Navigant Research Blog

Hope for Utilities with Decreasing Electricity Sales

— July 14, 2016

Cyber Security MonitoringUtilities today face a number of challenges in the changing energy landscape, but across the world, there is one disruptive and broad trend that could break down the traditional electric utility business model: the decoupling of electricity sales with economic growth. Traditionally, population and GDP growth have driven growing energy demand, as my colleague Jan Vrins points out in the blog series, “Take Control of Your Future.” However, over the past decade, the trend line between GDP and energy consumption has separated. Additionally, decreasing or stagnating electricity demand and sales are occurring as the base of customers worldwide is growing, meaning this phenomenon is not happening because the number of customers are decreasing, but because of the more efficient use of energy.

This phenomenon is seen largely in the United States, though studies show a lack of demand for electricity is also occurring in other developed countries in Europe and Asia Pacific. For example, in the European Union (EU), seven member states saw household electricity consumption fall between 2003 and 2013, generally by less than 10%. However, countries like Belgium saw a reduction in consumption of nearly one-quarter (23.9%), according to Eurostat. Among other factors, this reduction can likely be attributed in part to the use of energy-saving devices.

In Asia Pacific, Japan’s consumption of power in August fell to its lowest point since 2003, hitting just 74.6 TWh, and industry specialists expect to see a continuing decline in utility profits. The country has already begun taking steps to mitigate this by diversifying business segments and pursing other energy-related opportunities. Though these measures are technically power consumption versus electricity sales, they represent the idea that declining demand for power—especially for consumers in an economic environment that fosters less electricity usage year-over-year—is likely to challenge revenue growth for power companies.

Stagnating Electricity Sales

In the United States specifically, retail sales of electricity have stagnated, growing less than 1.5% from 2006 to 2015, according to the U.S. Energy Information Administration (EIA). However, the U.S. economy has climbed ahead, growing 11.84% between 2006 and 2015, according to the U.S. Bureau of Economic Analysis. Though this is not a vast amount of growth over a decade, in comparison to electricity sales growth, it is much more substantial; essentially, electricity sales grew at rate just higher than the rate that the GDP has grown annually. This shows that the relationship between economic growth and electricity sales is no longer connected.


 (Source: U.S. Energy Information Administration)

This is challenging for utilities, as many in the United States still rely on building grid infrastructure and increasing the rate base to turn a profit. Slowed or stagnated growth in electricity demand means less need for generation, less investment in infrastructure, slower growth in the utility’s rate base, and, therefore, a threat to revenue. This is happening to utilities all around the country. ISO-New England forecasts that its region’s overall electricity demand is expected to fall by 0.2% annually over the next decade, from 128,014 GWh in 2016 to 125,213 GWh in 2025. PJM has reported that it has retired 26,000 MW of generation infrastructure since 2009, nearly 14% of its generation fleet. NYISO forecasts that energy use in its territory will decrease from 163,514 GWh to 159,382 GWh between 2013 and 2016, stating that its year-over-year growth in the overall usage of electric energy from New York’s bulk electric system is expected to flatten or decline slightly over the next decade.

Despite this challenging forecast, utilities still have options for alternative revenue streams. Utilities can begin to prioritize investments in energy efficiency and distributed energy resources (DER). By offering an integrated package of energy services to customers and becoming a service provider outside of electricity, utilities have a chance to be successful in the future, according to the Rocky Mountain Institute. In order to survive, utilities must learn to align their interests in maintaining revenue with the interests of customers who want clean, affordable energy. This idea is laid out in Navigant’s white paper Taking Control of Your Future: Navigating Megatrends and Tipping Points in the Utilities Industry.


The Human Benefit Potential of LED Lighting

— July 1, 2016

LEDsHumans are visual creatures. Accordingly, the type of light we are exposed to can affect human behavior. Unfortunately, though, the extent to which light affects the brain is not well-known. Indeed, we understand very little about the brain overall, but the extent to which light affects the brain has until recently been largely unstudied. The emergence of LED lighting has enabled scientists to design experiments to ascertain what links exist between light and behavior. LEDs have immense controllability; they can be turned on and off rapidly (even faster than the human eye can perceive) and their color and brightness can be easily tuned. As scientific studies establish the myriad connection between light and behavior, lighting is expected to become an increasingly important part of business strategy, and not just the purview of a facilities manager.

Do You Want Fries With That?

A recent study published in the Journal of Marketing Research quantified the impact that lighting in restaurants has on what and how people eat. The researchers found that brightly lit rooms prompted diners to be more alert, increasing the likelihood of ordering healthy foods by 16%-24% over orders in dimly lit rooms. The study attributed the difference to alertness through comparison of results to follow-up studies that increased diners’ alertness through the use of a caffeine placebo or by prompting diners to be alert.

The human responses to lighting are not limited to inside buildings, either. The American Medical Association issued guidelines for communities to select LED lighting options to minimize potential harmful effects. LEDs emit more blue light than conventional lighting. Though the blue light appears white to the naked eye, it can worsen nighttime glare and decrease visual acuity. Additionally, blue-rich light adversely suppresses melatonin and can potentially lead to reduced sleep times, dissatisfaction with sleep quality, excessive sleepiness, impaired daytime functioning, and obesity. The effects are not limited to humans—outdoor LED lighting can disorient some bird, insect, turtle, and fish species.

The Future Is Bright

Lighting is ubiquitous in the built environment, and as such, the potential to modify human behavior is immense. In the future LED utopia, it will be easier to wake up in the morning, eat healthily, be more productive at work, and be a better person. Beyond personal implications, lighting presents opportunities to businesses as well. Whether it is attracting top talent or increasing sales, many of the challenges businesses face may be addressed by lighting. As we better understand the impact of light on behavior, savvy businesses will be able to translate this effect into better performance.


California Incentive Updates Recognize Value of Storage

— June 29, 2016

??????????????????California’s Self-Generation Incentive Program (SGIP) has been one of the most successful and contentious programs supporting the deployment of distributed energy resources (DER). The program has generated significant attention in recent years from stakeholders pushing changes to how financial incentives are awarded. As a result of recent controversies and the looming grid stability issues facing the state, the California Public Utilities Commission (CPUC) officially announced modifications to the program late last week.

These reforms include a number of significant changes that regulators believe will better align the program’s goals of reducing greenhouse gas emissions and peak demand, improving grid stability, and supporting technologies that have the potential to enable market transformation without long-term subsidies.

Storage Wins Big

The newly agreed upon rules highlight energy storage systems (ESSs) as a key priority for the program moving forward. Most notably, 75% of the program’s $77 million annual budget will be allocated specifically for ESSs, with priority given to systems tied directly to renewable generation. Within this, a 15% carveout has been mandated for residential ESSs specifically, which to date have struggled to secure incentives. The remaining 25% of the budget will go to generation systems, including wind turbines, gas-powered microturbines, and fuel cells. In response to concerns over single companies monopolizing the submission process and taking up a large percentage of the program’s budget, all awards will now be determined based on a lottery system, with no developer able to claim more than 20% of the total annual incentives.

In addition to ESSs being guaranteed the majority of the program’s funding, the actual incentive rates and how they are determined have also changed and will step down gradually each year. Incentives will now be determined based on the total energy capacity (or watt-hours [Wh]) for each system. This change helps align incentives with a system’s discharge duration, and in turn, its ability to reduce peak demand or shift usage to off-peak times. Furthermore, the CPUC has established separate incentive rates for systems that are also receiving financial support through the Investment Tax Credit (ITC). The initial rate for ESSs not receiving ITC support is now set at $0.50/Wh and at $0.36/Wh for systems that do receive the ITC. All residential systems (<10 kW) will receive the full $0.50/Wh incentive.

The new incentive rates also take into account the duration of each system by assigning decreasing rates based on the number of hours of discharge duration. For example, at a $0.50/Wh incentive level, a 4-hour 10 kW ESS would receive a total incentive of $15,000. $10,000 is awarded for the first 20 kWh of capacity, the first 2 hours of duration at 10 kW. An additional $5,000 would be awarded for the remaining 20 kWh, the second 2 hours of duration at 10 kW at a 50% reduced rate.

Looking Ahead

With an estimated $270 million in funding remaining through 2019 for the SGIP, these newly announced changes could have a major impact on California’s DER markets. Hopefully, the reformed program will support a more diverse and competitive market for ESSs that will result in a greater number of new systems and more rapidly falling costs. The state’s regulators recognize the unique and significant value that ESSs can provide the grid and are working to ensure the technology plays a key role in the evolution of the electricity grid.


Take Control of Your Future, Part VIII: The Emerging Energy Cloud and Final Thoughts

— June 16, 2016

Power Cloud ComputingMackinnon Lawrence also contributed to this post.

In the initial blog in this series, I discussed seven megatrends that are fundamentally changing how we produce and use power. Here, I discuss my last megatrend, the emerging Energy Cloud and its role in changing our industry.

What Is Happening?

Since coming back from Chicago, where I attended the EEI Annual Convention, I am even more convinced that the electric power industry is transforming. In the closing session of the convention, several utility CEOs spoke about the current state of this transformation and shared success stories. Although utilities will continue to focus on safe, reliable, and affordable power, they will also have to embrace clean, distributed, and intelligent energy. It was interesting to hear CEOs’ perspectives on customer engagement (“we now actually listen to our customers”), innovation (“we are all in”), and distributed energy resources, or DER (“we want to play”).

While that’s great, we are faced with an enormous dilemma. It is hard to comprehend the complexity of what we are dealing with here. The Energy Cloud will be the product of accelerating innovation, the bulk of which lies beyond our immediate purview. Although we cannot predict or anticipate all the disruptions that will be triggered by emerging technologies, there is an inevitability to this transformation that cannot be ignored. These changes will penetrate all corners of the industry: customers, regulation and policy, technology, business models, and grid operations.

Meanwhile, there is limited or negative demand growth throughout the United States. And because of more efficient ways to use power and more prosumers taking the plunge to generate their own, less and less electrons will flow through the central power system (indefinitely). At the same time, in order to provide safe, reliable power, as well as support a tsunami of DER, exploding Internet of Things (IoT) capabilities at the edge of the grid, and rapid digitalization, significant grid investments are needed. The number one question is: Who will pay for this evolution? The search for new value and pricing models (and there will be many) has begun.

We are at the beginning of the transformation, and I don’t think we have seen anything yet. I predict we will enter a 20-year period of uncertainty, trial-and-error, and both successes and many failures. Along the way, we will figure out ways to transform our power generation, delivery, and consumption system into an orchestrated, flexible, open, and efficient Energy Cloud platform.

The Emerging Energy Cloud

In my blog, “The Impacts of the Evolving Energy Cloud,” I discussed how we are moving away from a centralized hub-and-spoke grid architecture based on large centralized generation assets toward a more decentralized grid with an increased role for renewables, DER, grid-edge IoT, and digitalization. The Energy Cloud is an emerging platform of two-way power flows and intelligent grid architecture. 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 customer relationships, shape policy and regulation, change business models, propel continuous technology innovation, and overhaul grid operations in every single region of the world.

The Energy Cloud

Energy Cloud

(Source: Navigant)

North American utilities are at various stages of integrating distributed generation, demand response, energy efficiency, electric vehicles, and electric storage. Navigant expects this integration trend to accelerate. According to our analysis, DER is projected to grow almost 3 times faster than new central station generation in the next 5 years. That makes DER one of the most disruptive factors affecting the grid today and in the future. From a recent Public Utilities Fortnightly-Navigant survey among 400 utility stakeholders, 90% of survey respondents believe that the growth of DER will force a major shift in utility business models. We believe it is critical that utilities have an integrated DER (iDER) strategy and approach.

Path Forward: The Energy Cloud Playbook

The paths that utilities will follow to transition toward the Energy Cloud will be different. More importantly, the pace by which they move through iDER maturity levels will differ greatly. But understanding the North Star and taking the right steps at the right time are vital to making the transition successful.

At an advanced iDER maturity level, utilities have addressed issues arising from high DER penetration such as intermittency, reverse flows, and power quality issues. Utilities are using both information and operations technology (i.e., IT/OT) and have aligned their business processes, operations, and organizations appropriately. DER management systems (DERMSs) and advanced distribution management systems (ADMSs) are managing DER output at the feeder and substation levels. At this advanced iDER maturity level, the utility has augmented its role as a supplier of electricity and has become a platform provider and network orchestrator that enables prosumers to market their DER assets on an open market. This role is critical to fully maximizing the benefits of DER—and it will be key to providing future value to customers and shareholders.

What’s Next?

While the Energy Cloud is in its infancy today, its evolution will be both pervasive and highly disruptive to stable electric industry revenue streams for the next 30 years or more. Navigant projects that the Energy Cloud’s evolution could result in nearly $1 trillion worth of global investment shifting downstream to the retail segment of the value chain. What’s more, it could add an additional $1 trillion to 1.5 trillion in new value from investments in digital infrastructure and associated services by 2030.

As a follow-up to Navigant’s white paper, The Energy Cloud, we will publish our Energy Cloud 2.0 white paper in the next couple of months. This new white paper will move beyond the “what” to identify the “how.” At the same time, it will provide an Energy Cloud Playbook for the different utility, regulatory, investor, manufacturer, and government stakeholders positioning to build, manage, and protect their future in this emerging ecosystem.

Final Advice: Take Control of Your Future

This post is the eighth and final in a series in which I discussed power industry megatrends and the impacts (“so what”) in more detail. Navigant is at the forefront of what is happening in our industry. We continue to collaborate with our clients to help them navigate the rapidly changing energy landscape.

I have received positive feedback and insightful reactions on this blog series from many. Some readers wanted to understand more about the energy technology trends we see. So Navigant is preparing a new series in which we will cover the specific technology trends that we see disrupting our energy industry. Others have requested a megatrends series focused on oil & gas, which we are working on as well.

The megatrends discussed in this series 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.

I hope you enjoyed this blog series. Stay tuned for future series.

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


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