The IT Iceberg: Hidden challenges to realizing the energy transition lurking beneath the surface

The IT Iceberg: Hidden challenges to realizing the energy transition lurking beneath the surface | Utility Dive

Navigating the complex and ever-changing landscape of the energy sector, utility executives and regulators face the daunting task of realizing ambitious sustainability goals amid a thicket of hidden challenges. States across the nation have taken bold steps to transition to renewable energy and combat climate change. However, amidst the grand vision and aspirations, there lies a challenge often taken for granted that threatens to hinder our progress — the labyrinth of outdated IT systems on which most utilities run.

During my tenure as counsel for energy and the environment to the Governor of New York, one of my biggest sources of frustration in advancing our clean energy goals was the constraints imposed by archaic utility IT infrastructure. As we developed the suite of policies necessary to achieve New York’s goals, we often were told that IT upgrades would take several years to implement and require millions of dollars in change orders, ultimately constraining the state’s ability to pursue innovative policies.

Upon reflection, I wish I had more awareness of the IT landscape as a policymaker. At my recommendation, the Governor ultimately vetoed legislation focused on improving access to and affordability of renewable energy, largely due to the daunting administrative and IT costs required for upgrading existing billing systems. The estimated cost of the upgrades literally outweighed the benefits of these policies, a stark reminder that outdated IT infrastructure can thwart even the most well-intentioned policies.

Across the energy sector, the prevailing norm continues to be inadequately integrated on-premises IT infrastructure. Various utility systems have been stitched together over the years, creating a complex web of disparate technologies that make it challenging to adapt to the demands of the modern, decentralized energy landscape. Many utilities have expressed an appetite for change, but have been unable to meet their aspirations due to a dearth of suitable technology options that persisted for decades.

This realization underscores the importance of modernizing IT systems to meet current and future challenges. The pursuit of a simpler solution is what drew me to Kraken — a modern cloud-native operating system that’s purpose-built for utilities to manage and optimize energy resources while delivering exceptional customer experiences at lower cost.

The Energy Sector is an Outlier

While sectors like fintech and healthcare have embraced cloud-based systems, advanced analytics, and artificial intelligence, energy companies appear mired in the status quo, relying heavily on traditional on-premises IT systems. Utilities are understandably cautious about transitioning to new technologies that may disrupt their existing operations. The fear of potential downtime, data breaches, and cybersecurity threats prevents them from considering cloud-based solutions, even though moving to the cloud can substantially reduce those very risks.

Moreover, our industry operates within a unique regulatory framework that doesn't always align with the incentives needed to promote technological innovation. Traditional cost-of-service regulation, providing a return on equity (ROE) for capitalized expenses, serves to perversely disincentivize utilities from investing in modern systems that are more functional and cost-effective.

Achieve Parity between Cloud and On-premises Systems

Capitalizing cloud platform licenses presents one challenge, which, even if surmountable, leads to another — on-premises systems still typically cost substantially more and therefore provide a substantially higher ROE than software-as-a-service (SaaS) systems. However, there are additional approaches, like performance-based ratemaking and shared savings arrangements, that can offer a more balanced incentive structure.

Performance-based ratemaking shifts the focus from cost recovery to rewarding utilities based on their ability to achieve defined performance metrics. By tying financial incentives to outcomes like customer satisfaction, O&M savings, energy efficiency, demand flexibility, renewable energy integration, and carbon reduction targets, utilities are encouraged to adopt innovative IT systems and strategies that optimize resource utilization.

Under shared savings arrangements, utilities would capitalize SaaS license fees and other IT investments, and then share the resulting operational savings with customers. The utility would retain a portion of the avoided costs, levelized to match the expected ROE of an on-premises solution.

The energy sector is at a critical juncture in its evolution, and outdated IT systems pose significant obstacles to achieving our broader decarbonization objectives. We must acknowledge the hidden costs and challenges lurking beneath the surface and work collaboratively to integrate modern IT solutions that will enable a smooth and successful energy transformation.

The era of antiquated IT systems hindering progress is approaching its end and with modern systems like Kraken at the forefront, utilities can become more agile, data-driven and resilient. By addressing the IT iceberg, utilities can usher forward the overdue digital transformation and modernization needed to support the increasingly flexible and decentralized grid of the future.