Rewiring to Energize: IT’s Transformation of the Energy Sector
By Vishnu Murali, Business – Technology Transformation Executive, Green Energy Transition, NextEra Energy, Inc.
For the last 150 years, globalization has been primarily driven by oil and its fossil derivatives. These resources have been instrumental in powering various industries, enabling transportation, and connecting nations, thereby driving human progress worldwide. However, this progress has come at a significant cost, as the extensive use of oil has led to an existential threat to humanity in the form of the climate crisis.
As we look towards the next 50 years of development, oil will be replaced with electricity as an alternative primary energy source. The importance of electrification and its innovative uses cannot be overstated. The versatility and adaptability, coupled with technological advancements in software-define micro-electronics, make it a powerful force for change, with the potential to revolutionize industries, reshape transportation systems, and empower communities worldwide. Innovative uses of electricity are already driving this transformation. From the development of renewable energy sources to the deployment of smart grids, pioneers are harnessing the power of electricity to create a more sustainable and equitable world.
The ongoing global shift towards sustainable living is driving an Energy transition. By making electricity more accessible, affordable, reliable, and portable, individuals and communities can now take control of their energy needs. As a result, we can expect a more decentralized and democratized energy system that is more responsive to the needs of the people. However, the Energy & Utility, and Oil & Gas sectors are now at a crossroads and must rapidly adapt to this new reality.
For many years, alongside the Government sector, two industries were considered secure and reliable for long-term jobs with above-average but predictable profits and return on investment. They also served as a haven for Wall Street and the global financial markets, and their performance acted as an economic barometer for the global outlook. However, due to stringent regulations, high barriers to entry, capital-intensive business models, and lack of formidable and economical alternatives and outside-in strategies, the business functions, especially the Information Technology department, have become complacent to change and innovation. This, in turn, has created significant technical debt for IT, making the transition to clean energy more challenging. Moreover, the lack of an outside-in strategic vision for IT and a run-to-failure mindset further exacerbates the issue.
Energy and utility companies have traditionally viewed IT as a cost center, assigning it a tactical role rather than a strategic one in shaping the future of their business.
Sustainability has become a crucial strategic lever in various industries to manage future growth, create shareholder value, and respond to changing consumer sentiments. The acceleration of the global climate crisis has forced companies to rapidly adopt Real-zero, Net-zero, and Carbon-neutral strategies, leading to a significant increase in demand for electricity. However, the Energy and Utilities sector faces substantial challenges due to the high cost of replacing aging power infrastructure, modernizing outdated Operational Technology (OT) and Information Technology (IT), and a long-term capital lock-in business model, causing a significant drag to the much-needed transformation and innovation.
McKinsey’s study suggests that in order to achieve net zero emissions by 2050, governments, businesses, and individuals must increase their total global spending on energy and land-use systems by $3.5 trillion annually. This represents a 60% increase in investment compared to current levels. To put this into perspective, it is equivalent to half of global corporate profits, a quarter of world tax revenue, and 7% of household spending. Additionally, a further $1 trillion must be reallocated from high-emission to low-carbon assets.
Considering the current situation in which the Energy and Utility industry operates, CEOs and business leaders must reconsider their approach to the Information Technology (IT) function. To gain insight into this issue, I asked numerous senior executives in my network from the top 25 global Energy and Utility enterprises around the world for their perspectives on transforming the IT function. The bullets below summarize their responses.
1. The boundaries between Operational Technology (OT) and Information Technology (IT) are becoming increasingly blurred as they merge. Modern OT systems for renewables use up-to-date software solutions, creating a software-defined operational model. Both OT and IT have a unique and complementary set of best practices that can be combined to create synergy. For instance, the operational excellence discipline from running OT can be applied to run enterprise IT, while advanced skills from IT can be used to modernize OT. Based on my personal experience, we have seen significant value in how our enterprise systems are run by leveraging the best practices from OT and IT. Combining the two will also increase cyber resilience, improve cyber posture, predictable technology lifecycle, and better cost optimization. To embark on such an endeavor, CIOs and Business leaders should work together to formulate a shared vision and strategy, create a well-defined execution plan with a strong emphasis on cybersecurity and outcomes, and build a competent execution team and make this a strategic priority. The IT department faces several obstacles, including a scarcity of skilled professionals, the need for capital investments, organizational change management, selecting the right systems integration and transformation partner, and taking action to eliminate technical debt.
2. Energy and utility companies have traditionally viewed IT as a cost center, assigning it a tactical role rather than a strategic one in shaping the future of their business. This perception has also shaped the role of CIOs, putting them in a difficult position of balancing transformational and operational priorities, often making them walk on the edge.
However, it’s high time for CEOs and the Board of Directors to reconsider the position of IT and make it a strategic partner rather than an afterthought. By doing so, IT can significantly contribute to the growth and success of the company as the industry rapidly transforms.
One approach that can be considered is separating operational and transformational leadership responsibilities. The energy and utility industry is more recognized for its operational excellence capabilities than technology transformation. It is often a delicate balance between running and transforming the business. Hence, transformational or exponential change is an Achilles heel for the industry.
For example, while most of the world’s population uses a power supply within 6% of 230V, North America still uses 110V. Its rigid and legacy energy infrastructure makes it a gravity problem requiring a moonshot solution. It struggles to transition its infrastructure to a more efficient 220V power supply. To do so, it needs a radical rethinking of foundational technologies that run the business.
With new operational technologies becoming software-defined, CEOs must consider creating a strategic role of Chief Technology Transformation Officer (CTTO) whose focus will be to be the sherpa for the enterprise business transformation. In contrast, the CIOs can focus on efficient operations.
3. For a long time, the IT function has been seen as a source of shared services for business. This approach has made IT a mere order taker rather than a valued partner, focusing on short-term tactical tasks. Unfortunately, this has resulted in reduced trust and satisfaction among IT users. This is a common issue across industries but is especially prevalent in Energy and Utilities. While the service-centric approach has been practical in the short term, it’s not sustainable in the long run. CEOs must encourage their IT leadership to become customer-centric and innovation focused. One approach to positioning IT for success amid industry transformation is to shift its strategic posture and operating model to product-centric. This strategy is commonly employed in tech start-ups and is now being adopted across various industries. Customer-centric organizations focus on understanding their user and buyer personas. They learn about their challenges and build solutions to address those challenges.
The product-centric delivery model emphasizes long-term planning built around evolutionary design principles while delivering compounding value in shorter release cycles for its customers. This helps to increase delivery agility, enhance insights and interconnectedness, and reduce overall consumption costs.
Shifting the focus from a user-centric approach to a customer-centric one in IT will establish a strong bond and partnership between the business and IT.
A product-centric approach may not always prioritize solving a customer’s problems. Instead, it focuses on the details of the IT organization’s products. This approach can lead to co-innovation, build trust and transparency, and help overcome the talent shortage by encouraging employees to upgrade their skills. Ultimately, this can lead to higher levels of employee engagement. For example, a traditional IT Network Services team can be transformed into a Connectivity product team with a vision to become a platform that helps its customers stay productive from anywhere in a secure, reliable, and fast manner.
4. Operational excellence is a table stake for CXOs in the Energy and Utilities industry. They must ensure high uptimes, data security, privacy, and visibility into their business processes to deliver reliable services to customers and handle emergencies. However, CIOs face challenges due to inherited technical debt and the siloed culture of IT. These issues have been reinforced by years of complacent culture and lack of innovation, resulting in a short-term band-aid approach instead of a long-term solution. This non-collaborative culture puts CIOs at risk of losing the trust of the business due to the tactical priority nature of technology operations and a lack of clear IT operations strategy. One strategy that can help overcome this problem is to transform operations and enhance customer experience, CIOs can integrate Applications, Infrastructure, and Cybersecurity teams under a customer-focused and metric-driven operating model. This can be complemented by full-stack observability tools that can provide real-time insights into the health of IT systems and enable proactive monitoring and issue resolutions, which can significantly improve the operational resilience of the business systems and enhance customer experience. If implemented correctly, integrated IT operations can help boost SAIDI and SAIFI metrics, which have regulatory implications in some markets. After implementing this approach in large Energy & Utility, Aerospace & Defense, and Manufacturing companies, I have observed that the average time taken to respond to incidents has reduced by 60%, customer satisfaction has improved by 45%, and employee engagement in the IT operations team has increased by an average of 20 points. This has significantly enhanced the trust factor in the business.
5. Initiating business transformation for energy companies requires transforming their talent and organizational culture. To ensure success with large-scale strategic business transformation programs, CXOs must create a purpose-led transformation journey that is uniquely tailored to the organization, human-centered, effectively governed using value metrics, and continuously energized through hyper-communication. This approach must be driven from the top down to ensure that every employee understands the transformation journey’s why, what, how, when, and where. Although there are different organizational change management (OCM) frameworks, in my experience, every OCM strategy should be uniquely tailored to meet the organization’s DNA. OCM, being an expense-driven function, is often undermined during program design, only to realize later that it was a deliberate mistake in the middle of the transformation. According to a McKinsey study, 70% of transformational change initiatives fail due to employee resistance and lack of support from management.
6. As the world’s energy landscape evolves, it is becoming increasingly apparent that Capability is of great importance. Capability consists of two key components: Talent, which comes from people, and Skills, which are the abilities that people bring to the table. Unfortunately, Talent is becoming scarce, making Skills more crucial than ever. To address this challenge, we need a comprehensive bottom-up redesign of our education system. We also need government incentives to encourage younger talent to pursue and develop skills related to the energy transition. Another necessary change is the restructuring of the industry’s pay attractiveness to bring in a more youthful and more dynamic workforce. This challenge is particularly intense in developed countries where the energy infrastructure and the enterprises operating them have a significant aging workforce. They have been using the same technology for decades, leading to a complacent and risk-averse workforce culture. Other downstream industries, such as Auto, Manufacturing, Retail, etc., are transforming through electrification at a rapid pace, creating a massive pent-up demand for energy companies. One approach that CxOs can consider is partnering with local universities and co-creating a curriculum with industry-relevant and emerging technology-relevant syllabi in their respective degree programs. This will help significantly reduce the lead time for the talent to become productive as they transition into the energy industry. In addition, companies can consider creating programs that attract new talent with relevant skills to join the workforce. To overcome the acute shortage, this must be a strategy the entire industry adopts.
7. In the last few decades, the energy industry has become more software-driven, remotely accessible, and operable. As a result, cybersecurity has become a critical focus for the entire sector. Although most energy companies understand the importance of cybersecurity, recent developments in AI have exposed the industry’s Achilles heel. Many large energy companies still use outdated systems and technologies that continue to operate mission-critical energy infrastructure components, creating significant vulnerabilities for the electricity grid. The global electrification of societies and industries, as well as the interconnectedness of the infrastructure, has become an easy target for cyber threat actors to launch cyber-attacks that can have catastrophic impacts on the economic stability of countries.
According to IBM’s 2023 Cost of a Data Breach Report, the average impact of a data breach on organizations with fewer than 500 employees is $3.31 million, and the average cost per breached record is $164. The ACSC Annual Cyber Threat Report for the financial year 2021–22 revealed that the electricity, gas, water, and waste service sector entered the top 10 sectors reporting cyber-attacks, replacing the retail sector from the previous year. In 2022, Security Alliance reported, after extensive research, that the biggest threat to energy organizations was the exploitation of public-facing applications, accounting for 40% of all infections. Spear phishing and external remote services each accounted for 20% of cases, and botnets were responsible for 19%. Ransomware and BEC both came in at 15%.
Given the urgency and exposure of energy systems, cybersecurity must be a function that reports directly to the CEO instead of indirectly. The increasing sophistication and lack of sufficient investment in cyber defense and offense technologies, compounded with an acute capability shortage, has put energy companies at significant risk.
The energy industry is undergoing a significant, inevitable, and unmatched transformation. New ones are replacing old business models, and established players in the industry are struggling to keep up with the agility of new entrants backed by government and private investors. These new players are born out of necessity, fueled by innovation, and have a talented and lean workforce. They operate with a customer-focused strategy to disrupt the industry frontiers, aim to transform market structures, and challenge established regulations to create universal access to cheap and clean energy. However, industry incumbents are hindered by complex capital structures, technical debt, a complacent workforce, and outdated mindsets, making it challenging to adapt to rapidly changing markets.
To ensure that transformation is an organization-wide priority, CXOs must create urgency top-down. The information technology department can play a pivotal role as a transformation partner and enabler and potentially lead the industry transformation from the driver’s seat instead of seeing it from the rearview mirror. This means that CIOs must rewire their IT departments to energize them to lead the transformation.