Can utilities resolve the productivity paradox in a sustainable way?
Is productivity growth a myth in today’s economy? Every industrial revolution has unlocked productivity growth. Between 1947 and 1972, productivity increased by 3.5% annually. But since the oil embargo in the early 1970s, there was long period of a meagre 1% growth through the mid 90s. Even with the expansion of internet and the first wave of digitization productive growth reached 2.5% during 1995-2005, lower than post WWII era. In the last decade despite the growth in cloud, AI/ML, analytics, and IoT, the productivity growth has been elusive. This raises the quest if productivity growth is a myth now. Not so fast, say many and are unwilling to give that up yet. They look at the lag for technologies to fully operationalize. Electricity over four decades since its inception in the 1880s to fully realize its business benefits. Robert Solow famously termed this lag as the productivity paradox. So even though digitization is everywhere, productivity gains are not realized.
The utilities sector is at the cusp of a major renewal as part of the energy system transition. Billions of dollars of investments are expected over the next decade or so in digitization and transition from the century old model. A big bet is on productivity improvements across the board for those who belong to this camp. Digitization enables automation and automation results in productivity gains, indeed with the adoption in digital technology, whether it is smart meters or mobile workforce management systems, benefits have come from reduction in labor hours spent. But focusing merely on automation as a cost reducer may not be the productivity gains that is sustainable for the enterprise.
Productivity improvements results from increase of total output or value of the output and reduction of labor hours. These variables do not have the same impact on the business and the society. Increasing the numerator for the same labor hours adds more value who can then in turn consume or produce more creating a positive feedback loop, a virtuous circle that calls more more activity including employment and wage growth. If AI/ML based analytics can increase the dynamic loading ratings of T&D, reduce the outage time, or optimize market operations to balance curtailment, then more value is created, which increases the financial capacity to invest and grow further. Conversely, if the focus is only on cost cutting by applying piecemeal automation solutions, then the organizations can hit the point, where incremental benefits can no longer be reduced. Sadly, many utilities have been focusing on FTE savings to justify their business cases.
Focusing merely on cost cutting as the sole means of productivity growth cause other imbalances. It calls into questions broader sustainability issues. Sustainability is about taking a holistic approach to economic, social, and environmental impacts. Value from cost cutting largely goes to the investors and the ratepayers. And job losses without growth impacts disproportionately on low income communities, and creates adverse economic and social impacts.
To ensure that transition leading to productivity growth is consistent with sustainability, utility leaders must focus beyond cost cutting on five areas:
Value defined through a sustainability lens
Much work still needs to be done in tying business value to sustainability. While there is growing customer demand for sustainable products and services that is spilling over to how energy is generated and consumed, there is yet to be a clear valuation multiple attributed. Over the last couple of years, there is a movement driven by large investors to focus on greener portfolios, increased discussion of ESG (environmental, social, and governance) attributes, and concern DIE (diversity, inclusion, and equitiy), a practical framework is yet to emerge. Many utilities have mapped their strategic programs to UN sustainable goals directly and indirectly. Business value may be linked to KPIs that target - installed capacity of renewable resources, total CO2 emissions avoided, number of distributed energy resources connected to the grid, number of customers on digital platforms like smart meters. The question remains if these initiatives are in line with some overarching sustainability target. The climate action targets set in Paris accord with temperature limits do not necessarily translate to individual target setting that links to business value created. So in many ways targets are arbitrarily set at a company level often based on meeting policy measure of the government.
Rethink business cases
Business cases for initiatives are not entirely based on costs and benefits from financial standpoint. Sustainability targets become a criteria to be met. Companies like Enel that has launched green bonds have set thresholds of emission reductions that must be met to fulfill its obligations. In doing so, business cases have to be modified to include the impacts of sustainability and ESG measures where necessary. Therefore, an initiative that does not analyze the sustainability impacts will be disadvantaged to avail such financing opportunities. The measures for sustainability are not all quantifiable and therefore, the business case cannot rely on purely quantifiable rationale. Finance focus companies will have to expand its investment criteria. Value comes from SAIDI improvements, reduction in household spending, C&I savings, GHG savings, circularity and need mechanisms to track and report in terms of familiar business value metrics.
Ecosystem and partnerships
Given the pace of change, companies that can forge strong partnerships are better able to scale using plug and play models, initiate new products and services for customers with speed and marginal cost zero, introduce greater operational flexibility, smart serivices for prosumers, and open innovation with a broad section of innovation contributors. The choice of ecosystem partners and ability to collaborate will determine the impacts direct emissions and indirect emissions and how people learn, earn, and work.
Innovation is one of the pillars on which company’s business strategy and sustainability plan stands. Innovation cuts across many disciplines. Innovation hubs, open innovation structures that solicits ideas from across the organization and even third parties are emerging. This is not just about investing more in innovation projects but creating an entire system with processes, infrastructure, governance policies with incentives and measures to drive innovation.
Standards allow heterogenous systems to interoperate. Interoperability has many advantages - it reduces customization efforts for interfacing different systems, creates greater competition with more products to connect to, higher availability of skilled labor, and seek benefit of previous deployments. It is the ligua franca through ecosystems can be developed quickly for cooperation and inter-working.
Solow’s productivity paradox might still hold for the utility sector as it recreates with digital technologies. But simply believing will not make it a reality. Tangible actions must be taken.