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.

Advertisement




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.

Advertisement




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.

Advertisement




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

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

Advertisement




That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

Advertisement




Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

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