The cloud, capex conundrum for utilities

IDC Energy Insights

IDC Energy Insights recently released a new report, “Perspective: Cloud and the Capex Conundrum in the Utility Industry” (Document # EI251305), which provides an overview of the challenge that the regulated utility industry model presents for the cloud computing model.

The opportunity for cloud must be looked at differently in the utility industry, according to the report. The ability for utilities to receive a guaranteed cost recovery on capital investments creates an apparent disincentive for utilities to invest in cloud software. This new perspective explores what this means for utilities, vendors and regulators.

The cloud deployment idea has been sweeping across the landscape for several years, causing many chief information officers (CIOs) to re-evaluate how they license and deploy software and how they think of their information technology budgets. IDC projects the cloud software market will make up more than 20 percent of the worldwide software market by 2018, contributing to nearly half of projected growth in the software industry through 2018.

The opportunity for cloud must be looked at differently in the utility industry. The accelerating pace of change in the utility industry means that it has less room for error amid multiple disruptive threats: declining energy use, microgrids, distributed renewable energy generation, and growing questions about the industry model. The cloud software model provides agility and other benefits and deserves assessment on its technical and functional merits.

The regulated utility industry’s capital expenditure (capex) cost recovery model, however, turns the cloud value proposition on its head. Although much of the appeal of cloud software has been to make a software asset look more like an operating expense, the regulated industry cost recovery model incents utility CIOs to undo the cloud technology’s operating expenditure (opex) value proposition and to turn it into a capital asset.

With the evolution in software technology, enterprises must evolve in their appreciation and assessment of new technologies, and with limited clear guidance from regulators, utilities have little choice but to get more aggressive if they hope to tap the advantages of the cloud and the Software as a Service (SaaS) model that so many other industries are seeing. The boldest utilities are making moves to the cloud.

“With both the utility industry and technology in general evolving pretty rapidly, it may be time for the regulatory sector to evolve more quickly and to embrace the opportunities that come with being technology enablers,” said Robert Eastman, research manager at IDC Energy Insights. “We believe that the industry — regulators, shareholders, stakeholders and ratepayers — need to take a closer look at the true economic impact of the traditional capex-opex to determine whether the numbers, in fact, do make sense for all parties involved. We believe that they won’t.”

Click here to purchase report

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