Hang on to your seats, my friends: The utilities industry is going to get a lot more interesting over the next 12 months, as executives start to lay out their strategic plans.

And that means there will be lucrative opportunities for investors with the savvy to identify the firms best positioned for the long term.

What has me so worked up? Utility executives rarely use the word “change.” And when they do use that word, especially as frequently as they have in recent speeches and presentations, it’s a potentially epochal portent of the shape of things to come.

In this case, if past events are any guide, the industry is set to undergo a huge shake-up.

The last few times change of this magnitude swept the industry, it led to all sorts of new investment opportunities–both good and bad.

The electric deregulation of the 1990s produced energy-trading firms that went belly up with Enron by the early 2000s. But deregulation also produced wires-only companies (firms formed from the spin-off of utility electric transmission assets) that are arguably more stable than the utilities themselves.

Subsequently, merchant generation really came into its own in the mid-2000s, paving the way for retail electric competition, where independent firms compete regionally for retail customers. But only a few merchant generators were real successes, and consequently plays on retail electric competition have had mixed results.

The last time real change was in the air was from the threat of climate legislation in the mid-2000s. This pushed many utilities to develop renewable-energy strategies, which have proved profitable for some firms, enabling them to climb to the top of the industry. These firms took advantage of multi-year contracts as part of state renewable portfolio standards, creating additional stable, utility-like earnings.

Longtime readers will recall that we’ve spent the past year discussing many of these changes in the pages of Utility Forecaster. But now we’re shifting from discussing potential disruption to acceptance of such changes. And that means we must define how utilities will embrace new distributed renewable technologies and natural gas dynamics.

Taking the Lead on Change

In late January, at the United States Energy Association’s 11th Annual State of the Energy Industry Forum, Edison Electric Institute President Tom Kuhn, whose association represents investor-owned utilities, outlined the challenges.

“As you are aware, ‘change’ is the buzzword in our industry today. I always say that there are three key drivers to change: shifts in public policy, new technologies, and evolving customer and market expectations. How our industry adapts to and leads these changes, while continuing to provide value to our customers, will define our long-term success,” Kuhn said.

And Kuhn was laser-focused on three particular issues: 1) The Environmental Protection Agency’s (EPA) proposed rule to regulate greenhouse gas emissions of existing plants, which will lead to mass coal-plant shutdowns; 2) the growing interest in the use of distributed-generation systems such as customer-owned wind power and rooftop solar panels; and 3) cybersecurity and new advances in technology integration.

Of course, Kuhn leads an association whose members include a number of utilities that will be hurt by the EPA’s new emissions rules. These regulations would force utilities to incur heavy costs to replace coal plants, while losing market share to firms who are ahead of them on the renewable-energy front.

As such, Kuhn called for the relaxation of interim requirements in the EPA rule, since he believes the industry cannot comply with present goals.

He also made the case for the grid to be the backbone of the technological revolution, particularly as the industry is spending billions on its modernization to do just that. And Kuhn insisted that both those with and those without distributed generation help pay for this effort, since the absence of the former would make the economics of this system upgrade unsustainable.

Although Kuhn’s proposals are clearly designed to protect coal utilities and vertically integrated utilities in the short term, even if his ideas were fully adopted that still would not be enough to preserve the status quo over the medium to long term.

And I think Kuhn understands this. For as much time as he spent describing the need for certain policies, he also spent considerable time explaining how these new technological breakthroughs would transform the U.S. economy.

His remarks lead me to believe that investors should expect a showdown between those utilities that lead these changes and those that don’t.

And just what will this change look like? David Crane, CEO of NRG Energy Inc (NYSE: NRG) really wowed attendees of the company’s investor meeting in mid-January. In his presentation entitled, “Win Today, Win Tomorrow, Win the Future,” he detailed rooftop solar’s incredible potential for value creation.

He likened the industry transformation that’s underway to the move that telecoms made from fixed line to cellular. Crane observed that in the telecom space the incumbent that fully embraced the future technology continued to compete aggressively and win new market share.

He showed how the successors of two Baby Bells, AT&T Inc (NYSE: T) and Verizon Communications Inc (NYSE: VZ), came to dominate the space for new technologies and go from a combined $40 billion market capitalization in 1988 to $540 billion in 2014, increasing their aggregate market cap by 13.5x.

Most investors would be quite pleased with such growth if it happens in the utilities space.

What’s the winning blueprint? Crane says it comes down to three things. The first, as mentioned, is embracing new technology.

Second, firms must change their culture from being a fixed-asset company to a customer-focused company built on a foundation of fixed assets and technological expertise.

Lastly, a successful utility must be a consolidator of value of the traditional sector along the way. In other words, even a firm that’s embracing technological change must still be able to beat its peers by operating under the traditional business model while it remains dominant.

That’s how Crane believes NRG will win the future.

And his template could prove useful as a way to begin thinking about how to identify tomorrow’s top utility investments.

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