How Streamlining Utility Supply Chains Can Transform Performance

The Industry
Written By Maria Garcia

Investor-owned utilities (IOUs) in the U.S. face mounting pressure to improve reliability, keep rates affordable, attract high-demand customers like data centers, and deliver shareholder value—all while managing rising capital costs, projected to reach $168.2 billion in 2025.

A powerful yet under-utilized strategy to achieve these goals lies in streamlining the supply chain. By removing layers of friction and middlemen, each utility and partner EPC can save hundreds of millions in markups and reinvest those dollars into grid modernization, transmission expansion, new generation, and internal initiatives. Let’s take a look at a clear, linear path from supply chain savings to reinvestment and improved performance metrics, with real-world examples.

Step 1: Unlocking Savings Through Supply Chain Efficiency

Utility supply chains are often bogged down by inefficiencies—multiple intermediaries, redundant processes, and outdated procurement systems. These add significant markups to equipment costs, such as transformers, cables, and smart grid components. A 2023 McKinsey report estimated that utilities could reduce procurement costs by 15–25% by optimizing supply chains, translating to $500 million to $1 billion in annual savings for a large IOU with a $4 billion procurement budget.

Real Example: Duke Energy implemented a direct-to-manufacturer procurement model for transformers in 2022, bypassing distributors and reducing costs by 20% per unit. By consolidating vendors and using predictive analytics for inventory management, Duke saved $300 million annually. Similarly, Southern Company adopted digital procurement platforms to streamline bidding and contract management, cutting administrative costs by 15% and speeding up delivery timelines.

How It Works:

  • Eliminate Middlemen: Partner directly with manufacturers for critical components, reducing markups by 10–20%.

  • Digital Tools: Use AI-driven platforms for demand forecasting, product & project analysis and vendor selection, minimizing overstock, missed milestone dates and delays.

  • Standardized Contracts: Simplify procurement with pre-negotiated terms, as seen in Xcel Energy’s 2024 supply chain overhaul, which saved $150 million.

These savings free up capital that can be redirected to high-impact investments, directly improving performance.

Step 2: Reinvesting Savings for Strategic Impact

Redirecting supply chain savings into targeted capital investments can transform key metrics like SAIDI (System Average Interruption Duration Index), shareholder returns, residential rates, and the ability to attract data centers. Here’s how:

1. Grid Modernization for Reliability (SAIDI)

  • Investment: Deploy savings into smart grid technologies—advanced metering infrastructure (AMI), distribution automation, and predictive maintenance systems. These reduce outage duration, lowering SAIDI.

  • Impact: A $200 million investment in automation could cut SAIDI by 20–30 minutes annually, aligning with IEEE 1366 benchmarks. Pacific Gas & Electric (PG&E) used supply chain savings to fund AMI upgrades in 2023, reducing SAIDI by 15% and avoiding $50 million in outage-related costs.

  • Business Benefit: Improved reliability boosts regulatory approval for rate cases, securing 10% ROE, and reduces operational expenses.

2. Renewable Energy and Storage for Sustainability

  • Investment: Allocate savings to solar, wind, and battery storage, leveraging Inflation Reduction Act (IRA) tax credits (30% for new projects). Transmission upgrades ensure grid stability for new loads.

  • Impact: A $300 million investment could add 500 MW of solar capacity, serving data centers with clean energy. NextEra Energy reinvested procurement savings into 1 GW of storage in 2024, securing PPAs with tech giants like Google, boosting revenue by $200 million annually.

  • Business Benefit: Renewables attract private capital (e.g., green bonds, up 3% in 2024) and ensure long-term revenue through PPAs, enhancing shareholder value while keeping rates affordable via IRA incentives.

3. Data Center Infrastructure for Growth

  • Investment: Build dedicated transmission and substations for data centers, funded by savings. Introduce large-load tariffs to equitably allocate costs.

  • Impact: A $250 million investment could support 500 MW of data center load, meeting 4.5% of U.S. power demand (projected to hit 8% by 2030). AEP Ohio used supply chain savings to fund a 2024 substation for Amazon, generating $100 million in annual revenue without raising residential rates.

  • Business Benefit: Data center contracts provide stable cash flows, boosting ROE, while tariffs protect residential customers from rate hikes (retail prices up 23% from 2019–2024).

4. Performance-Based Regulation (PBR) for Alignment

  • Investment: Fund PBR initiatives tied to reliability, efficiency, and emissions reductions, such as DERs or customer efficiency programs.

  • Impact: A $100 million investment in PBR metrics could earn 1–2% ROE bonuses, as seen in New York’s 2023 “clawback” reforms. ConEdison reinvested savings into efficiency programs, reducing customer bills by 5% and earning $80 million in incentives.

  • Business Benefit: PBR aligns investments with regulatory and customer goals, ensuring predictable returns and affordability.

Step 3: Driving Better Metrics and Performance

Reinvesting supply chain savings into these areas creates a virtuous cycle of improved performance:

  • Reliability (SAIDI): Lower SAIDI (e.g., 15–30% reduction) enhances customer satisfaction and regulatory standing, as seen with PG&E’s AMI success.

  • Shareholder Value: Higher ROE (10–12% with PBR incentives) and private capital inflows (e.g., NextEra’s green bonds) boost stock performance. Duke Energy’s stock rose 8% in 2023 after supply chain-driven investments.

  • Residential Rates: Large-load tariffs and efficiency programs keep rate increases below the 26% rise seen from 2019–2024. Xcel’s 2024 efficiency programs cut average bills by 3%.

  • Data Center Attraction: Reliable, clean power attracts hyperscalers. Dominion Energy’s 2024 renewable investments secured a 2 GW data center deal with Microsoft, adding $500 million in annual revenue.

    Why It Matters

    Streamlining the supply chain isn’t just about cost-cutting—it’s a strategic lever to unlock capital for transformative investments. By saving $500 million annually, an IOU can fund grid upgrades, renewables, and data center infrastructure without raising rates excessively or sacrificing ROE. This approach aligns with market trends—11.5% load growth by 2035, $36–60 billion in data center grid needs, and increasing weather-related outages ($53 billion in 2024)—while meeting regulatory and customer expectations.

It is time for action.

Utility industry participants need to adopt intelligent technology to optimize supply chains quickly. This will liberate funds for reinvestment into projects tied to PBR metrics and data center growth. This pragmatic and feasible strategy is crucial for maintaining a competitive edge, as the window to keep pace with progress will not remain open forever. Reach out to see how we can help you, not just keep up, but excel.

Maria Garcia