Three Challenges Facing Operational Excellence in Utilities

Within a regulated industry like utilities, operational excellence is a key tool in the balancing act between keeping prices for consumers down and providing value for shareholders.

However, market forces are combining to place hurdles in the way of utilities' continuous improvement efforts, which will ultimately be to the benefit of consumers.

In the UK, for example, the "Big Six" energy suppliers are facing pressure from the public and regulators to keep retail prices down and for their influence on the market to be reduced.

The energy infrastructure in the country is ageing and a quarter of the capacity will be decommissioned by 2020. Climate change legislation is placing an ever increasing burden on operations.

These factors broadly align with the three major challenges facing operational excellence in utilities across the globe: new obligations, changes to the industry landscape and a growing, more demanding customer base.

Challenge 1: Market Reforms

Utilities have often found themselves faced with market reforms, due the essential service they provide and the inevitably costs this presents to the consumer.

The aforementioned changes taking place in the UK form part of the government's wider Electricity Market Reforms, created to help the country meet its legally binding target of cutting CO2 emission by 80 percent by 2020.

Measures laid out to help achieve this include the introduction of a carbon floor price, new long-term contracts to offer investment incentives and an emissions performance standard. More than £110 billion will be required to make the infrastructure updates needed, and a proportion of this will need to come from suppliers.

Achieving operational excellence in the face of these changes presents a significant challenge.

Challenge 2: Changing Customer Expectations

The industry has always been one which is largely consumer orientated, but market changes and new innovations are now making it even more so.

More products are becoming available, competition is increasing between suppliers as the number of people connected to the grid almost reaches saturation point and utilities must be capable of maintaining operational excellence as their business continues to grow.

Offering a superior service to clients through operational excellence is a key customer service advantage which will allow companies to remain competitive, but the task is not an easy one.

As a recent Economist Intelligence Unit white paper noted, utilities are no longer competing on price, but rather on service, and this places pressure not only on supply but back office functions.

After reliability, companies in the EMEA region have the strongest focus on flexible product offerings. "This differentiator is higher ranked in EMEA than elsewhere," the report noted, yet once again flexible offerings make standardisation – a key factor in operational excellence – a challenge.

Challenge 3: Shifting Energy Landscape

Domestic market reforms are not the only industry changes taking place which are likely to affect utilities. The energy sector as a whole is experiencing a shift as it looks to reduce its CO2 emissions and climate change legislation will inevitably impact upon the sector.

For utilities, smart grids present a major operational excellence challenge.

Ernie Wallerstein, President of smart grid technology providers Zeacom, explained in a statement: "The proliferation of smart grid, smart metering and other potentially paradigm-shifting technologies, coupled with having to fight off challenges from a growing number of energy resellers, has permanently shifted the industry landscape as well as consumer expectations."

Those which manage to complete the task well will hold a much needed advantage over their competitors and have the potential to access significant levels of data on consumer energy usage to better help them increase their competitive advantage.

And here is already evidence that changes of this nature are beginning to impact upon investment priorities.

"Utilities' IT investments will continue to be driven by smart metering 2012 rollouts, operational excellence, cost reductions, and the need to comply with energy policies and regulation," Roberta Bigliani, head, EMEA, IDC Energy Insights commented following the news that IT investment by utilities in western Europe will top $9 billion (£5.5 billion) in 2011.

But while these changes certainly provide challenges for operational excellence in utilities, they also offer opportunities to excel – ultimately with the advantage of improved customer service and bottom line.