How capability assessments unlock the true cost and time needed to prepare for energy reform

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For utilities, market reform is both an exogenous and unpredictable event. Indeed, when initial reform announcements are made, many utilities’ reaction is usually a mix of shock and denial, and a tendency to delay the necessary and significant planning and preparation process.

Cultural and operational impacts

These reactions are understandable given the size and scope of change imposed upon utilities by energy reform. The two biggest impacts are:

  1. Cultural: A utility must completely alter its corporate consciousness as it moves from being a vertically integrated supplier of overall services to a specialist and competitive supplier of only one of the components of energy generation, distribution and retail.
  1. Operational: The business processes required to deal with new generation and retail entrants fairly, and on an arms-length basis, often require human capital, business process and IT capabilities which are simply not present within any part of the existing utility.

At the same time as dealing with the usual shock and denial, a utility’s management team is also faced with the decision to move boldly forward and commit the large amount of capital required to undergo the required operational and strategic business process transformation. This is made even more challenging by the fact that key elements of the new market, for example wholesale market design, business-to-business (B2B) requirements, customer protection arrangements and enabling legislation and associated guidelines may be many months away from being developed, or even discussed. 

“Light touch” capability assessments

When working with utilities during these early stages of reform, we advise them to conduct light touch diagnostic “capability assessments” of each organizational function, that are designed to understand:

  • What the business does now: How many people are employed per function? What business processes are followed in order to meet current requirements?
  • How these requirements will change, at a high level, once the market opens.  For example, network companies with call centers designed for billing and network reliability contact only may find themselves faced with significantly more inbound calls from customers or retailers seeking billing or load data in order to enable churn.
  • What capability gaps, whether in process, information technology systems, or numbers of people, are implied by these changes. How much it will cost to fill these gaps and how long it will take?

These capability assessments are much less granular than a full-scale blueprinting and transformation planning exercise, but they are extremely important in revealing the two most critical pieces of information required by a utility, both for internal high-level planning and for dealing with government:

  1. The cost of the process being imposed upon it and the likely impact on prices.
  1. The timeline of reform preparations and whether it is possible to be ready when the market opens. 

The latter, in particular, is critical information for government in understanding whether the dates announced are realistic, in order to avoid later political embarrassment. 

It's bigger than you think

EY’s extensive experience working with clients on these assessments reveals two key insights:

  1. Most governments underestimate the time, resources and budget required to prepare for energy reform and unbundling.  In other words, these processes are often bigger than people think. While the utilities sector is becoming more adept at managing change, transforming a company’s entire rationale and function within a newly competitive market is a more extensive and complex process than any other. Governments need to understand the operational, cost and timing implications of the proposed reforms to set realistic market and regulatory parameters.
  1. Utilities struggle to prepare for reform while the new market design is still in flux. It is a reality that much of the information required to undertake capability assessments will not be available when the work needs to be done, as it takes some time for government to set the rules and arrangements for the new market.

In order to plan, even at a high level, utilities need to think carefully through the ranges of requirements for each function of their business. For example, likely churn ranges based on other markets, the possible models for B2B automation, the ranges of regulations for metering and meter data etc., need to be considered to begin to form an understanding of the best and worst cases for the business. This process also allows for granular feedback to be given to governments on design features of the developing market.

The most important message for a utility leadership team upon the announcement of energy reform is: don’t wait. The sooner that a company considers the options, understands its capability gaps and outlines the cost and timing implications of needed internal and external changes, the better its chances of being positioned for success when the market opens.

For more insights on energy reform and unbundling, please visit www.ey.com/energyreform or follow @EY_EnergyReform  

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