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Will XaaS Transform the Utilities Industry as We Know It? Exploring the Benefits, Dynamics, and Risks of Anything as a Service Commissioned by ABB Published 1Q 2019 Michael Hartnack Research Analyst Richelle Elberg Principal Research Analyst

WHITE PAPER

Will XaaS Transform the Utilities Industry as We Know It?

©2019 Navigant Consulting, Inc. Notice: No material in this publication may be reproduced, stored in a retrieval system, or transmitted by any means, in whole or in part, without the express written permission of Navigant Consulting, Inc.

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Section 1 DIGITAL TRANSFORMATIONS ARE DRIVING UTILITIES TO RETHINK THEIR BUSINESS

1.1 Introduction

Utilities are in the midst of a foundational transformation from unidirectional power providers to energy network managers, operational controllers, and technology providers. As utility responsibilities and expectations grow, an evolution in mindset and the adoption of innovative business models must occur. Perhaps the most impactful new business model becoming available to utilities is the as a service (XaaS) model. Historically offered mainly by software vendors and IT service providers in the form of software as a service (SaaS), an XaaS model for grid-specific software applications, data management, and business processes could provide utilities with dynamic benefits in many aspects of their core business.

This white paper includes an overview of the XaaS model for hardware, software, operations, and other grid applications, and discusses the unique advantages that the model can deliver. A thorough analysis of risks and challenges is also included, and evolving market dynamics are explored in depth. Section 4 of this white paper provides recommendations for utilities that will help them benefit from XaaS models for grid applications.

1.2 Definitions

Originally employed for enterprise software initiatives, an XaaS business model is defined in this report as the delivery of a product, service, or other capability by a vendor to a customer where the vendor owns, operates, and manages the enabling hardware and software and delivers it to customers on a one to many basis. Customers consume the capability on a metered or subscription basis. Applied to grid asset management, this could be a subscription to cloud-based asset performance management software, where the vendor provides the utility access to the software application or possibly just delivers a custom report and provides recommended actions to the utility. For grid hardware, utilities could use a sensing as a service solution, with a monthly service fee resulting in the delivery of a dataset with the required grid performance indicators. This report addresses several different options for XaaS offerings being explored and deployed by utilities:

• Platform as a Service (PaaS): Applied to utilities, this can include the collection, ingestion, storage, and management of data, managed in the cloud and accessed remotely by customers. This category typically also includes cybersecurity capabilities.

• Software as a Service (SaaS): The delivery of software as a service, which can include enterprise asset management, asset performance management, workforce management, outage management, and other enterprise-scale software applications.



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• Business Process as a Service (BPaaS): The delivery and management of physical assets and associated business processes such as remote monitoring of grid equipment, asset performance optimization, cybersecurity incident monitoring, as a service offering. Ownership of the grid assets typically remains with the utility but the BPaaS model does not preclude the vendor owning the grid assets and providing services back to the utility by operating and maintaining those assets.

The most innovative and potentially most advantageous aspect of the XaaS business model involves the management of an entire business process as a service, with the utility receiving the output of the service or function being provided by the vendor, such as report, condition alert, or set of recommended actions. This allows the utility to maximize its investment in the XaaS product by capitalizing on a service provider’s business process expertise and acting only when necessary.

1.3 Market Overview

In recent years, utilities have progressed toward the increased use of service-based delivery for enterprise applications—specifically software—such as productivity and collaboration (Microsoft Office 365, Google G Suite), CRM (Salesforce) and ERP (Workday, SAP). However, most network operations, physical assets, and innovative technology deployments have remained in-house and are often purchased as CAPEX. Additionally, evolving financial schemes, shifting regulatory environments, and changing market dynamics have driven mounting interest in the XaaS model to help utilities improve flexibility in business processes while mitigating risks and reducing costs. Furthermore, the latest business and delivery models offered by innovative vendors can provide significant performance and operational benefits for power grids on which they are deployed.

Despite the success of SaaS offerings and the potential benefits provided to utilities with XaaS business models, the classic regulated utility model still favors a wait-and-see approach to adoption of new technologies and business models. Utilities often prefer to wait for technologies to mature before investing and are incentivized to capitalize their investments.



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Figure 1-1 displays a variety of grid and utility operations, and the likelihood of adoption of XaaS business model for data, software, and BPaaS models.

Figure 1-1. Heat Map of XaaS for Grid Applications

(Source: Navigant Research)

Starting from the bottom of the figure, energy efficiency and demand response (DR) represent business processes that most utilities have outsourced entirely to dedicated service providers. Most energy efficiency and DR devices are produced, installed, and often sold to customers by independent specialists, removed completely from the utility’s sphere of operational control. This is an example of a situation where service providers have taken their services directly to consumers, sidestepping utility involvement entirely.

Distributed generation (DG) and energy storage illustrate segments of the utility business profile in which utilities have given up operational control and asset ownership but have not been removed from the equation entirely. Third-party storage and DG providers and the owners of residential systems now manage entire distributed energy resources (DER) portfolios, relying on the utility only for supplemental power and grid connectivity.

Smart metering is a notable example of the deployment of SaaS solutions—for network management or meter data management systems—but utilities are typically reluctant to relinquish ownership of the meters themselves. Meter data management, mobile workforce management, and condition monitoring platforms are being provided to utilities as a service by a partner vendor. Data is often funneled further through to a cloud-based holistic asset management platform, which is typically offered as a service or as part of a capitalized license purchase agreement. For these applications, utilities typically require that asset management operations and controls stay in house. To compel utilities to relinquish control

Functional Area Business Processes Software DataT&D Hard AssetsMicrogridsVirtual Power PlantsGrid Asset OptimizationCondition MonitoringMobile Workforce Mgmt. Smart MeteringEnergy StorageDistributed GenerationDemand ResponseEnergy Efficiency

Increasing likelihood of outsourcing to service provider



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over their asset management operations, significant economic and grid performance benefits must be presented by the XaaS model.

Virtual power plants, grid equipment such as for distribution automation and fault location equipment, microgrids, and transmission and distribution (T&D) utility assets will be the last grid components to convert to an XaaS model. Some of these grid components may never fully make the switch to an XaaS delivery model, and some will take significant time to convert. These typically require significant capital investments, and a culmination of market barriers such as high costs, regulatory and financing constraints, and security and risk mitigation present significant challenges that XaaS models must overcome. These grid components typically house critical infrastructure and power availability components, where a failure or security breach would be devastating.

Additionally, critical grid infrastructure equipment is expensive, and these grid components require significant cost recovery for the financial viability of every project. An XaaS delivery model typically requires OPEX recovery mechanisms that are less favorable to the utility than CAPEX recovery.



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Section 2 APPLICATIONS FOR XAAS BUSINESS MODELS CONTINUE TO GROW

2.1 XaaS Deployment Will Grow as Its Utility Applications Expand

Applications for XaaS business models pervade nearly the entire portfolio of utility operations. From back office business processes such as billing services and customer call centers, to grid operations such as asset management and condition monitoring, grid maintenance and scheduling, outage management and service restoration, Volt/volt-ampere reactive (VAR) control and others, the potential for service delivery models continues to grow. Figure 2-1 displays each segment of the grid and the potential applications for the deployment of an XaaS business model.

Figure 2-1. Potential Applications for XaaS Offerings


As shown in Figure 2-1, it is important to understand that many utilities may be hesitant to outsource several of the applications listed, especially critical grid infrastructure, operations, and control. But if presented with an XaaS solution that can provide financial and operational benefits while limiting exposure to risk, all but the least innovative utilities will find the XaaS solution appealing.

Residential Customer

C&I Customer

Transmission

Utility Back Office Distribution

Situational AwarenessDynamic Line RatingAsset Management & Condition MonitoringGrid Health DiagnosticsDamage AssessmentTransmission Planning & Load ForecastingRenewables/Storage/DR Integration

Outage ManagementDistribution Planning & Load ForecastingGrid Optimization & Volt/VAR ControlFault Location, Isolation & Service RestorationAsset Management & Condition MonitoringRenewables/Storage/DR Integration

Customer EngagementEnergy Efficiency/DR ProgramsDynamic PricingDER PricingBilling Services

Customer EngagementEnergy Efficiency/DR Programs

Dynamic PricingDER Pricing

Billing Services

Business IntelligenceFinancial Forecasting & Planning

Human Resource PlanningCustomer Call Center

Maintenance OptimizationSupply Chain Optimization



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2.2 Utilities Stand to Benefit Significantly

The primary market driver for the adoption of XaaS business models is the potential to reduce utility expenses. Secondary drivers that are also crucial include the demand for more flexible business processes, cybersecurity, and financial risk mitigation, and reactions to the disruption caused by the Energy Cloud Transformation1. The strength and significance of nearly all drivers is increasing as these transformations develop, and utilities must adapt accordingly. Figure 2-2 illustrates the dynamic of the significant market drivers behind the adoption of an XaaS business model for grid operations.

Figure 2-2. XaaS Drivers


2.2.1 Reducing Costs Drives Utility Innovation, Regulatory Approval, and Customer Satisfaction

The most significant driver of the deployment of XaaS solutions is the benefits they bring to overall utility spend. The current utility ratemaking construct is an agreement between the utility and the regulators, allowing utilities to operate a monopoly by earning an approved rate of return on capital. If a utility can reduce overall costs to the customer and operate within established guidelines, regulators are almost certain to eventually allow utilities to recover on it. The transition to XaaS business models may take time, but eventually, the financial benefits will drive widespread adoption.

1 Navigant Research, Energy Cloud 4.0, 1Q 2018.

REDUCE UTILITY

EXPENSES

Embrace the Energy Cloud

Transformation

Streamline Operations

and FlexibilityMitigate Risks



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Other market drivers such as risk mitigation, operational enhancement, and digital transformation are only relevant to the deployment of any new business model if the utility stands to decrease overall expenses as a result. Once the potential for financial savings is established, additional market drivers such as those discussed in the following sections will propel XaaS business models to higher utility penetration rates.

2.2.1.1 Use Case: Asset Performance Management SaaS

Some utilities are already adopting the SaaS model for grid-specific applications such as asset performance management and other analytics applications. In this case, the utility provides the vendor access to asset data from sources like its enterprise asset management system, SCADA historian, and online sensors. The vendor manages this data in the cloud and provides the utility access to its data and the associated analytics. The utility retains ownership of its data and the results of the analysis and the vendor retains ownership of its software and operates and manages the software on behalf of the utility. The SaaS model can reduce the total cost of installing, operating, and managing the software by avoiding the need for additional utility data center capacity, IT staff, and data scientists. It can also provide more flexibility through increased scaling capabilities, improved fault tolerance, and cultural innovation supported by new agile principles

2.2.2 Utilities Must Continue to Embrace the Ongoing Transformation

By 2030, a mature Energy Cloud is likely in which the industry’s revenue allocation shifts significantly toward the customer. This is expected to be driven in part by an increasing shift toward renewables generation, which will likely account for most generation. In addition, peer-to-peer trading will enable small-scale producers to sell excess generation to their neighbors, sidestepping utility involvement and cutting them from the revenue stream. The distribution network is expected to use artificial intelligence (AI) and Internet of Things (IoT) to become self-healing and dynamically secure. Current utility business models and IT and operational infrastructure are not designed to accommodate these challenges. The industry and each individual utility will have to change rapidly to cope with this disruption. Changing the way grid operations, services, and supporting IT are delivered could well be part of it.

If an XaaS solutions provider approaches a utility with a cost-effective and scalable XaaS solution to streamline grid operations, and the utility turns them down, it is possible the solution can be repackaged and offered directly to consumers. This poses a significant threat to utility revenue, one that cannot be ignored. In addition to the threat of innovative technologies to utility revenue, customer satisfaction and engagement have become priorities, and innovative business models such as XaaS would allow utilities to meet growing expectations for the customer interaction experience.

2.2.2.1 Use Case: EV Charging Management

In this example of business process as a service (BPaaS), the vendor would provide the utility with comprehensive, integrated management of all electrical assets and systems in charging depots or other locations. The vendor would own, operate, and maintain the EV



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charging infrastructure, battery energy storage, protection and control system, asset management system, and energy optimization system. The utility would benefit from a new revenue stream at a lower total cost of ownership and lower risk.

2.2.3 Opportunities Exist to Streamline Operations and Flexibility

The flexibility of an XaaS model provides utilities with the unique opportunity to both improve operational performance while streamlining their own involvement. By partnering with a service provider for a cloud-hosted data analytics platform, for example, a utility can reduce personnel, avoid high priced programmers and IT technicians, and allow a specialized partner to provide a superior product than what they might have been able to support in house. Additionally, a streamlined multi-functional XaaS delivery model can decompartmentalize historically siloed utility operational departments, improving operational efficiency and cross-functional interactions without sacrificing benefits.

The most attractive XaaS vendors will be those with an established track record and demonstrated expertise in the provision of their proposed service. Many utilities lack the key skills or resources to provide all in-house solutions; innovative and successful XaaS partners must highlight this discrepancy to utilities. Most of these providers present utilities with solutions and opportunities not just to streamline operations but to improve performance, all while cutting costs. This allows utilities additional operational flexibility to commit their own resources elsewhere.

2.2.3.1 Use Case: Asset Data Management

Many utilities struggle to manage the large and disparate datasets associated with their assets. Utilities can address this challenge by using a platform as a service (PaaS) offering that enables the utility to centralize its data on a cloud platform that offers data ingestion, cleansing, storage, and management, often using automated processes. The PaaS offering can also help address data governance issues such as providing access to data for authorized users and implementation of data retention and data quality policies. Advanced capabilities may include benchmarking and other data analytics. This will become increasingly important as the number of sensors collecting data from assets increases.

2.2.4 Risk Mitigation Is Vital to All Parties

Regulators and utility leadership have historically been hesitant to relinquish total control over critical operational data, but an XaaS agreement will likely provide the utility with improved security among its other benefits. Many utilities are already using cloud-based data management and analysis tools such as asset management platforms, particularly as part of a pilot program for new grid initiatives. By deploying these systems as pilot projects, utilities can reduce upfront cost and mitigate operational and financial project risks and cost volatility if the pilot is converted to a mainstream project. Pilot programs also allow utilities to assess the viability of their partnership organization, reducing the risk of issues while the project is underway.



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Cybersecurity is among the most significant risks faced by utilities, and among the most significant obstacles that must be navigated throughout the digital utility transformation. It is also one of the most substantial areas in which utilities stand to benefit from an XaaS delivery model. Software and operational specialists often offer tighter security than a utility’s internal team could provide. The adoption of an XaaS model for nearly any component of utility operations will likely improve a utility’s overall security. Specialist solutions providers typically have staffed security teams that monitor systems 24/7, sophisticated detection tools, and security event correlation with predictive capabilities. They often offer geographically diverse locations for data hosting and analytics, with double or triple data redundancy on networking, computing, and physical grid assets. Many of the advanced grid monitoring platforms can remotely monitor T&D assets around the clock and assess potential and actual risks.

2.2.4.1 Use Case: Cybersecurity Incident Monitoring

Security incident or event monitoring is a BPaaS offering already being utilized by many utilities. The vendor provides real-time monitoring, correlation, and expert analysis of cybersecurity activity on the grid, detecting and alerting on valid threats to data and grid equipment. This type of XaaS offering can often provide both lower cost and lower risk compared to in-house options.

2.3 Significant Challenges and Risks Remain

Innovative XaaS business models offer several advantages to utilities for grid management and optimization. Despite these advantages, significant challenges have historically outweighed these market drivers, limiting the current market. This trend is shifting, but



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utilities will need to navigate several roadblocks to drive prevalent adoption of XaaS business models among utilities worldwide. Figure 2-3 highlights the main market barriers.

Figure 2-3. XaaS Barriers


2.3.1 Regulators Are Historically Resistant to Change

A pervasive attitude among utilities regulators is a resistance to fundamental change. Many regulators believe that nobody besides a utility should have control over utility operations, especially not a third-party company with interests that may differ from those of the utility. This trend must shift significantly if XaaS business models are to become the new norm. Regulators must allow the financial and operational utility benefits to outweigh their hesitancy simply because it is new. This reluctance is displayed by the higher likelihood of initiative approval if the utility can demonstrate its proven success by multiple other utilities. Regulatory approvals are commonly made in the best interest of the ratepayer, and that often includes the capital purchase of well-proven and demonstratively high performing assets for capital cost recovery. This model disincentivizes transformational innovation and prioritizes maintaining status quo.

2.3.2 Cultural Inertia Impedes Utility Innovation

Antiquated mindsets and hesitation to adopt new technologies are not just regulator issues, but utility ones as well. C-suite level utility leadership may prioritize innovations, but many operational and business unit managers are tasked solely with running their business unit effectively on a day-to-day basis, slowing the pace of innovation and narrowing the

• Regulators have historically believed that nobody besides the utility should have control over utility operations

• Decisions are often made in favor of conservative and well-proven solutions

Regulatory Resistance

• Utilities and regulators are generally hesitant to fundamentally alter significant business practices

• Common unwillingness to trust new market participants• Lack of utility motivation to improve operations and performance

Cultural Inertia

• Reliance on a service provider means exposure to risks• Cybersecurity risks increase as digital utility footprint expands• Operational complexity among multiple service providers can drive

fragmentation and reduce operational performance

Additional Risks and Complexity

• Current regulatory structures do not favor higher CAPEX and lower OPEX pricing schemes

• Cost recovery model prefers recovery of OPEX to CAPEX• Utilities may find it difficult to recover on assets they do not own

Financing and Cost Structures



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capability for improvement. Utilities commonly default to a “this is the way it has always been done” mindset, which is especially dangerous given the transformation the industry is facing. It is not uncommon for utility employees to disregard workplace efficiency improvement opportunities for the sake of “getting the job done today” and leaving innovative ideas to company leadership. This hamstrings innovation and spreads complacency throughout the organization.

The deployment of an XaaS business model can foundationally transform this mindset by integrating the service providers’ commitment to high performance product delivery and desire for constant innovation. The best XaaS offerings will be those that provide utilities with opportunities to improve and upgrade their business without significant capital investment. These types of offerings can transform the utility into a company that is a leader instead of a follower.

2.3.3 Wariness of Mounting Risks Can Suppress XaaS Integration

The perceived lack of control from outsourcing anything to a third party can become a major hurdle for utility leadership and regulators. Utilities are accustomed to building and maintaining their assets and managing their operations in house. The XaaS business model is a stark departure from traditional in-house management schemes. For utilities that do not understand the potential financial and operational benefits, switching to a subscription-based partnership may not be appealing. It is a huge responsibility for any service provider to manage of any part of the utility business, and it brings significant risks. In many instances, the sum of the benefits simply cannot outweigh the risks of deployment of an XaaS business model.

By outsourcing any component of grid and utility operations, the utility is relying on its service provider to operate within the established performance parameters and deliver the services as expected. There are instances where partners cannot and do not follow through and deliver on these expectations and agreements. Any XaaS proposal must address these concerns. Technology companies come and go; some only exist for a few years before succumbing to cost overruns or acquisitions by larger market players. Additionally, many of the most innovative XaaS vendors are small and relatively new, and utilities typically prefer to partner with established vendors to reduce exposure to risk. This fact can slow the formation of partnerships and hamper XaaS growth for utilities.

In addition to concerns about the staying power of XaaS partners, there are inherent cybersecurity and data privacy risks to providing a third-party vendor with access to secure data. This could be customer data, asset performance data, or critical real-time grid operational data. Security compromises are unacceptable to utilities. By hosting and managing data onsite with a licensed software agreement, a utility maintains direct control over the security and data privacy protocols it employs. Mounting cybersecurity concerns have made utilities hesitant to cede this control, and this will continue to be an obstacle.



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2.3.4 Financing and Cost Structure Barriers Must Be Addressed

A utility is tasked with effectively deploying capital and is then allowed by regulators to earn a fair rate of return to ensure adequate cost recovery. This is the fundamental framework of utility investment and has been since the origin of the regulated utility model. This guarantees utilities a fair and just return on investment (ROI) in both grid infrastructure and power production. Due to this, there is a strong incentive to make CAPEX investments in their network with both hardware and software infrastructure while curbing OPEX as much as possible.

The XaaS business model represents a significant departure from this model, in that the highest sum of an XaaS business agreement’s expenses will be through a recurring subscription model, and likely categorized as OPEX instead of CAPEX. There is traction for a transitional shift in accounting practices that may someday allow business to capitalize XaaS investments, but for now, utility options are limited. In August 2018, the Financial Accounting and Standards Board (FASB) approved a modification to accounting standards, allowing for many of the upfront costs such as software implementation and development costs to be capitalized, departing from traditional accounting practices. However, even with these changes, most software and other XaaS subscription costs must be classified as OPEX.

Despite these financing structures and their related challenges, utilities are still likely to pursue XaaS solutions which present them with a significant opportunity to cut overall costs. Regulators have historically allowed some degree of recovery on operations and maintenance (O&M) expenses. Given the savings potential and operational improvement of XaaS offerings, it is to be expected that this permission will expand to subscription and ongoing XaaS delivery model costs as well.



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Section 3 THE EVOLVING UTILITY BUSINESS MODEL IS REACHING A PIVOTAL TIPPING POINT

3.1 Disruptive Technologies Are Propelling Business Model Innovation

The historical utility business model centered around single-direction power delivery is being fundamentally threatened by the proliferation of DG and other DER such as EVs, DR programs, and so on. Integration of renewables and other DER and the resultant two-way power flows strain traditional grid assets and stability. Figure 3-1 illustrates this transformation from the traditional power grid to the Energy Cloud.

Figure 3-1. Grid to Cloud: The Energy Transformation


In preparation for these new network challenges, utilities are deploying sophisticated new technologies and solutions. As the legacy electromechanical grid transforms into a highly digitized platform, utilities and T&D network providers have growing opportunities to deliver innovative technologies to customers.

However, as the task of managing this ever more complex machine grows, utility resources may become strained, and customer expectations may not be met. Outsourcing certain functions or specific applications with a service provider can allow utilities to continue to provide a high performance grid to their customers, while allowing their service provider(s) to maximize the utility’s returns on investments in grid technology and deployment.



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While the digital grid transformation and addition of new grid technologies are significant in and of themselves, the impact of these technologies on overall utility operations must be considered as well. For each new grid technology, a utility must commit significant resources to the development, deployment, and management of all related hardware or software assets. This can become a financial burden while forcing utilities to attempt to provide a service they may not be fully equipped to offer.

This type of disruption is prompting utilities to consider alternative and innovative business models such as XaaS.

3.2 Digital Utility Transformations Highlight the Value of Data

As the electric grid undergoes a digital transformation, the quantity and value of collected operational and customer data is skyrocketing. Data is being collected at nearly every point on the grid, and the collection, control, and analysis of this data is becoming progressively more burdensome. In addition to the escalating quantity of data, the value that this data can bring to utilities is significant, and utilities are constantly evaluating new methods for extracting this value. Below are a few examples of the benefits provided by the enhanced grid data collection and analysis:

• T&D network management enhancements

• Power quality and grid reliability improvements

• Technical and non-technical loss identification augmentations

• Predictive and condition-based monitoring program upgrades

• The provision of detailed customer consumption reports, leading to performance and load management benefits.

The value of the data collected for each of these applications and more is reliant on the quality of the data and the number of correlations and conclusions produced by analytics. The more a utility can integrate separate but relevant datasets, the more accurate the analytics become. For these advantages, utilities are increasingly turning to SaaS solutions and cloud-based analytics deployments for cost-efficient data analytics.

3.3 Progressive Utility Mindsets Will Continue to Strengthen

Despite their historical conservative approach to innovation, utilities are not wholly averse to new business models like XaaS. Although most utilities may still be hesitant to cede grid control to a third-party provider, utility leadership and decision makers have begun to recognize the value proposition offered by XaaS models for grid applications. This represents the continuation of a recent trend for utilities but is a departure from historically reluctant and conservative approach to utility O&M.

Presently, utilities are more comfortable using cloud-based data storage and analytics for smart grid applications than outsourcing complete business processes. These cloud-based



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data solutions help reduce upfront capital cost while maintaining the value returned. The success and popularity—along with the enhanced cybersecurity protocols of XaaS products for data hosting and even minor analytics—have created a positive environment for change and for the adoption of this business model for more complex and even critical grid operational data.

Additionally, the current regulatory structure disincentivizes business model innovations, with rate structures and regulatory proceedings often favoring conservative, established approaches over pioneering initiatives. It is imperative that utility leadership continues to fight to overcome the challenges this presents.



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Section 4 CONCLUSIONS AND RECOMMENDATIONS

4.1 Recommendations for Utilities

The adoption of an XaaS business model for grid data, software, and business processes is one that can dynamically transform utility operations from top to bottom. Minimizing overall costs while maximizing grid impacts and challenging existing regulatory frameworks are key to the success of any utility business model. Exploring an XaaS approach can help utilities accomplish these goals. This section discusses several recommendations for utilities as they seek to integrate new business models.

A common theme among these recommendations is the need for utility perseverance and commitment to the deployment of innovative business models despite the barriers that currently stand in the way. Each of the challenges discussed in this report will fade as more utilities adopt XaaS models and the benefits are repeatedly demonstrated. Financial and regulatory institutions are designed to serve in the best interest of both the ratepayer and the utility, and they will continue to adapt to the changes brought about by the Energy Cloud Transformation to facilitate innovation.

4.1.1 Remain Committed to Overcoming Obstacles

As with any new business transformation, there are significant risks that must be understood and addressed with the deployment of an XaaS business model. By outsourcing anything, from critical asset health data and analysis to grid maintenance schedules and even billing and payment programs, utilities leave themselves exposed to the performance of their provider. However, utilities should remain confident and aggressive. The performance of the best XaaS solutions providers in the market is extremely high, and often exceeds the capabilities of the utilities themselves.

In addition to operational and performance risks, the adoption of an XaaS service model is contingent on the acceptance of potential financial and regulatory risks. Utility regulators typically prefer established programs and initiatives and have historically been hesitant to support fundamental utility business model innovation, especially those with increased operational risks. In the pursuit of innovative business models such as XaaS, utilities must understand and accept the challenges ahead of them and focus on demonstrating the benefits, financially and operationally, of these initiatives.

4.1.2 Recognize and Maximize the Value of Data

A utility must invest in its data collection and management infrastructure if it is to truly survive and thrive through the digital utility transformation. Many utilities have already invested significantly and continue to do so, and others are further behind. Software investments are becoming more significant, both in impact and in cost, and can be defining initiatives for utilities.



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Much of this software investment is driven by the desire for utilities to establish a unified digital platform across all operational departments, streamlining operations while enhancing performance and reducing costs. This digital platform is centered around the ingestion, storage, and analysis of increasingly complex datasets. An XaaS subscription-based approach often best positions utilities to maximize their investment in a digital platform.

4.1.3 Learn from Other Utilities

Given the conservative nature of utilities and their monopolistic business model, utilities can, at times, insulate themselves from the progress being made by their peers. The disruption and complexity of the digital utility transformation can create uncertainty, and each utility needs to approach their evolving situation accordingly, and often in entirely different ways than other utilities. A decentralized regulatory framework, varying from one jurisdiction to another, accentuates this issue, as two utilities in different regions with the same problem may choose to address the situation differently, based on their regulatory environment.

This can suppress collaboration among utilities across the industry, but it also provides a diverse set of utility solutions from which all utilities can learn. As innovative utilities employ more XaaS business models for software, operations, and even grid assets, other more conservative utilities must learn from these programs to gain the evidence and support they need to deploy these models themselves.

4.1.4 Collaborate with Regulators to Demonstrate Benefits for Customers and Utilities

Equally as important as collaboration among utilities to facilitate growth and business model innovation is managing the relationship with utility regulators. With a monopoly revenue model, the utility regulatory framework is designed to ensure that utility decisions are made with the customers’ best interests in minds and that they are deploying capital effectively. That places the burden on utilities to demonstrate the benefits of any initiative, and especially those which require significant capital investment. The most successful initiatives, from a regulatory perspective, will be those which decrease the overall cost to the consumer without weakening the product delivered. An XaaS business model has the potential to check all these boxes, and is positioned for success if deployed effectively.



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Section 5 ACRONYM AND ABBREVIATION LIST

AI ..................................................................................................................................... Artificial Intelligence

BPaaS ........................................................................................................... Business Process as a Service

CAPEX ................................................................................................................................ Capital Expenses

DER ................................................................................................................. Distributed Energy Resources

DR .................................................................................................................................... Demand Response

EV ........................................................................................................................................... Electric Vehicle

IoT ....................................................................................................................................... Internet of Things

IT ............................................................................................................................... Information Technology

O&M .................................................................................................................. Operations and Maintenance

OPEX ...........................................................................................................................Operational Expenses

PaaS .............................................................................................................................. Platform as a Service

ROI ................................................................................................................................Return on Investment

SaaS ............................................................................................................................. Software as a Service

SCADA .......................................................................................... Supervisory Control and Data Acquisition

T&D ................................................................................................................. Transmission and Distribution

XaaS ........................................................................................................................................... As A Service



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Section 6 TABLE OF CONTENTS

Section 1 ...................................................................................................................................................... 1

Digital Transformations are Driving Utilities to Rethink Their Business .............................................. 1

1.1 Introduction .................................................................................................................................... 1

1.2 Definitions ...................................................................................................................................... 1

1.3 Market Overview ........................................................................................................................... 2

Section 2 ...................................................................................................................................................... 5

Applications for XaaS Business Models Continue to Grow ................................................................... 5

2.1 XaaS Deployment Will Grow as Its Utility Applications Expand ................................................... 5

2.2 Utilities Stand to Benefit Significantly ............................................................................................ 6

2.2.1 Reducing Costs Drives Utility Innovation, Regulatory Approval, and Customer Satisfaction . 6

2.2.1.1 Use Case: Asset Performance Management Software as a Service ............................. 7

2.2.2 Utilities Must Continue to Embrace the Ongoing Transformation ........................................... 7

2.2.2.1 Use Case: EV Charging Management ........................................................................... 7

2.2.3 Opportunities Exist to Streamline Operations and Flexibility .................................................. 8

2.2.3.1 Use Case: Asset Data Management .............................................................................. 8

2.2.4 Risk Mitigation is Vital to All Parties ........................................................................................ 8

2.2.4.1 Use Case: Cybersecurity Incident Monitoring ................................................................ 9

2.3 Significant Challenges and Risks Remain .................................................................................... 9

2.3.1 Regulators Are Historically Resistant to Change .................................................................. 10

2.3.2 Cultural Inertia Impedes Utility Innovation ............................................................................. 10

2.3.3 Wariness of Mounting Risks Can Suppress XaaS Integration .............................................. 11

2.3.4 Financing and Cost Structure Barriers Must Be Addressed ................................................. 12

Section 3 .................................................................................................................................................... 13



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The Evolving Utility Business Model is Reaching a Pivotal Tipping Point ......................................... 13

3.1 Disruptive Technologies Are Propelling Business Model Innovation .......................................... 13

3.2 Digital Utility Transformations Highlight the Value of Data ......................................................... 14

3.3 Progressive Utility Mindsets Will Continue to Strengthen ........................................................... 14

Section 4 .................................................................................................................................................... 16

Conclusions and Recommendations ...................................................................................................... 16

4.1 Recommendations for Utilities .................................................................................................... 16

4.1.1 Remain Committed to Overcoming Obstacles ...................................................................... 16

4.1.2 Recognize and Maximize the Value of Data ......................................................................... 16

4.1.3 Learn from Other Utilities ...................................................................................................... 17

4.1.4 Collaborate with Regulators to Demonstrate Benefits for Customers and Utilities ............... 17

Section 5 .................................................................................................................................................... 18

Acronym and Abbreviation List ............................................................................................................... 18

Section 6 .................................................................................................................................................... 19

Table of Contents ...................................................................................................................................... 19

Scope of Study ................................................................................................ Error! Bookmark not defined.

Sources and Methodology ....................................................................................................................... 21



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SOURCES AND METHODOLOGY

Navigant Research’s industry analysts utilize a variety of research sources in preparing Research Reports. The key component of Navigant Research’s analysis is primary research gained from phone and in-person interviews with industry leaders including executives, engineers, and marketing professionals. Analysts are diligent in ensuring that they speak with representatives from every part of the value chain, including but not limited to technology companies, utilities and other service providers, industry associations, government agencies, and the investment community.

Additional analysis includes secondary research conducted by Navigant Research’s analysts and its staff of research assistants. Where applicable, all secondary research sources are appropriately cited within this report.

These primary and secondary research sources, combined with the analyst’s industry expertise, are synthesized into the qualitative and quantitative analysis presented in Navigant Research’s reports. Great care is taken in making sure that all analysis is well-supported by facts, but where the facts are unknown and assumptions must be made, analysts document their assumptions and are prepared to explain their methodology, both within the body of a report and in direct conversations with clients.

Navigant Research is a market research group whose goal is to present an objective, unbiased view of market opportunities within its coverage areas. Navigant Research is not beholden to any special interests and is thus able to offer clear, actionable advice to help clients succeed in the industry, unfettered by technology hype, political agendas, or emotional factors that are inherent in cleantech markets.



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Published 1Q 2019

©2019 Navigant Consulting, Inc. 1375 Walnut Street, Suite 100 Boulder, CO 80302 USA Tel: +1.303.997.7609 http://www.navigantresearch.com

Navigant Consulting, Inc. (Navigant) has provided the information in this publication for informational purposes only. The information has been obtained from sources believed to be reliable; however, Navigant does not make any express or implied warranty or representation concerning such information. Any market forecasts or predictions contained in the publication reflect Navigant’s current expectations based on market data and trend analysis. Market predictions and expectations are inherently uncertain and actual results may differ materially from those contained in the publication. Navigant and its subsidiaries and affiliates hereby disclaim liability for any loss or damage caused by errors or omissions in this publication.

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Note: Editing of this report was closed on February 4, 2019.

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