With all the pressures on energy businesses today, you can often find the technology budget you need to fund innovation hidden in plain view.
Pressures on the Business
The energy industry is on an innovation roll because the pressures to change are diversifying, intensifying, and magnifying. The dramatic decline in the cost of renewables has forced many legacy energy suppliers (principally coal power generators) to reduce costs and improve productivity to match the renewables, or to be mothballed forever. New and disruptive technologies such as better battery technology have suddenly appeared to unlock new business models. COVID alone triggered an overhaul of work processes, locations of work, and work technologies just in the past 18 months. Internal business systems and processes have been reimagined so that people can work safely from home, control rooms are protected, and assets safely maintained.
Efforts to decarbonize have intensified interest in emissions detection, leak management, carbon measurement, carbon credits and offsets, and trading services. Climate change has highlighted the need to invest even further to strengthen infrastructure and improve infrastructural resilience in the face of climate extremes.
Utilities face particular challenges as they strive to be affordable, reliable, and resilient. Energy costs are rising, but consumers are resistant to paying more. The demand for clean power is growing along with growth in the absolute demand for power. A new and potentially lucrative demand source is growing with the demand for electric vehicles. Many utilities have declared their intent to be carbon neutral over the next 10-20 years while beefing up their ability to operate reliably.
With all of these pressures, and with the opportunity to invent the energy industry of the future, you would think that energy companies are pivoting all of their available resources to realize the future.
This is a lot harder than it sounds.
All the Agility of a Flying Brick
Energy companies are not the most nimble of businesses. A few years ago I helped a large pipeline company tabulate the number of performance measures that it used to run its various lines of business. The lines of business included long distance transmission pipelines, smaller feeder and connector systems, off shore gathering lines, product storage and blending facilities, energy trading, and new renewable wind farms and solar plants.
In the course of the work, I discovered a curious phenomenon. The older the business unit, the more performance measures it had. The transmission pipeline business, dating back 60 years, accumulated over 25000 different backwards-looking performance measures. My team and I had to build a little database to keep track of them all. The renewables unit, on the other hand, just 7 years old, had 100. I argue that there was no way the transmission pipeline business unit needed that many measures of its performance. Besides, who could possibly analyze all those measures each month anyway?
But that’s what happens as businesses age. They devote more and more of their resources to operating and maintaining the status quo, leaving less and less for other purposes. I admit that a considerable share of the effort in energy is driven by regulatory requirements, but frankly, organizational inertia was the bigger culprit.
The Implications for Technology Leaders
There are typically four buckets or categories of spend that account for the technology dollars that go to information technology, operations technology and digital technology.
- Operate – these funds keep the existing technology running, to produce those 25000 performance measures.
- Maintain – these funds go to keeping technologies current, patched, and resourced appropriately.
- Grow – these funds are for adding capacity to handle the growth in demand as the business grows. Business growth is either through acquisitions or organic growth.
- Innovate – these funds are for doing things differently or doing different things, such as writing an app that communicates with your customers.
Many companies in energy find themselves devoting far too much of their scarce technologist resources to operate and maintain their existing technology investments, leaving precious little for innovation. Gartner estimates that as much as 90% of the typical technology budget is used for ongoing operations and enhancements. It’s no wonder that when you step into a plant that serves the energy industry (such as a power generation plant, a chemical plant, or a gas plant) you can feel like you’ve stepped back in time.
Examples of Innovation
It’s not as if there is a shortage of innovation potential in the energy industry. Here are a few real-life examples where leading energy companies are investing in innovation:
- Smart power infrastructure—Improve power affordability and reliability by deploying smart meters throughout the grid network and intelligence tools to process the data, which lowers energy costs and provides for customer self service.
- Remote support—Lower energy cost and improve reliability by deploying augmented reality that connects the front line with remote experts, which accelerates installations, trouble shooting and return to service.
- Autonomous plants—Reduce labor costs and improve facility throughput by investing in fully autonomous predictable plants capable of self optimization, which allows operations to run facilities remotely and expand without adding headcount.
- Drone data collection—Enhance energy facilities operations by deploying data collecting drones (satellites, cameras, gages) and data interpretation support (AI and machine learning), which enables faster detection of emissions, errors and faults.
- Prediction—Enhance customer service and social resilience by using predictive models based on weather data and energy use to predict when a rolling blackout is coming, which lets customers better prepare for disruption.
- Business virtualization—Optimize facilities operations by creating a digital replica of a plant that is driven by data and its actual state over time, which allows for deeper analytics and artificial intelligence capabilities on top of the digital twin.
- Business modelling—Improve resilience in the face of climate change by modelling the overall energy system during adverse weather events, such as hurricanes, floods, heat domes and cold snaps, which lets operations return to service more rapidly.
- Energy supply—Lower energy purchase costs and improve grid reliability by linking precise geographic consumption data by supply facility and inbound weather analysis, which lets utilities purchase energy in much finer supply increments.
The challenge is finding the budget that allows for innovation.
Publicly traded energy companies have traditionally raised funds through capital markets to finance growth and innovation, but energy businesses are somewhat constrained in this regard. Capital markets are not keen on financing further expansion of fossil fuel activities out of a concern that fossil fuels may become stranded. Investors tend to be alarmed about the disruptive impacts that digital technologies have brought to bear on so many other industries, including retail, entertainment, telecommunications and finance. Energy might just be next in line.
As a consequence, there is a renewed interest in exploiting every possible way to reduce costs. Just prior to the pandemic, I met with the CFO of a very large gas company who was obsessed with keeping his new cost structure intact, which had tumbled with the decline in commodity prices in 2015. We discussed the hurdle rate that internal investments needed to attract investment. His poster child example was Gatorade. In the Texas heat, field crews drank a lot of Gatorade to keep hydrated. They recently shifted from supplying bottled Gatorade to powdered Gatorade that the crews mixed on their own. It saved them maybe $50k per year. Everything is on the table.
Spending less on hydration is one thing, but how does the technology leader adjust their spend structure to free up funds for innovation?
Here are a few tactics I’ve personally seen through to success:
- Consolidate applications supported. A big cost driver for technology support can come from the sheer number of application products that are under management. Application diversity pushes up help desk costs, integration costs, upgrade expenses, and skills diversity, and reduces nimbleness.
- Rationalize physical infrastructure and capture any scale economies available. Digital works particularly well at scale.
- Renegotiate your services contracts. Services companies are themselves deploying digital tools to reduce their costs, and it’s likely to that the services contracts reflect their pre-digital cost structures.
- Migrate to the cloud. Not only can cloud environments set you up for digital gains, but cloud costs can be a fraction of what you spend for the same thing internally.
- Revisit licences to remove unused licences and seats. You’d be amazed how many Microsoft licenses you pay for actually have no person associated with them.
- Selectively outsource support. Applications with a wide installed base across multiple industries now attract many alternative support services. These new support services operate at a scale that was unimaginable even a few years ago, and usually at a scale that the typical company cannot achieve.
If you find yourself devoting too much of your resources to keeping the lights on, consider some of the pro moves you can make to extract hidden value from your technology budget.
Check out my book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, coming soon in Russian, and available on Amazon and other on-line bookshops.
Sign up for my next book, ‘Carbon, Capital, and the Cloud: A Playbook for Digital Oil and Gas’, coming next year.
Take Digital Oil and Gas, the one-day on-line digital oil and gas awareness course.