KUHN CAPITAL Sunday, February 25, 2018
Dispatches from the front

The State of Energy IT

Information technology spending by utilities has weathered a perfect storm of declining demand in the last several years. Now, however, energy IT projects are reviving, but for different reasons and in different locales.

That Was Then
Back in 2000, the energy industry IT spending boom began to hit the wall. It hit harder than other industries because of an unholy trinity of converging trends. Obviously, one was the dotcom meltdown: suddenly, CEO’s began to doubt whether the latest technology bells and whistles were competitive must-haves. Then, at the same time, their CIO’s began to report worrisome budget overruns and delays in implementing the giant enterprise application suites that seemed so necessary only a short while ago. We’re not sad to see these two pigeons coming home to roost: wasting money isn’t good for business. But the third factor was unique to the energy business: the California re-regulation and Enron debacles froze or in some cases even reversed US retail open market deregulation.

Despite this pull-back, utilities still account for about 5% of all US IT expenditures, and the industry’s proportionate share of the US IT total continues to grow. IDC claims that US utility spending on external IT products and services totaled $1.3 billion in 2002.

Now What?
After their binge IT buying, many large organizations were left with two problems: how to get the enterprise systems they had recently installed to work; and how to integrate them so that they effectively exchange or extract data. Both challenges may be characterized as a drive to extract ROI from prior investments.

Now, several years and hundreds of millions of dollars later, most utility enterprise IT systems are finally delivering the functionality for which they were originally purchased, freeing up buyers to pursue cross-system integration projects and to address lower-cost, more definable return on investment (ROI) projects.

IT Demand by the T&D Segment
Utility asset management and maintenance projects are well-fitted to ROI analysis and frequently show clear financial promise. Those particularly attracted to such applications are asset-intense transmission and distribution (T&D) companies who, according to AMR Research, are now spending significantly more than other energy industry segments on IT infrastructure: in 2000 and 2001, about 4% of revenues. In fact, T&D company IT spending is expected to increase by about 15% annually through 2007.

T&D executives are facing the challenge of managing an aging infrastructure in the face of demand driven by the use of energy-intensive electronic devices, this despite a global economic slow-down. Also, here at home, years of regulatory oversight and environmental special interests have suppressed US distribution infrastructure growth and maintenance.

Coincident with the increased visibility of utility asset management, the industry is also seeing rising rates of technological progress in automated equipment and load monitoring, bringing more assets within the realm of IT system coordination.

Over There
While domestic utility retailer demand may have faltered, some of the most exciting IT applications are surfacing at utilities in European and Asia/Pacific regions. In addition to responding to continuing deregulation -- which drives IT demand by requiring energy players to do business with more suppliers and customers -- overseas utilities are experimenting with increasingly sophisticated real-time network balancing and P&L analytic functions that allow them to manage their business on-the-fly. Perhaps the leading example of such forward-looking IT usage is National Grid Transco.

Meanwhile, Back Home
With these trends in the background, the pace of utility IT vendor consolidation has clearly picked up. Just in the last 12 months, Itron, seeking to add more value to its automated meter data flows, purchased meter data management company Silicon Energy and load forecaster RER. In the same period, Sungard, the giant transaction processing vendor, purchased Caminus, a utility transaction management solutions provider, and public/utility sector applications vendor HTE.

This flurry of transactions comes on the heels of a long M&A slumber in energy IT during which time a batch of new entrepreneurial IT firms attempted to exploit specialty energy application niches. Those who focused on energy trading drew a bad hand, but many of those who specialized in utility operations (complex transaction management and load shape analysis) have prospered or at least survived.

Apparently, Itron and Sungard believe that the slowed pace of US energy deregulation is not an obstacle to the long term prospects of profitably serving the IT needs of the huge and global energy business. Prepare yourself for Act II of the energy IT industry.

Ryan Kuhn

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