Navigant Research Blog

May Comes in like a Lion for Demand-Side Management

— May 11, 2016

multimeterLast week was a busy one in the demand-side management (DSM) industry, with M&A activity and regulatory news both making headlines. It started first thing on the morning of May 2 with the announcement that Opower was being bought by Oracle for over $500 million. This move shouldn’t be so surprising since it was just over a year ago that the two companies announced a partnership to enable utilities to integrate Opower’s tools into Oracle’s systems and vice versa.

EnerNOC is now the only publicly traded pure-play DSM provider left standing. Could it be that dealing with the regulatory risk and long timeframes for deal making in the utility industry is a mismatch with Wall Street’s pressure for quarterly earnings? Opower appeared to have a good pipeline of projects, but the market did not seem to value it enough to provide attractive returns for investors. Furthermore, the energy software business requires extensive R&D spending, so the prospects for an annual profit were too long for the NASDAQ set. As part of a larger organization, the long project runways could be blended in with other quicker turnaround products, and R&D expenditures could be swallowed among the much larger expenses at Oracle. The only question is how committed Oracle is to Opower’s legacy DSM products versus focusing on solutions more directly in line with its business.

CPower on the Move

Later that same day, word spread that CPower acquired rival Johnson Control’s Integrated Demand Resources business. This move thins the already-small commercial and industrial demand response (DR) aggregation sector. It also continues the trend of larger organizations getting out of the DR business, which started when Constellation sold off CPower in 2014. For CPower, the acquisition is the latest move to expand following the purchase of Demand Response Partners in 2015. CPower and Johnson Controls still intend to retain a commercial relationship that would allow CPower to offer DR services to Johnson’s customers, and CPower customers could gain access to Johnson’s building management technologies for their facilities.

These cases appear to show some contradictory trends between acquisitions and divestitures of DSM businesses by larger entities. However, they both seem to agree on the point that DSM may survive either as part of a bigger firm or as an independent private company, but as a standalone public entity, the road ahead is hard. Look at Comverge, which went public in 2007 but went back private a few years later and has seemed to steadily grow under the radar since then, or Nest, which is able to keep its finances out of public view as part of the Google empire.

Emergency Generators

The final piece of noteworthy news relates to the U.S. Environmental Protection Agency’s (EPA’s) rules for emergency generators (EG) for DR purposes. Last year, the U.S. Court of Appeals overturned an EPA rule that allowed 100 hours of EG use for emergency DR programs. It granted the EPA a 1-year stay, which expired on May 1, 2016. The EPA has no plans to make changes to the rule, meaning that the court’s ruling will remain intact, affecting upward of 20% of DR resources in some markets.  However, there is still some ambiguity in the remaining EPA rule language, so the fight will continue to allow EG to participate to some extent.

If the first week of May was any indication, it could be an interesting summer for DSM, but these recent developments may have been just some early fireworks before a regular course of business settles in.

 

Take Control of Your Future, Part II: The Power of Customer Choice and Changing Demands

— May 9, 2016

DataIn my last blog post, I discussed seven megatrends that are fundamentally changing how we produce and use power. In this blog, I discuss how customer choice and changing customer demands have become the leading drivers of industry transformation.

Move from “Big Power to Small Energy”

Customer choice is driving a large move from big power to small energy. More and more customers are choosing to install distributed energy resources (DER) on their premises. DER solutions include distributed generation, demand response, energy efficiency, distributed storage, microgrids, and electric vehicles. This year, DER deployments will reach 30 GW in the United States. According to the U.S. Energy Information Administration (EIA), central generation net capacity additions (new generation additions minus retirements) are estimated at 19.7 GW in 2016. This means that DER is already growing significantly faster than central generation. On a 5-year basis (2015-2019), DER in the United States is growing almost 3 times faster than central generation (168 GW vs. 57 GW). This trend varies by region because policy approaches, market dynamics, and structures vary. However, the overall move to small power will persist. In other words, the movement toward customer-centric solutions and DER will ultimately become commonplace worldwide.

Annual Installed DER Power Capacity Additions by DER Technology, United States: 2015-2024

Jan Blog Update(Source: Navigant analysis)

Customer Choice: Everything Is Changing

Customers want to self-generate and sell that power back to the grid. Customers also want new energy management products and services from their utility or other providers. The rise of the prosumer and active consumer movement is being fueled by three things:

  • A growing number of customers care about how and where their energy is generated and about the impacts of global warming.
  • Unprecedented and rapid technology advances are bringing greener energy choices directly to consumers.
  • New and disruptive entrants are rapidly emerging that give customers meaningful energy usage insights and options related to their homes, businesses, and transportation choices.

Where we see this movement picking up pace is in the increased number of commercial and industrial (C&I) customers that are choosing to implement their own more sustainable energy solutions. Amazon, Apple, Cisco, Google, Honda, Walmart, and other large energy users have increased their focus on installing onsite solar. Walmart has 142 MW of solar PV capacity at 348 installations in the United States, according to the Solar Energy Industries Association’s (SEIA’s) Solar Means Business 2015: Top U.S. Corporate Solar Users report. The retail company has a 100% renewable energy target, together with 57 others currently as part of RE100. And then there is the “Power Forward” movement, where 215 Fortune 500 companies are pursuing their own investments in local greenhouse gas (GHG) reductions, sustainability, or renewable energy initiatives. Power Forward 2.0 states that if incumbent utilities are not proactive (e.g., offer power purchases agreements, financing, rates, or project development), then they will be bypassed in favor of third-party energy providers (including non-regulated subsidiaries of incumbent utilities).

What Is New?

The focus on customer engagement and improving the customer experience is not new. In recent years, utilities have tried to improve the customer experience by introducing broader self-service, multi-channel options, and advanced information on energy products and usage. Such improvements include offering energy management applications like DTE’s Insight app.

What is new (and isn’t getting enough attention) are the actual implications of customer choice. With the increased availability of DER and new energy management technologies, the breadth and diversity of customer needs and interests that the utility will have to deal with are growing exponentially. Meeting diverse and changing customer demands is forcing utilities to rethink their role in the energy value chain. The range of possible services goes well beyond what they currently provide, including building energy management solutions, fast demand response, distributed generation, storage, microgrids, etc. Utilities must understand the full impact of all this on their customer service processes and systems. They must also understand how DER and advanced energy management solutions will affect their strategy, product innovation, business models, and the way they operate the grid. Taking an integrated and holistic approach is key.

Who Else Wants to Play?

Besides the incumbent utility, we see new entrants coming into the market that are focused on meeting the changing demands of large energy users. In the last 6 months, we have seen several announcements of new business models going after this market. Some examples are described below.

  • Edison International is launching a business that will help reduce energy costs, improve efficiency, and offer more environmentally friendly options for large energy users. The company’s new subsidiary, Edison Energy, aims to serve commercial buildings, data centers, retail centers, healthcare operations, and educational institutions nationwide.
  • Duke Energy’s Commercial portfolio president, Greg Wolf, has said, “In addition to utility-scale solar projects, we’ve also made investments in distributed generation and energy management systems for commercial and industrial companies.” Last year, Duke Renewables bought majority stakes in REC Solar (for commercial businesses) and Phoenix Energy (energy management systems and services for C&I customers).
  • GE Current combines GE’s products and services in energy efficiency, solar, storage, and onsite power with our digital and analytical capabilities to provide customers—hospitals, universities, retail stores, and cities—with more profitable energy solutions,” said Jeff Immelt, Chairman and CEO of General Electric (GE). Customers include Walgreens, Simon Property Group, Hilton Worldwide, JPMorgan Chase, Hospital Corporation of America, Intel, and Trane.

What Does All This Mean for the Incumbent Utility?

The incumbent utility (which includes the traditional competitive retailer not offering DER) has to adapt. Customers will look for better, greener, and cheaper alternatives, and more and more of these alternatives are becoming available. What’s more, the fight has started for the business of large C&I customers. If only a small percentage of large C&I customers switch over, the incumbent utilities will be in trouble. This will affect their revenue streams, roles, and the cost versus value of the centralized managed grid.

Facing declining revenue as customers consume less and produce more of their own power, utilities are faced with potential stranded generation (and eventually transmission and distribution) assets. This makes it even harder to make large investments (aimed at improving reliability and resilience) in their current grid while also making it more intelligent. And finally, they have to make investments in developing DER capabilities, offerings, and businesses. Given these challenges, utilities must play both defense and offense.

An updated defensive strategy will entail:

  • Engaging with customers to understand their customer choices and changing demands vis-a-vis price and reliability.
  • Engaging with regulators to find equitable ways to charge net metering customers for transmission and distribution services that fairly address the cost to serve.
  • Improving customer service and grid reliability at the lowest prices possible.
  • 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.

The above objectives can only be accomplished by implementing new business models that include developing, owning, and operating integrated DER such as community solar, customer-sited storage, microgrids, charging stations, building energy management systems, and home energy management systems. These goals also require utilities to provide third-party financing for DER and offer 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 defense and offense—or they run the risk of being sidelined.

This is the second in a series of posts in which I will discuss each of the power industry megatrends and impacts (“so what?”) in more detail. My next blog will cover the rising number of carbon emissions reduction policies and regulations. Stay tuned.

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

 

Recapping the PLMA Spring Conference

— May 2, 2016

Home Thermostat DialThe Peak Load Management Alliance’s Spring Conference was recently held in San Francisco from April 18 to 20. It felt great to be back in the Bay Area after having worked out there on the first generation of demand response (DR) programs to help avert rolling blackouts following the Enron mess. That saga is well in the past now, but DR continues to evolve and adapt to the changing market conditions due to technology, policy, and economic forces. Leading practitioners and visionaries in the industry were at the conference, trading opinions on several themes that coalesced as the event progressed.

The concept of integrated demand-side management was discussed from a couple of different angles. First off, there’s the combination of energy efficiency and DR program offerings based on enabling technologies like smart thermostats and targeting specific geographic territories. Utilities like NV Energy and Commonwealth Edison reviewed their thermostat experiences, while Consolidated Edison, Central Hudson, Pacific Gas & Electric, and National Grid explained how to drill down to the distribution level to address location-specific constraints. Successful implementation will require breaking through the traditional utility and regulatory silos that separate energy efficiency and DR operations and budgets.

Second, there was the concept of integrating DR with other distributed energy resources like energy storage and solar PV as a full-service offering for customers that addresses their concerns outside of technology silos. Hawaii and California were highlighted as areas that are dealing with this market shift in real time, leading to new operational system needs and program design structures.

Some of the early utility and vendor adopters of the BYOT, or Bring Your Own Thermostat, design concept—including Xcel Energy, SCE, Great River Energy, Nest, and EnergyHub—provided their best practices and lessons learned, while the audience pondered how quickly this model could go mainstream. There was a lot of discussion about the technical and operational barriers to bringing BYOT to scale and maximizing customer engagement without turning them off through excessive hoops to jump through. It was mentioned that the seemingly simple step of requiring a customer to provide a utility account number in order to sign up for a program dramatically reduces the likelihood of enrollment.

The next opportunity for DR thought leaders to convene will be the National Town Meeting on DR in Washington, D.C., running from July 11 to 13. It might not be as exciting as it was to be in D.C. last fall for the Supreme Court hearing on DR, but there should be plenty to talk about as the presidential election heats up.

 

Integrated Demand Side Management Gathers Steam Through Targeted Approaches

— March 17, 2016

Network switch and UTP ethernet cablesIntegrated demand-side management (IDSM) has been a topic among DSM professionals and utilities in the United States for a decade. However, efforts to integrate energy efficiency and demand response (DR) in utility programs thus far has been challenging, and little progress has been made. Traditionally, energy efficiency and DR have been siloed within utilities, with misaligned goals and barriers to transferring funds between programs. Yet, the integration of DSM programs has become increasingly popular, especially in places such as California, where the combination of these programs has been used as a fundamental part of the state’s energy planning and strategy.

There is no standard definition of IDSM at this point in time, but the most common definition combines energy efficiency and DR technologies. There is also an aspect of integrating electric and gas DSM programs. More recently, integration has evolved to include other resources such as energy storage, solar, and fossil fuel-based distributed generation. The key drivers for advancing IDSM include technical, policy, and economic factors, such as increasing DSM goals and regulatory pressures, program cost reduction potential, targeted DSM, grid modernization, and smart thermostats.

Barriers to Overcome

However, the slow rate of IDSM program development points to a number of barriers to be overcome. These include utility organizational structures and budgets that are siloed and hard to cross-promote; energy audits that don’t consider both types of measures; cost-effectiveness and measurement and verification challenges with accounting for both types of benefits and potential double-counting; vendor conflicts of interest; and niche, early-adopter customer markets that may not accurately reflect the mass market potential for these offerings.

The move toward targeting DSM to specific distribution-level areas with high load growth or infrastructure constraints appears to be a growing trend. Historically, DSM programs were administered state- or utility-territorywide as a means to reduce overall system energy usage. As the electric grid has aged and general load growth has slowed due to economic conditions and the success of large-scale DSM programs, a more discreet form of DSM may be more effective and efficient. Even if systemwide load growth slows, many utilities will still have areas on their network with higher growth rates due to residential or commercial development.

An all-of-the-above DSM approach is valuable in such cases, since it may be unrealistic to have separate energy efficiency and DR vendors and marketing efforts to a small geographic territory. A combined effort makes sense so as to not overload customers with multiple messages. The concept of a non-wires alternative (NWA) has entered the lexicon, where a utility will look at other means of meeting its reliability requirements at a lower cost than a traditional distribution capital expenditure upgrade. Utilities such as Con Edison, National Grid, and Central Hudson have recently initiated such targeted DSM programs to address acute system needs.

Navigant Research’s new report, Integrated Demand Side Management, covers these topics and case studies in addition to forecasting of future growth of IDSM. As utility models, policies, and technologies evolve, the integration of various resources will only increase in practice and importance.

 

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