Friday, June 28, 2013
Utilities grapple With Change
As usual leaders take up the challenge and find solid working solutions when real change arrives.
The fact remains that a given utility can sit on its book of business and not respond and they will get along okay for quite a while. Yet that is a form of eating your capital.
What is important is that a flood of technological change is upon the industry right now. The palette is filling up and certainly prudent buys are demanded.
At the same time, it is clear that natural gas will replace Coal unless there is something wrong with the reserves. The value proposition is just too compelling. The speed of the turnover has been breathtaking.
Sooner or later a new heat source will be rolled out to replace natural gas.
Behind Closed Doors, Utilities Grapple With New Strategies
According to energy analyst Chris Nelder, not all utilities are simply digging in their heels against change.
CHRIS NELDER : JUNE 19, 2013
Not all utilities are simply digging in their heels against change, or merely wringing their hands over disruptions to their business models. Some are taking the bit between their teeth and experimenting with new ways of doing business.
San Antonio-based CPS Energy, the largest municipally owned electric and gas utility in the U.S., is the solar leader in Texas, accounting for roughly half the solar power installed in the state under utility rebate programs. Supported by one of the most attractive rebate programs in the country, which covers nearly half the cost of a rooftop solar system, CPS Energy’s system includes 10.8 megawatts of customer-installed rooftop solar and 44 megawatts of utility-scale solar PV.
The utility aims to add another 400 megawatts over the next four years, increasing its utility-scale capacity by a factor of ten, as part of its ambition to generate 65 percent of its power from “low- and no-carbon-emitting” sources by 2020. The utility also offers rebates for energy efficiency upgrades, free weatherization for low-income households, and demand response services.
On Tuesday this week, CPS hosted the second in a series of invitation-only, closed-door regional forums designed to bring utilities, regulators, and “advanced energy” businesses together for frank discussions on how to adopt new grid technologies and services more rapidly.
The Advanced Energy Executive Forum series was conceived last year by Hemant Taneja, who co-founded Advanced Energy Economy along with California billionaire hedge fund manager and clean energy activist Tom Steyer, and Dr. Richard Lester of MIT's Industrial Performance Center. They hope that the discussions will lead to an action plan to remove the structural, financial, regulatory, and cultural obstacles that stand between us and AEE’s vision for a “prosperous world that runs on secure, clean and affordable power.” The MIT Industrial Performance Center is pitching in by studying various strategies for accelerating the adoption of low-carbon power.
Attendees at the first forum, held at MIT on March 6, included top executives from PSEG Energy Holdings, Northeast Utilities, CPS Energy, NRG Energy, NextEra Energy Resources, CLEAResult, EnerNOC, Gridco Systems, SustainX, Viridity Energy, and California ISO.
The San Antonio forum included executives from OGE Energy, First Solar, Silver Spring Networks, Landis+Gyr, Green Energy Corp., C3 Energy, and the Electric Reliability Council of Texas (ERCOT), in addition to attendees from the first event.
On a Q&A call after the forum, Lester explained why it’s so important to engage all the stakeholders in the utility business to find solutions. It's important to “recognize that the power industry is on the verge of a set of changes that are greater than anything that has taken place for the last century,” he said, “both upstream and downstream. Mainly because of need.” In his view, “There’s no innovation and change needed more in this country than the transition to renewables while maintaining reliability.”
Taneja emphasized that making public policy more friendly to renewables must be done at a regional level, because each state has a different set of regulations. Lester was drawn to Texas, he said, “because some of the most interesting and exciting activities are happening here” and it might offer some useful lessons to the rest of the country. When I asked if that was partly due to the fact that Texas is the only state in the union with its own grid, which would make it easier to implement changes, CPS Energy CEO Doyle Beneby acknowledged that it certainly helped, but asserted that “differentiated solutions for various areas” will work across the country.
I asked Beneby if municipally owned utilities are better positioned to adopt distributed generation from sources like rooftop solar, as I speculated in April, since it poses a challenge to the investor-owned utility (IOU) business model. Beneby didn’t think there was an “absolute answer” to that question, but noted that one of the IOUs participating in the forum was “on a similar track to us,” which he saw as a “validation of bottom-up, inside-out change.” For both municipals and IOUs, Beneby thinks it’s important to “take the pulse of your own customer base, regulatory regime, and zeitgeist to figure out what works in your community.”
Where Beneby does see an advantage is in being vertically integrated: owning generation, transmission and distribution assets. It allows CPS to implement changes in the system more extensively, and means the utility is “linked instead of coupled” to the value proposition of each business unit. Being locally managed also means the utility can get things done more quickly.
Try and try again
Distributed generation and technologies like demand response and microgrids need not cut into the revenue streams of utilities, Beneby said; they just have to be marketed the right way. Utilities should differentiate their service offerings and segment their companies to go after specific niches, much as Rob Day suggested in April. Beneby noted that demand response and microgrids can be treated as a generation source.
Even the problem of short-term overproduction from wind and solar, which occasionally drives grid prices into negative territory, could be addressed by “aggregating at certain times of day or in certain regions” so that it “can be bid into the market profitably.”
Regulations must also be updated to allow renewables to compete more effectively. The utility industry has become calcified and lost its innovative spirit. “Regulations set a rigid framework, and ways of thinking are conditioned by those ways of doing things,” Lester observed. “All that has to be loosened up to get the kind of innovation we need over the coming decades,” he said, even as innovation is being forced upon the system from outside.
Naimish Patel, CEO of grid integration company Gridco Systems, agreed. “Current regulatory structures have historically been shaped by reliable and cost-effective delivery. That’s worked well,” he said. “Now what’s happening is that technology is becoming available to meet diversified customer needs.” But to meet those needs, it will be necessary to "pare down certain regulations.” Patel is confident that “well-placed and -architected deregulation would help to unleash innovation.”
Specifically, Beneby thinks state renewable portfolio standards offer a supportive policy framework, as do regional greenhouse gas standards like those in California and the Mid-Atlantic region. “Hard” reserve margins on generation capacity, instead of the soft reserve margins in Texas, might also be worth reconsidering.
The participants agreed on one thing: There aren’t any one-size-fits-all solutions. Every region has its own needs and its own capacities. The best strategy is to start experimenting and see what works. “We can’t delay,” Beneby said. “We need ideas and test beds. [...] Utilities have to reach out beyond conservative, low-risk approaches and start trying things. We have to keep evolving, [...] get something in the ground and moving, and see what happens.”
CPS Energy seems to be taking that notion to heart. After announcing in April that it would replace its net metering program with a new “solar credit” program that would only pay about half as much for the power generated by rooftop solar systems, the utility responded to the resulting cries of dismay by delaying changes to the program for one year. It now intends to work “with local installers to come up with an equitable solution.”
Chris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books (Profit From the Peak andInvesting in Renewable Energy) and hundreds of articles, and has been published byScientific American, Slate, the Harvard Business Review blog, Financial Times' Alphaville,Quartz, the Economist Intelligence Unit, and many other publications.