had, this needs to change. Water utilities could face challenges similar to electricity counterparts on the technology integration front, making it harder for them to mitigate the dual threat.
Digitization and Industrial IoT
The digital economy’s impact on the utilities landscape can be seen in shifting customer preferences. Customers now have access to apps that help them further the cause of sustainability. These include JouleBug, which uses gamification tools to encourage people to cycle to work or use reusable coffee mugs, and GreenMeter, which calculates vehicles’ fuel efficiency to help owners reduce their environmental impact.
As this behavior evolves, utilities see the need to engage with their customers digitally and invest in technologies such as advanced meter infrastructure (AMI) that can generate data. When this data is combined with analytics performed at the network’s edge, it can provide insights to improve customer engagement and satisfaction. On the distribution side, utilities are investing in grid modernization that relies on sensors to enable energy efficiencies, flexible pricing and the integration of renewable energy into the grid.
Together, AMI and grid modernization provide a platform for the industrial IoT for utilities. In the long run, this will provide utilities and consumers more control over energy consumption and help in reducing the impact of climate change.
Parts 2 and 3 of this series will focus on what electric and utilities organizations are doing to meet these challenges, as well as future challenges and solutions.
Larry Rubenacker, a Senior Director in Cognizant Consulting’s Energy & Utilities Practice, contributed to this article.