Clean Power Initiatives Everywhere: What Now?
In a recent post named “The Paris Climate Accord: What’s Next for Utilities?” I talked about how the new emission regime will likely impact utilities because a similar set of circumstances drove wealth-destroying behavior in the Eighties. Today, I want to explore other angles of this phenomenon.
In mid-2015, President Obama announced the EPA’s Clean Power Plan (CPP), which uses as its basis the section 111(d) of the Clean Air Act. It set states-specific carbon dioxide emission goals and implementation plans, which are part of the Paris Climate Accord effort.
The issues with some of the in-scope areas are plenty but there are a few main ones per Black & Veatch’ most recent report (Market Impacts of the Clean Power Plan):
- Nuclear generation is not covered halting any generation expansion, which, despite what people may feel about it, is part of the carbon-neutral energy family
- The EPA’s authority is being litigated this and next year delaying investment certainty
- The regional differences are stark, e.g. coastal states are much more aggressive reduction goals than the country’s heartland
On top of this various legacy utilities have started to dial back attempts to release new fixed-charge regimes because of the outcry from solar power generators. It is the classic problem of who owns the network and who uses it for how much requiring what type of fee.
When government subsidies evaporate and rooftop solar generators (often residential) suddenly have to burden additional cost for network usage, the value prop becomes increasingly slimmer. Even more so, as traditional utilities increasingly purchase power from such producers, they have no visibility which type of generation (wind, solar…) is actually profitable, where is it and who owns it? Often some of these smaller producers only own shares of a larger generation capacity. Dynamic pricing creating peak pricing due to the aforementioned location, form and ownership requires knowing who you are dealing with and their cost structure.
While the lack of action seems to rest with the newer form producers, the legacy operators are also at fault. They have largely failed to engage their existing, long-term relationship with customers to become trading clearing houses or value-added services providers. Utility websites continue to be a major point of consternation for consumers, which will be even more problematic when millenials become the dominant consuming force.
OFGEM (UK regulator) reported the highest percentage of customers switching utilities in 5 years. Also, 22% of consumers would switch to another provider because of improved service. Whole towns, e.g. Feldheim, Germany, are now working with smaller providers (Energiequelle) installing turbines and a biogas factory to become less dependent on the giant E.ON.
London is working on generating 25% of its power from local sources by 2025.
The Energy Information Administration in the US posited that 20% of all photovoltaic generation is now owned by municipalities. Residential solar power generation already outpaced commercial generation by 400MW in 2014.
Unlikely market entrants and joint ventures will continue to put pressure on legacy operators. A study by IDC Research found that the biggest threats are Google and telecommunication firms, closely followed by Apple and internet companies.
On top of all this, the utility sector is battling an aging workforce. Utilities are suddenly battling for talent with the new competition in the telecom and internet space.
So what keeps utility execs up at night?
- The search for a viable, new business model
- Operational efficiency improvements
- Lower cost
French regulators launched a draft bill encouraging communities to explore schemes to rethink grid hosting capacity and demand response mechanisms. Some utilities attempt to improve profitability by shortening the rate case approval lag (see my earlier post as well). Another realizes that 40% of the rate is fuel, which will be the major lever to reduce cost, which can be passed on to consumers.
These are stop gap measures, as important as they are, but they do not address the fundamental change in the works today. Many utilities are so conservative (54% based on IDC Research) they do not intend to make major disruptive leaps.
The new market will look for
- Bundles (delivery, advisory, equipment warranty) for commercial, community and residential
- Data management services for large and small producers and consumers
- Use of 3rd party distribution networks (e.g. electric vehicle)
All these have an improved customer experience at the center. But how will an energy market player know who the best customers are for a specific bundle, what location/vehicle/partner is the most cost effective first roll-out? What data is needed to make this new project happen? Is the data in good shape and can it easily be integrated to facilitate this insight?
You guessed it…work with your technology providers to figure out where the bang for buck is hidden, field test it in a pilot, adjust, scale….
When was the last time you were positively surprised by your utility in terms of service? Do you have a rooftop solar panel? Do you live in a community trying to go off-the-grid?