Energy Risks

7 Critical Risks Facing the Utilities Industry

Decentralization of power generation and a rapidly shrinking talent pool are risks that utility companies will continue to grapple with for years to come.
By: | July 20, 2018 • 6 min read

Change is constant in the utilities industry, but the pace of that change has accelerated in recent years and will continue to do so. Utilities must navigate a complex path while serving customers and create value for stakeholders. Here are seven critical risks facing the utilities industry.

1) Distributed Generation

Centralized power generation has been the order of business for more than a century. But new technologies have emerged to challenge that model and create options (such as rooftop solar) for distributed generation and storage of energy.

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A distributed power model makes risk-management sense in terms of regional resilience in the event of weather events, cyber attacks, etc. Legislators have largely supported this shift, often favoring tax incentives for consumers investing in resources such as solar panels.

Now, utilities are being asked to accommodate power flowing in both directions, to and from consumers, without compromising safety and reliability. These distributed resources include not just rooftop solar, but wind power, batteries and more, profoundly altering the performance of the grid.

The imbalance for utilities is that while some customers are producing all or a portion of their own power, the centralized utility is still required to support the entire infrastructure for all sources of production.

“This is a critical risk, but it’s like a glacier, it’s moving slowly,” said Dan McGarvey, managing director with Marsh’s U.S. Power & Utility Practice.

Advances in distributed generation technologies may reduce the cost of alternative power, making it more attractive to consumers and lower demand for power produced at central power stations.

Other new technologies are suppressing demand in other ways. Smart meters, smart water heaters, smart thermostats, smart appliances, etc. are increasing in popularity among both residential and commercial customers seeking to manage costs and reduce their carbon footprint.

Batteries that allow for the storage of energy rather than sending it back to the grid will also impact the amount of energy that consumers rely on utilities for.

2) Community Choice Aggregation

In a Community Choice Aggregation (CCA), or municipal aggregation, structure, individual cities, towns or communities pool the purchasing power of their residents to make independent decisions about their energy purchasing decisions. Power magazine referred to CCAs as a buying club – the “Costco of energy.”

CCAs “peel off from the regulated grid structure and purchase energy from whomever they want,” explained McGarvey. Those that remain have to bear the brunt of the cost of infrastructure investment, and maintenance, he said.

“They put billions into nuclear and coal plants with the idea that there will be long-term recovery of those assets over time. So when they go to shut down an asset with plenty of life left, there are big issues with the regulators about how they recover those stranded assets.” — Dan McGarvey, managing director, U.S. Power & Utility Practice, Marsh

CCAs are currently in practice in seven states: Massachusetts, Ohio, California, Illinois, New Jersey, New York, and Rhode Island. Typically, the goals of CCAs are to lower costs for consumers and to control the energy mix, offering a greener generation portfolio than the local utility.

Investor-owned utilities have serious concerns about the impact of customer defection. In 2107, California utilities projected that CCA programs could result in the departure of up to 80 percent of their retail customers and load.

3) Stranded Assets

There’s an ongoing push to rotate out of coal and nuclear and into natural gas, with utilities voluntarily shutting down coal plants, building natural gas plants, converting coal plants to natural gas, as well as developing their own solar and wind resources. But stranded assets pose a vexing problem for companies.

“They put billions into nuclear and coal plants with the idea that there will be long-term recovery of those assets over time,” said McGarvey. “So when they go to shut down an asset with plenty of life left, there are big issues with the regulators about how they recover those stranded assets.”

Dan McGarvey,
managing director of the U.S. power and utility practice, Marsh.

Regulators are also incented to help companies become greener, so they want to support rotation. But at the same time, they’re not going to allow a lot of the stranded asset recovery costs to be passed along to rate payers.

Decommissioning costs deepen the pain of stranded assets, said McGarvey.

“It’s bad enough that your shutting down an asset that would have 20 or 30 years of life left … you can’t just walk away from the plant, you have to treat the impact to the environment that’s been created over many years. Decommissioning is a major expense.”

4) Cyber Resilience

Utilities and other infrastructure have become increasingly attractive targets for bad actors, whether for financial or political gain. Attempts to breach systems grow, especially for systems that control critical infrastructure such as the electric grid.

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Decentralization of energy resources, and the interconnection with smart technologies is exploding the volume of potential entry points for attackers.

As the cyber threat to the grid becomes more persistent, regulators are working to ensure its security. On July 19, the Federal Energy Regulatory Commission ordered the North American Electric Reliability Corp. to broaden its Critical Infrastructure Protection reliability standards to include mandatory reporting of cybersecurity incidents that could harm the bulk electric system.

“It would be foolish to underestimate the level of sophistication of our adversaries when it comes to cyber,” said McGarvey. “We have to continue to stay a step ahead.”

5) Environmental Citizenship

Across all industries, environmental responsibility is going to become a significant investment issue, said McGarvey. Unfortunately gas and electric utilities are likely to be a disadvantage, at least at first.

The 10K of the future will include environmental impact statements, he said.

“[Investors are] going to want to see more about what’s my impact to the greater climate? What am I doing to reduce my carbon footprint and my impact on the environment? Investors are going to increasingly make that a factor in decisions about where to invest their money,” he said. “Companies with a good story will be more attractive investments.”

6) Customer Expectations

In the “traditional” customer-utility relationship, customers rarely had cause to interact with a utility unless there was a service issue or billing problem. The lack of alternatives left little urgency for utilities to focus on or invest in the customer experience.

But while power generation alternatives have been developing, retailers, financial services and other industries have been busy raising the bar on the customer experience, and changing expectations and demands.

Technology has dramatically changed what customers expect in terms of customer service applications, self-service capability, mobile engagement and even social media.

Utilities must engage customers and understand as well as meet their expectations, or customer loyalty will begin to erode.

7) Growing Talent Gap

More college students are hitching themselves to the technology train, which is shrinking the pool of graduates for other industries, including energy and utilities. According to a 2015 survey by the U.S. Department of Energy, 72 percent of energy employers reported having difficulty finding talent.

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This problem is exacerbated greatly by the aging out of the current workforce. According to the Department of Labor, as much as 50 percent of the nation’s utility workforce will retire in the next five to 10 years.

The era of the loyal worker who stays at a utility for decades, the era where workers brought their sons and grandsons into the industry, is waning, said McGarvey.

“Every kid I know who’s 17 years old wants to design video games, wants to be a coder,” he said. “They want a popcorn machine and a pool table – they want to be on the Google campus.”

Some utilities are partnering with community colleges to offer placement for students that complete related programs. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.

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But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.

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Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]