Navigant Research Blog

How Can Regulatory Drivers for DER Realign Utility Business Models

— May 13, 2016

IT InfrastructureThe movement of the electrical grid toward an Energy Cloud model with expanding distributed energy resources (DER) will require new regulatory rules to ensure both reliability and utility profitability. Creating a platform to generate, distribute, and sell energy closer to where it is consumed (referred to as utility 2.0) will require regulation 2.0 changes. Shifting DER and regulatory changes in world markets shape Navigant Research’s DER perspectives, which were highlighted in its recent market forecast report, Distributed Energy Resources Global Forecast.

Those closely following the development of DER models know that movement toward an altered regulatory framework has a number of requirements. These include roadmaps that balance innovation, the economic benefits of competitive markets, the maintenance of reliability, and the reduction of carbon emissions. The 51st State Initiative, a consortium of well-informed industry stakeholders, has created two sets of roadmaps to highlight the type of regulatory changes needed to strengthen the future of the electric industry along these lines.

Advancing Carbon Initiatives

Parallel to DER is the advancement of carbon reduction initiatives in the United States and around the world, as can be seen with the U.S. Environmental Protection Agency’s Clean Power Plan and renewable energy and carbon reduction requirements in both California and New York. DER is likely to play a central role in these efforts. The following developments highlight several recent key regulatory and policy initiatives that are a part of the DER journey:

  • As part of the New York Reforming the Energy Vision proceedings, the New York Public Service Commission (NYPSC) introduced the Benefit Cost Analysis Order. This order will require the NYPSC to place a value on carbon emissions, consider portfolios of DER that capitalize on the grid benefits of DER aggregation software, and consider tariffs that compensate customers who generate their own electricity.
  • NYPSC recently approved Consolidated Edison’s Brooklyn/Queens Demand Management Program to address the overload of substation feeders with a combination of traditional utility-side solutions and non-traditional customer and utility solutions, including energy efficiency and DER.

An important benefit of DER that also includes energy efficiency is the ability mitigate the carbon impact of fossil fuel-based electricity generation. The ability to utilize battery energy storage systems and innovative DER aggregation software suppliers are expected to make demand response, distributed solar, and energy efficiency larger, more reliable parts of the DER landscape. However, the regulation 2.0 changes currently underway will need to align the financial interests of local utilities and distribution system operators. This journey is certain to bring some uncertainty, but also plenty of opportunity for innovation and new business models.

 

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.

 

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. The power of customer choice and changing 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.

 

Tracking the Rise of Distributed Energy Resources

— December 21, 2015

While leaders from nearly 200 nations reached a historic agreement in Paris last week to limit greenhouse gas (GHG) emissions, market forces are already driving the growth of distributed energy resources (DER). This rapidly evolving technology landscape is forcing stakeholders throughout the industry to reconsider the structure of the grid itself in addition to the economics of generating, distributing, and consuming electricity.

Utilities and regulators have taken widely differing stances on the deployment of these resources. While some are beginning to embrace the DER trend by developing new products and services and demonstrating the necessary flexibility to evolve, others have been lobbying aggressively to limit or halt their spread. Although all DER represent a shift away from the traditional centralized grid, the potential of different technologies to disrupt the industry varies considerably. While the term disruption can be somewhat vague, in this sense it refers to developments that can alter the relationship between incumbent service providers and their customers or require significant new investments in grid infrastructure. Navigant Research’s recent report, Distributed Energy Resources Global Forecast, explores the growth and impact of DER worldwide.

New Players Emerging

The DER expected to be the most widely deployed over the coming decade are actually those that will cause the least amount of disruption to the industry; demand response (DR) and fossil-fueled generator sets are already widely deployed and have not resulted in significant change in the industry. Equipment to charge electric vehicles (EVs) is expected to be one of the fastest growing DER segments worldwide. This emerging technology is expected to add significant load on the grid and necessitate new business models by both utilities and third parties to effectively manage this new resource, including vehicle-to-grid capabilities. Some utilities have begun experimenting with innovative programs to own new infrastructure and benefit from the integration of EVs.

Disruption on the Horizon

The rapid growth of distributed solar PV is proving to be disruptive to the industry, generating contentious debates over proper compensation for system owners as well as causing a need for new technologies on the grid to help maintain stability. Along with solar PV, the most disruptive new DER technology in the coming decade may be distributed energy storage systems (DESSs). These systems can provide end users with the ability to consume most of the power they generate onsite, lower their bills, and have power available during an outage, among other benefits. Customers empowered with these technologies may have a radically different relationship with their local energy service provider. Several utilities have taken an active role in this growing industry by offering energy storage and solar PV solutions directly to their customers. Energy providers that fail to adapt to new technologies may find their customer base migrating to alternative solutions.

The growth of DER technologies will bring about the need for a greater level of coordination between stakeholders on the grid to enable a two-way flow of energy and services between customers, utilities, and potentially between customers themselves. Known as the Energy Cloud, this concept can lead to the development of new players within the industry, such as the role of a network orchestrator to ensure a balance of supply and demand on the increasingly distributed and complex network. While the future of DER in most areas may rely heavily on new regulatory frameworks, there is no doubt that the ground is shifting under the global industry and the need for new business models is only a matter of time.

 

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