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.

 

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.

 

Climate Risks Provide More Validation for the Energy Cloud

— October 19, 2015

The U.S. Department of Energy (DOE) just released a new interactive map and report highlighting the risks to resilience and reliability of energy supply at a regional scale across the United States. The report highlights projected climate change impacts across seven regions to direct climate change resiliency and mitigation efforts on the most vulnerable components of our energy infrastructure.

The climate projections and potential impacts span across nine segments of the energy sector, including oil and gas exploration and production, fuel transportation, thermoelectric power generation, hydropower, bioenergy and biofuel production, wind energy, solar energy, electric grid, and energy demand. This comprehensive view of climate change impacts across the energy. The threats are prioritized for each region based on the DOE’s analysis, as illustrated in the map below.

Projected Climate Impacts on the U.S. Energy Sector by Region

Casey Oct. Blog

(Source: U.S. Department of Energy)

The climate change-related threats to fuel transport, the grid, and energy demand underscore the importance of investment and commitment to transforming how we think about and use energy. Navigant Research characterizes this necessary revolution of the energy sector as the energy cloud. Profound changes in the technologies that support our use of energy will also transform the nature of the grid, energy assets, and even buildings.

The rapid increase in investment of distributed energy resources (DER), the technology enablement for demand response, and the growing volumes of data associated with the Internet of Things (IoT) is changing the character of buildings. The intelligent building is the framework that helps building owners leverage technology and services to use the expansive data on facility equipment, operations, occupancy behaviors, and other business systems to optimize energy consumption.

Intelligent building solutions are enabling greater integration of control and automation across systems, from HVAC to plug loads, to deliver more strategic and coordinated energy management. The insights from these building energy management systems and industrial energy management systems direct changes in when and how much energy our buildings use.

As climate change impacts continue to threaten our traditional energy industry, intelligent building solutions can usher in a new era in building management. The opportunity is two-fold; first, the technology can restructure building system operations, and second, the software and services can support the change management of people investing in and operating building systems. The technology is available and capable of delivering sophisticated energy management strategies, and the future will be shaped by how software and services help change the mindset and procedures on the human side of the equation.

 

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.

 

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