Looking at the development pace for alternative energy sources, it’s only a question of time when a disruptive innovation wipes over the utility business. So what could be done today to keep the utilities in business, and what does the regulation have to do with it?
“Prognosing the future is always difficult - actually I consider it impossible - but in every industry, there is a vision of what the future beholds, based on the development trends and where we imagine they will take us,” Tarmo continues. Then, there are the current issues to be tackled, and a lot of the unknown between the current and the future. “But if you look both backwards and forward, you can see what you should probably do today to get to your imaginable future, or, actually, rather what you shouldn’t do, what could prevent you from getting to where you want to be.”
Food for thought: What Future Utilities should Avoid Today
Tarmo continues: “If we’re looking at the distribution network business right now, how the utilities are investing and how they’re developing their network and business, it’s very much dependent on what motivates them. And what motivates them today, in turn, comes through the regulation.” In many countries, the regulation sets notable importance on the reliability of the energy supply as well as the costs for the electricity distribution. However, if the regulation only focuses on raising motivation in these areas, it drives many network companies to over-invest, or to invest too much, too fast. Tarmo explains: “If you consider the payback time of the distribution network investments, it’s usually from 40 up to even 60 years. But considering how fast the technology is evolving right now, I’m sure it takes much less time for significant technological breakthroughs to change the industry.”
IN THE SPOTLIGHT
Of course, there are differences between countries in how the regulation takes the future aspect into account. For example, the RIIO regulation in the UK encourages utilities to future-smart decisions and network innovation by issuing half the financial benefit to the utility. Similarly in Finland, utilities above an average are rewarded, whereas those below the average face disadvantages. On the contrary, for example in Estonia, there are no incentives for the network companies to make better decisions - there’s only the current situation, the current price, and the current reliability. “So even though the regulator is to look at the current problems,” Tarmo ponders, “a lot depends also on the interest to look into the future. For the utilities, this means that to have a higher ability to shape a better future, to make something new happen, an effort should be made to affect the regulation - today.”
Tarmo suggests for utilities to consider more carefully where to invest right now, rather thinking about what not to do in order to shape an optimal future instead of focusing on resolving only the issues of today. Food for thought, indeed!
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