Outlook 2025: four themes empowering utilities

While there is talk about environmental, social and governance (ESG) topics and decarbonization moving down on C-suite agendas, especially amid an upturn in demand for electricity and the coming change to a Republican administration, long-term projections still show green ambitions are a matter of “how” not “if.” 

In an EY Industrials & Energy Brand Survey from October 2024, 45% of responding P&U executives expected to invest a high amount in sustainability and ESG consulting and reporting over the next 12 to 18 months, compared with 32% among all respondents across sectors. And 57% of P&U respondents say the same about their investments in decarbonization and energy transition, compared with 33% across sectors.

At the same time, utilities must meet near-term energy demand. This is at a time when US data center energy demand is projected to grow at a compound annual rate of 15% from 2023 to 2030, and to potentially account for 8% of total US power demand (up from about 3% in 2024).

To balance both goals, utilities are diversifying from coal- and oil-powered plants to not only renewables (which require support from energy storage providers, to address intermittency challenges) but also natural gas, potentially bolstering the opportunity for carbon capture. Interestingly, in the longer term, nuclear energy is undergoing a renaissance as a technology that can provide scalable baseload power supply. Nuclear energy’s potential has been highlighted through several commercial projects announced toward the end of 2024:

• Microsoft signed a 20-year purchase price allocation (PPA) with Constellation to restart one unit of the Three Mile Island nuclear plant, which was shut down (for economic reasons) about five years ago. It is expected to be operational in 2028. Microsoft intends to buy energy from the plant to help offset the power used by its data centers with carbon-free energy.¹
• A large tech company reached a master plant development agreement with an energy company to deploy 500 megawatts of advanced nuclear power by 2035. Under the PPA, the tech giant would begin buying carbon-free power for its data centers by 2030.
• A large online ecommerce company signed three agreements to help develop several small modular reactors. Uniquely, this company’s plans involve not just a PPA, but a direct investment in nuclear plant construction within Washington state, with power potentially flowing by the early 2030s.

More broadly, US renewables are likely to expand and remain an important factor in long-term capacity planning, due not just to government incentives but also to new innovations and technologies that enable scale. From March 2023 to April 2024, the US added 9.115 gigawatts of renewable capacity, with solar accounting for 81%. Furthermore, in the first half of 2024 alone, US battery storage mergers and acquisitions (M&A) volume increased 64% year over year, finishing with $2.8b of deal value. Additionally, in June 2024, Fervo Energy and Southern California Edison entered into the world’s largest geothermal PPA, totaling 320 megawatts at two projects set to become operational in 2026 and 2028² — another example of the power of clean energy PPAs.

Renewables and the developing infrastructure needed to support them are going to continue to be critical to meeting increasing energy demand as well as state and company decarbonization targets. While the IIJA and IRA provide funding (often administered by the states), the P&U industry will need to navigate those decarbonization commitments. The industry must therefore prepare for a landscape characterized by varied regulatory pressures and investment climates across different jurisdictions.

P&U companies are increasingly integrating customer experience at the heart of their priorities, focusing across residential customers, small and medium-size businesses, and larger commercial and industrial customers. There is a growing importance on maximizing the ROI of customer initiatives to capture load-growth opportunities, maintain affordability and balance investments with the significant capital commitments many utilities are making.

Capturing load-growth opportunities, enabling local economic development and maintaining overall energy affordability while delivering great customer experience is critical for regulated utilities. EY research shows that two-thirds of US consumers report feeling squeezed by higher energy costs and are unable to absorb a 10% increase in their bill. Meanwhile significant weather and emergency disruptions are putting a spotlight on critical gaps in today’s energy experience.

Customer experience is an important component of utility rate cases. In fact, a number of utilities have had their rate cases fully or partially disallowed based on challenges related to reliability, resiliency or customer service.

Threading the needle on affordability, load growth and higher customer satisfaction can be tricky, but the following five focus areas are worth considering:

1. Start with the invoice experience

By redesigning the end-to-end billing and payment journey and integrating digital invoicing with expanded payment options, utilities can simplify the most frequent customer interaction and build engagement.

2. Reinvent CX with new technology

Many utilities are struggling with aging and inefficient systems, particularly their back-office enterprise resource planning (ERP) and customer information system (CIS) platforms. Utilities have historically tried to extend the lives of these technology solutions, often clinging to customized, but stagnant systems. However, the leap to the cloud, evolution of customer systems and emergence of new platform options and generative AI (GenAI) are prompting opportunities to reimagine the customer operating model and capabilities. With this, utilities can consider moving beyond initial implementation to leveraging technology to drive reimagining of the customer and employee energy experience.

3. Drive digital first value

By enhancing self-service and digital employee enablement capabilities, including artificial intelligence (AI), GenAI, robotic process automation (RPA) and other traditional digital areas, P&U providers can drive lower cost and better employee and customer experiences. A critical component of this is using customer effort score (CES) as a key metric, with a management focus on eliminating dissatisfiers and reducing operating costs by process and journey. Further, the integration and benefits of advance metering infrastructure (AMI)/smart meters extend across operations, enhancing the customer and operations experience.

4. Take a customer-led view of grid management

Optimizing the grid — including driving electrification and enabling energy flexibility — is critical to how many utilities approach grid modernization, but customer experience is often an afterthought. Fragmented and challenging customer experiences when choosing energy solutions and taking part in energy management programs are increasingly impacting adoption. Utilities can break down silos and streamline areas such as new connections, network planning, energy management, field work and customer service such that work can be performed efficiently, with information available to all employees in a way that best serves the customer.

5. Develop a holistic approach to growth

Many providers are experiencing unprecedented load growth driven by data centers, manufacturing and overall electrification. However, the customer experience for large commercial and industrial customers looking to grow or build capabilities in new geographies is often slow and challenging. Utilities can reinvent the support model with holistic approaches to key account management, economic development, load planning and stakeholder engagement with levels of government to make it easy for businesses to grow, create jobs and drive load growth in ways that are beneficial for all.

Utilities customer organizations are at a unique moment facing pressures around enabling growth, affordability, customer satisfaction, grid reliability and resiliency. It is a perfect storm and a perfect opportunity. Finding win-win customer programs that drive multiple outcomes is key. Investment in customer technology, reinventing the customer operating model and enabling growth presents an opportunity to save on ongoing costs, enable agility and improve both the customer and the employee experience.

Historically, utilities have been slow to embrace technology, preferring to maintain the role of “fast follower.” At the same time, AI and machine learning are not new concepts for utilities — these technologies have been a part of grid management capabilities and have become an increasingly critical part of managing customer and back-office operations. However, we are seeing a significant ramp-up in the use of AI and its counterpart, GenAI, with the ability to create text, images, audio and video.

An EY survey shows that the tide is turning on AI within the sector. P&U respondents were more likely than overall respondents across sectors to rank these focus areas among their top three: intelligent optimization of operations performance; customer experience, services and support; and predictive maintenance of heavy equipment and assets.

Use cases include

1. Sharpening demand forecasting

AI can be used to clarify demand forecasting based on historical trends, and GenAI adds a way to query and interact with the data conversationally. GenAI can also be used to comb through regulatory rulings and better understand the implications through natural language prompts.

2. Enhancing customer experience and service

GenAI can automate the scheduling of service appointments based on the availability of technicians and the urgency of the service required, efficiently allocating human resources by analyzing workloads, skills and the geographic distribution of requests. The materials to be used during those service appointments can similarly be managed and allocated automatically.

3. Supporting transmission and distribution efficiency and resilience

Through AI, utilities can better understand load modeling capabilities and build them into planning-related activities and ongoing grid management for resilience and reliability. Amid increasing extreme weather events, M&A volume in transmission and distribution rose 21% year over year, spotlighting the importance of upgrading grid infrastructure. The ability to streamline regulatory approval may also lead to an acceleration of infrastructure construction in the transmission space, which has been challenged in recent years.

AI can also be an effective tool for risk management, although (ironically) the technology itself necessitates cyber risk management. While utility engineers may be eager to pursue numerous emerging technologies use cases, IT, regulatory and risk departments require protocols and control mechanisms in the back office. Given that utility operations are vital to the overall functioning of the economy and to national security, electric utilities must strike a balance between risk and reward through proper controls and governance models.

And beyond AI, a number of innovative technologies are poised to transform the energy industry: from biomimetic robots that could be used to perform specialized, potentially dangerous tasks in field environments — self-sustaining and self-healing autonomous units that could assess and manage systems without human intervention — to highly accurate weather and climate prediction for renewables, and even to quantum batteries.

Making the math work — to grow generation, transmission and distribution; to finance new projects with interest rates high; to adopt technology; to meet customer needs; and to make progress on sustainability goals — will require creativity.

The sector must consider how it maximizes existing capital, finds new funding sources and navigates M&A. Overall, the P&U industry is rising to the challenge through traditional options, as well as others that reflect this unique moment in history:

1. Utilities face equity crunch

This is caused not only by new technologies, but also by deferred maintenance needs, electrification, and the growth of new demand centers (e.g., re-shoring of manufacturing and data centers). Some standard things have been done before (e.g., preferred issuances), but P&U companies, in combination with private equity debt providers, are evolving their models to help finance this gap.

2. Selling non-core minority interests and other assets

While P&U deal volume has been subdued, declining 3% in the Americas in the first half of 2024 year over year, there are factors pointing to an increase in transactions. Some utilities are flush with cash, while others face significant balance sheet issues. Further, compared with other industries, the P&U sector is much more fragmented, partially because of its unique and heavily regulated structure, which could drive broader consolidation within the next six months. Private equity firms, which own many independent power producers (IPPs), have signaled interest in P&U divestments. It’s expected that partial asset plays, which enable utilities to progress their investments while generating returns for PE investors, will continue.

3. Securing nontraditional financial partnerships with other sectors, private equity investors and the infrastructure community

Like the PPAs and nontraditional partnerships around nuclear and renewable energy discussed above, PE-owned IPPs are leaning into the utilities sector with hopes to capitalize on elevated power and capacity market prices.

4. Remaining focused on rigorous cost management and core operations

Opportunities exist across nearly every P&U company function to drive efficiency and reduce operations and maintenance costs. Ultimately, the right mix of top-quality people, greater efficiencies through technology and a forward-looking operating model can provide more time and ability to expose value across a company.

5. Helping utilities understand capitalization policy

Utilities have relied on historical perspectives when evaluating the appropriateness of capitalization philosophy and have inconsistently implemented existing policies.

In general, the deal outlook for 2025 is positive and there isn’t likely to be a slowdown in capital investments in energy. With a Trump administration returning, dealmakers are likely to get better guidance with respect to the complex regulatory, tax and interest rate policies — thus leading to a firm M&A market this year.

A shorter version of this article was originally published by Public Utilities Fortnightly on January 6, 2025.