Navigant Research Blog

Take Control of Your Future, Part I: Megatrends in the Utilities Industry

— April 29, 2016

Energy CloudThe pace and impact of change in the utilities industry is unrelenting. Each of the following megatrends is changing the way we produce and use power globally. Together, these megatrends are revolutionizing the industry.

  1. Increasing customer demands: More customers want to control their electricity usage and spend, as well as when and what type of power they buy. Customers want the ability to self-generate and sell that power back to the grid. Amazon, Apple, Cisco, Google, Honda, Walmart, and many other large energy buyers have increased their focus on sustainable energy solutions. This trend, in turn, is forcing new power purchase agreements with the incumbent utilities in order to minimize their risk of losing significant load. For example, a second (Google was the first) major technology company, Cisco, has confirmed that it is using Duke Energy’s Green Source Rider to provide clean energy for its North Carolina operations.
  2. Rising number of carbon emissions reduction policies and regulations: The impact of COP21 will be significant. Navigant believes that the “hold” on the U.S. Environmental Protection Agency (EPA) is temporary, and state governments and utilities are not waiting. They are taking actions now to be compliant. In fact, sustainability objectives between government, policymakers, utilities, and their customers are much more closely aligned than ever before.
  3. Shifting power-generating sources: U.S. electric-generating facilities expect to add more than 26 GW of utility-scale generating capacity to the power grid during 2016. Most of these additions will come from three resources: solar (9.5 GW), natural gas (8.0 GW), and wind (6.8 GW), which together make up 93% of the expected total additions. Existing assets (coal, but also nuclear) are devaluing and are at risk of becoming stranded as source shifting continues and newer natural gas and renewable generation sources come online.
  4. Delivering shareholder value through mergers and acquisitions (M&A): New industry ventures and M&A are happening at a rapid pace. Exelon’s acquisition of Pepco, Southern Company acquiring SoCoGas, Duke acquiring Piedmont Gas, Emera acquiring TECO, etc. In search for shareholder value through scale and increased synergies, this is a path that utilities will continue to explore.
  5. Regionalizing of energy resources (interstate, north-south, global): In order to provide reliable and affordable power, more energy resources are being regionalized. For example, PacifiCorp and Puget Sound Energy (PSE) and, later this year, NV Energy is joining California ISO. One of the main drivers is to achieve the benefits to manage local differences with regard to renewables, wind, and solar. Another example is Florida Power & Light’s (FPL’s) investment in natural gas exploration and production companies in Oklahoma and gas transmission pipelines to secure fuels for its natural gas combined cycle plants in Florida. Meanwhile, the global availability and movement of natural gas has created an abundance of natural gas. Some of the world’s biggest entrants into the growing global gas market have considered investing in power plants and other big projects now that their multibillion-dollar exporter terminals are about to open, executives said at the Columbia Global Energy Summit on April 27.
  6. Merging industries and new entrants: Several industries, including utilities, oil and gas (O&G), technology, manufacturers, OEMs, etc., are merging around areas like renewables, distributed energy resources (DER), energy management, smarter cities, and transportation. Navigant sees many cross-industry movements, and one of them is increased crossover investments between the electric utility and O&G industries. We see utilities investing in natural gas assets. And we see oil companies making investments in utilities. We also see both making investments in new areas of opportunity, like renewables, DER (distributed generation, energy efficiency, demand response, energy efficiency, etc.), transportation, smart infrastructure and cities, and energy management. That’s why the announcement in April by French supermajor Total is not a surprise to me. Total announced the creation of a Gas, Renewables and Power division, which it said will help drive its ambition to become a top renewables and electricity trading player within 20 years. According to a statement by the supermajor, “Gas, Renewables and Power will spearhead Total’s ambitions in the electricity value chain by expanding in gas midstream and downstream, renewable energies and energy efficiency.”
  7. The emerging Energy Cloud: Old infrastructure is being replaced and geared toward an increasingly decentralized and smarter power grid architecture known as the Energy Cloud. The Energy Cloud is an emerging platform of two-way power flows and intelligent grid architecture expected to ultimately deliver higher quality power. While this shift poses significant risks to incumbent power utilities, it also offers major opportunities in a market that is becoming more open, competitive, and innovative. Fueled by steady increases in DER, this shift will affect policy and regulation, business models, and the way the grid is operated in every single region of the world.

These megatrends cannot be underestimated. They are accelerating transformation in the energy industry, enabling the entry of new players, putting pressure on incumbent players, and altering traditional strategies and business models. Organizations will need to adapt, and there will be winners and losers as this transformation takes shape. My advice to senior leadership of energy companies is to take an integrated, holistic view of the opportunities and challenges that are flowing from these megatrends. Only then will you be able understand the full impacts and path forward. And that is the only way you can really take control of your future.

This post is the first in a series in which I will discuss each of the megatrends and the impacts (“so what?”) in more detail. Stay tuned.

Learn more about our clients, projects, solution offerings, and team at Navigant Energy Practice Overview.

 

From Grid to Cloud: A Network of Networks in Search of an Orchestrator

— October 8, 2015

Magnifiers_webIn my blog, “The Impacts of the Evolving Energy Cloud,” I discussed how the power sector is undergoing a fundamental transformation. It is transitioning from a centralized hub-and-spoke grid architecture based on large centralized generation assets toward a more decentralized grid with a bigger role for renewables and distributed energy resources (DER). Navigant calls this new grid the Energy Cloud.

Where networks of networks exist, the business model that Wharton School dubbed the network orchestrator has been found to achieve faster growth, larger profit margins, and higher valuations relative to revenue, compared to three other types of business models (asset builder, service provider, and technology creator). The network orchestrator role will capture value by tailoring electricity supply and demand services for a customer, utility, or grid operator. In Navigant’s latest article in Public Utility Fortnightly, we explore how network orchestrators will emerge from the developing Energy Cloud and who might be candidates for such a role.

The New Uber

This week, in an interview with Energy Post, RWE’s Head of Innovation Inken Braunschmidt talked about the different business models that RWE is pursuing to capture an important position in the future energy system in Europe. She states, “In that energy system, it’s much more about sharing … you go onto a platform and say: I have electricity left over from wind or today I want to order some electricity from wind. It will be like ordering Uber.” This is a good example of how a large utility wants to transform its business and build a network orchestrator business model on top of its traditional business models. Many utilities have recently started new businesses, evaluating and making the initial investment in network orchestrator roles in areas like virtual power plants, building energy management systems, microgrids, storage, and others.

Another example this week was General Electric’s (GE’s) announcement of Current, powered by GE, an energy company that integrates GE’s LED, Solar, Energy Storage, and Electric Vehicle businesses to identify and deliver cost-effective, efficient energy solutions to its customers. This is clearly a move to become more of an orchestrator. The new company combines GE’s products and services in energy efficiency, solar, storage, and onsite power with its digital and analytical capabilities to provide customers—hospitals, universities, retail stores, and cities—with more profitable energy solutions.

Since companies employing the network orchestrator business model outperform other types of companies on several significant dimensions, it may only be a matter of time before pure network orchestrators emerge and establish themselves as key orchestrators within the Energy Cloud. As in other industries, Navigant strongly believes that new players will enter this field to become the network orchestrators of the utility industry.

So with that said: Who will be the Uber of the utilities industry? More to come on this soon.

 

The Impacts of the Evolving Energy Cloud

— April 9, 2015

In my July 2014 blog, I discussed how utilities should play both offense and defense as the energy cloud evolves and transforms the energy sector. Navigant Research’s new white paper, authored by Mackinnon Lawrence and Eric Woods, provides an update on the evolution of the energy cloud. To summarize, we foresee the strategic, business model, and operational impacts on incumbent utilities increasing, more so as new entrants play important roles in states like Hawaii, California, Arizona, Colorado, New York, New Jersey, and the Carolinas.

Distributed energy resources (as detailed in Navigant Research’s report, Global Distributed Generation Deployment Forecast) and renewables will continue to grow exponentially over the next 5–10 years globally, driven by expanding customer choices and a rapidly changing technology landscape. This will dramatically affect utilities’ customer relationships and increase the complexity of their operations as distributed, intermittent, renewable energy resources spread and the grid becomes more and more digitized. Below is an overview of the highlights of the themes we see evolving rapidly.

Customer Relationships: The further evolution of distributed generation, energy efficiency, demand-side management, demand response, smart metering, behind-the-meter energy management systems, and social media will drastically change the way utilities interact with their customers—many of whom will generate their own power, sell power back into the grid, and plug in their electric vehicles at night. These increasingly sophisticated energy customers expect increased self-service and new products and services, which in turn will require innovative front- and back-office customer operations. This is likely to lead, in many cases, to a strategic pivot in how utilities proactively engage with customers.

Operations: Increasing the return on capital investments and reducing operating expenditures has historically been a priority for utilities. As the energy cloud revolution spreads, the importance of managing assets and capital will only increase. Utilities must give special consideration to managing assets, particularly procurement and the decommissioning of stranded assets. Additionally, utilities will look to build or acquire distributed energy resources and other disruptive technologies that transform day-to-day grid operations while maintaining security and reliability through climate change and other major shifts.

Regulation: All of this will also have a profound impact on regulatory policy, raising the question: will current deregulated market structures be forced to change? The utility industry is vital for the global economy, and is regulated as such. As the energy cloud matures, the regulatory environment can and must change. For a more detailed examination of likely regulatory shifts, please see this blog by Mackinnon Lawrence.

Ultimately, the objective is to provide a safe, reliable, and affordable service to customers. But a fragmented landscape of players (developers, producers and operators, wholesale and retail) will drive the need for organizational, infrastructural, process and data integration, and coordination across the power value chain and could create significant cost in a highly distributed energy infrastructure environment. It will be very interesting to see how markets will evolve as the energy cloud transformation takes hold. More to come…

Mackinnon Lawrence contributed to this blog.

 

To Win, Utilities Must Play Offense as well as Defense

— July 10, 2014

Since I’m originally from the Netherlands and spent several years living in Brazil, the semifinal results of this week’s World Cup soccer (or football, as we Europeans call it) matches have been disappointing, to say the least.  One thing that’s clear from the tournament ‑ one of the most exciting World Cups in my memory, by the way ‑ is that to succeed at this level, teams must play well on both ends of the field: offense and defense.  The Netherlands squad, the Orange, played superb defense on Argentinean superstar Lionel Messi, but failed to muster a goal in 120 minutes of regular and extra time and lost on penalty kicks.  As for Brazil, it played neither offense nor defense.

The same is true for utilities in today’s rapidly transforming power sector.  Playing defense – by sticking with established ways of operating and traditional forms of customer service – is no longer enough to succeed.  Utilities must also play offense; they must proactively develop new capabilities and innovative business models to thrive in a world of proliferating distributed energy resources (DER), greater customer choice, and rising competition from new players.

A Shifting Landscape

Widespread coal plant retirements, stiff renewable portfolio standards in many U.S. states, and the spread of renewable generation are all irrevocably changing the mix of generation assets while increasing the need for load balancing and frequency regulation on the grid.  Navigant forecasts that cumulative solar capacity in the United States will reach nearly 70,000 MW – 60% of it distributed – by the end of 2020.

At the same time, the U.S. Environmental Protection Agency’s (EPA’s) proposed limits on CO2 emissions from existing power plants will drive further changes in the generation landscape.  These limits will bring new natural gas capacity online, put upward pressure on wholesale electricity prices, and make demand response and energy efficiency programs key parts of the answer.

(Source: Navigant Consulting)

Today’s centralized, one-way power system is quickly evolving into an energy cloud in which DER support multiple inputs and users, energy and information flows two ways across the system, and market structures and transactions grow more complex.  The energy cloud is more flexible, dynamic, and resilient than the traditional power grid, but it also brings new challenges to a power sector that until recently has changed little in its fundamental structure for almost a century.

Lead or Lose

Facing declining revenue as customers consume less and produce more of their own power, utilities are faced with large investments to build new transmission capacity, upgrade distribution systems, and invest in new DER businesses.  Given these challenges, utilities must be adept at playing offense and defense.  An updated defensive strategy will entail:

  • Engaging with customers and regulators to understand customer choices vis-a-vis price and reliability
  • Improving customer service and grid reliability at the lowest prices possible
  • Finding equitable ways to charge net metering customers for transmission and distribution services
  • Developing utility-owned renewable assets to appeal to environmentally conscious customers

Playing offense is even more important.  Utilities must:

  • Create new revenue streams through the development of new business models, products, and services
  • Transform their organizations and culture in order to fully integrate sales, customer service, and operations
  • Upgrade the grid and operations to facilitate the integration of DER

These objectives can only be accomplished by implementing new business models that include developing, owning, and operating DER such as rooftop solar, customer-sited storage, and home energy management systems; providing third-party financing for DER; and offering new products and services focused on energy efficiency and demand response.

There is no going back to the old ways of doing business.  Utilities must lead – by playing both offense and defense – or they run the risk of being out of the competition.

 

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