Are Australia’s electricity networks ready to innovate?

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by Michael Rath and Kumar Padisetti, Deloitte

We hear a lot about innovation, but what actually is it? It is hard to find a consistent definition and what it is meant to achieve. Innovation can be described as the creation of a new, viable business offering(1). It differs from invention in that it goes beyond products and extends to platforms, business processes and the overall enhancement of a consumer’s experience. Most importantly, innovation brings added value across all of these areas.

Australia’s electricity network businesses find themselves in the middle of an energy transition brought about by rapidly changing technology, and dynamic and evolving consumer preferences, including escalating energy prices and a regulatory environment that is grappling to respond to a changing market.

They recognise the need to innovate right now and know they need to invest more in transformational innovation, new products and markets.

The challenge however is to expand their innovation into areas they find less easy in order to overcome the difficult structural changes needed.

Innovation through the process of energy transition represents the greatest opportunity for network businesses to invest and deliver value for the consumer.

Deloitte’s Innovation in Electricity Network study(2), assessed the state of innovation within Australian electricity networks and found an urgent need for them to innovate in order to meet (and exceed) customer needs into the future.

The study also identified a need for greater investment in transformational innovation, including distributed energy resources, battery storage, multi-flow networks, demand and energy management, and advanced data analytics and automation.

Network businesses recognise the risks and opportunities presented by disruption and, in response are becoming more innovative. Innovation for network businesses is viewed as a developing capability.

They accept the need to take advantage of changes in technology, however over half of those who contributed to the study acknowledged they lack the current capability to act upon their innovation ambitions.

They feel limited by their ability to access innovation opportunities in these areas due to regulatory frameworks and organisational risk appetite.

Five other key takeaways from the study include:

1. Electricity networks have big ambitions for innovation in their businesses.

They see the need to direct a greater proportion of investment to transformational innovation in new products and markets. Today, 17 per cent of networks’ innovation investment is directed toward game-changing, transformational innovations. In five years, networks want 24 per cent of innovation investments to have a transformational ambition.

2. Network businesses need to create the right environment for innovation to deliver on their big ambitions.

61 per cent say they do not effectively measure innovation progress or outcomes to identify when they’ve done it successfully or poorly. Only 11 per cent of businesses think they are effectively recognising and rewarding staff contribution to innovation.

3. Networks’ ability to innovate is constrained by their appetite for risk and the regulatory environment in which they operate.

Australia’s regulatory framework defines areas in which regulated network activity can occur, including the types of activities that can be undertaken. In addition to regulatory requirements, businesses acknowledge a lack of appetite for risky investments. Many of the more innovative network businesses are more motivated to pursue higher risk opportunities where and when needed.

4. Network businesses are highly specialised and focus their innovation investment on core assets and business processes.

63 per cent of networks’ innovation investment is in core business. The challenge is to expand innovation effort into areas they find less comfortable in order to overcome the difficult structural changes needed and access opportunities to create value for consumers.

5. Some network businesses have well-defined and understood innovation strategies, but many also identify issues within their strategy or their ability to execute.

Strategies may articulate the networks’ ambition, but many are not clearly laying out the specific actions, roles and responsibilities needed to deliver. Our analysis found no correlation between businesses’ innovation ambitions and their ability to execute. The barriers to innovate may be significant enough to prevent the delivery of new ideas and value creation.

What is clear is businesses need to have a bold, clear innovation strategy with tangible targets and expected outcomes, freeing people up to innovate in a disciplined way that embraces risk, and accepting potential failure in the pursuit of positive and sustainable results.

Where to from here?

Ultimately, network businesses will be able to say they have a high degree of innovation maturity and capability when innovation becomes an organisational core capability and is a highly systematised effort with adaptive capabilities.

Processes, governance and resourcing will be refined, additional reinforcing mechanisms implemented to accelerate outcomes, and novel, specialised capabilities created to adapt to new opportunities.

The way we produce and use electricity is rapidly changing. It is essential that network businesses navigate this change and deliver the benefits of innovation to customers.

Their ability to lead effectively will influence Australia’s ability to address the energy trilemma – cleaner, affordable and reliable electricity.

Michael Rath

Kumar Padisetti

 

ABOUT THE AUTHORS

Michael Rath is a power sector specialist and National Leader for Energy and Resources. Kumar Padisetti is a partner and leads Deloitte Access Economics’ Energy and Resources team.

 

 

 

(1) Larry Keeley, Ryan Pikkel, Brian Quinn, Helen Walters, 2013, Ten Types of Innovation: The Discipline of Building
(2) Deloitte, 2017, Innovation in Electricity Networks

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