Setting Energy Market Strategy for 2025? Read this first.
As the calendar year clicks over, many management teams and boards of energy companies are beginning to turn their minds to setting and refining strategic direction, whether that’s long-term 10+ year vision, a midterm review of existing 3-5 year strategy, or annual planning of strategic priorities that feeds into budget processes. These are turbulent times - the energy sector today faces a level of uncertainty unprecedented in recent years. From shifting global and domestic policies on renewables, fossil fuels and nuclear, to evolving trends such as EVs, batteries and demand management, and new structures such as new REZs and network operators – navigating this unpredictability requires deliberate strategic consideration, much more than just addressing the present.
In this environment of flux, it may be tempting to focus solely on the here and now, parking long-term strategic thinking in favour of responding to immediate challenges. Our strong view is that the opposite is true. Periods of great uncertainty are precisely when organisations need to double down on strategic planning, considering a broad range of scenarios that might unfold over time, and putting strategic guiderails in place to navigate a successful outcome across a spectrum of potential futures.
Strategic Planning is More than Reviewing Current Priorities
At its core, strategic planning isn’t about looking at last year’s performance or reviewing current projects that are underway. It is about making the deliberate effort to pause, step back, look at the forest for the trees, and reassess whether the current strategic direction is the right one, or if it needs to be seriously challenged and changed. Running a process that only confirms existing strategies or seeks consensus on minor adjustments is often the path of least resistance, but is incredibly dangerous. If a new strategic direction is required, it will not be delivered by such a process.
Key Elements of Strategic Planning in Uncertainty
1. Scenario-Based Planning
The first key element of strategic planning in uncertainty is to take a scenario-based approach. This means identifying the key factors that could significantly alter the organisation’s trajectory, and defining the range of possible outcomes and potential impact on strategic decisions.
This is not about simply picking AEMO’s Step Change or Progressive Change as the most likely scenario, it's about identifying the specific drivers and the specific nature of their impact. For example this might include the uptake of CER and optimisation, data centre growth, industrial electrification, or the impact of a nuclear energy policy. Understanding these drivers allows organisations to plan for different outcomes and define a strategic direction that can be robust under different outcomes.
2. Defining Strategic Objectives and Guiderails
The next step is to define the high-level strategic direction that will enable the organisation to respond effectively under different scenarios. This includes the strategic aspiration, objectives, goals, principles and guiderails that will guide decision-making and allocation of resources (capital and people) as the future unfolds. This also leads to identifying the “no regrets” strategic decisions and investments that will be robust under a range of future scenarios.
3. Organisation Capabilities
Effective strategic planning also requires a strong understanding of an organisation’s capabilities. What are its sources of competitive advantage and disadvantage? What are the physical assets, process, human capabilities and technology capabilities that can be leveraged to drive future success? What are the key capabilities that need to be strengthened, built or acquired to drive long-term success? For example, for a DNSP, energy retailer, VPP operator or battery distributor, does the business have the requisite capability in AI-powered optimisation technology to be successful, and/or should it look to develop it, and/or does it need to partner, and if so, partner with who?
4. Asking the Difficult Questions
Our view is also that strategic planning must create the space to ask the most difficult and challenging questions. For example, what would need to be true for the current strategic direction to be wrong? If the organisation were to fail in the next five years, what would have been the cause? As astronaut Chris Hadfield puts it in ‘An Astronaut’s Guide to Life On Earth’ – “What’s the next thing that could kill me?” Deliberately thinking about the biggest risks enables management teams and boards to begin the process of dealing with them, and identify if key changes to strategic direction are required.
5. Data and Insight
Finally, effective strategic planning must be grounded in data and insight. This relates to both having a strong understanding, based in data, of the external environment (key trends, regulations, market shifts, etc), as well as key internal factors (sources of economic profitability, areas of competitive advantage and disadvantage, etc).
As a case in point, one of our clients had lost a percentage point of market share each year for 3 years, but it had not done the analysis to realise that it had been losing that market share not to its tier 1 competitors, but to smaller tier 2 competitors. That realisation alone had enormous implications for understanding what it needed to do to turnaround its competitive position, including transforming its customer offerings and its capabilities to deliver those customer offerings.
Uncertainty means effective strategic planning is needed even more than ever, as tempting as it may be to focus on current initiatives only and let the future emerge. Rennie works with clients to understand their external and internal strategic environment, and proactively define strategies that are resilient and competitive under a range of scenarios. Get in touch if you would like to discuss further.