The US utility market is changing and the traditionally dominant players are seemingly beset on all sides. Could the distributed generation sector hold the key to a new business model? Elisa Wood spots signs of a new relationship.
At the end of last year outgoing chairman of Duke Energy, Jim Rogers delivered a message of détente to end a strained relationship between US utilities and distributed generators that had lasted years.
It is no easy task, given how the two have viewed each other. Rogers jokes that the relationship has been like Motown Records (the utilities) trying to prevent the Beatles (the distributed generators) from invading the US music scene in the 1960s.
The music ultimately co-existed and thrived. So, too, will the energy players, according to Rogers: “We need to avoid the tyranny of either one or the other. I think our country needs both.”
Rogers brought his message to Boston and a conference held by the World Alliance for Decentralized Energy (WADE) and the Northeast Clean Heat and Power Initiative.
Why is the utility industry offering an olive branch? Some credit the emergence of Utility 2.0, a new business model for utilities that embraces alternative electricity technologies such as distributed energy and Smart Grid.
The fact that Rogers is pushing for this friendship is significant. Based in North Carolina, Duke Energy is the largest electricity utility in the US with 7.2 million customers. And Rogers is seen as one of the most persuasive thinkers in the industry. He is not alone in reaching out to the decentralized energy sector. The same message is coming from other prominent US utility leaders, as they ready for an era of revolution in the power plant industry. Indeed,WADE aptly played the Beatles song Revolution to kick off its conference.
The utility industry is preparing for a massive infrastructure turnover. Rogers points out that all of the power plants operating today are likely to be retired by 2050. It is an enormous fleet to replace; the US has almost 7000 power plants of at least 1 MW. In all, they represent more than 1100 GW of electricity generating capacity. Configuring the new grid requires careful thought; the US will feel the economic and environmental consequences of any wrong decision for years to come.
“We all need to work together. The utilities are not the bad guys. We’re trying to find solutions,” says Ralph LaRossa, president of Public Service Enterprise Group (PSEG), another influential utility leader who spoke.
But how exactly can utilities and distributed generation companies work together? It’s easy to see why acrimony exists. The distributed generators are the newcomers, the disrupters. The utilities are the old guard with enormous market and regulatory influence. Utilities make their money selling electrons. Distributed generators take away some of that business. It doesn’t sound like a marriage made in heaven.
That’s where Utility 2.0 comes in to play. Rogers sees the utility role changing. The new utility, he says, will be an “optimizer,” an entity trying to gather the best technologies and services. Not a resister, but a facilitator who works with the decentralized energy industry “side-by-side in the distributed generation space.”
This shift isn’t sudden, but a direction that the utility sector has been heading for some time, as regulators have gradually weakened its monopoly status. Rogers traces the changes to 1978 when the US enacted the Public Utility Regulatory Policies Act. Commonly known as PURPA, the law required utilities to contract for power from cogeneration plants and small renewable generators.
“That was the start of the erosion of the generation monopoly,” Rogers says. Next came deregulation in several states and the rise of the independent power developer and the competitive retail supplier – more utility rivals. That was followed by about 30 states establishing renewable portfolio standards – requirements that utilities make renewables a portion of their supply portfolio. Utilities have also seen their authority weaken with the establishment of regional transmission organizations and independent system operators that manage much of the nation’s grid, he says.
Today, the utility finds its monopoly sway largely confined to one segment of the electricity business: the distribution system, where an electron makes the final leg of its journey into the home or business. And “the attack on that has now started,” Rogers says, with rooftop solar and other forms of distributed power generation.
|Boston played host to 300 utility and DE professonals in November last year|
Where does that leave the utility? It becomes less a monopoly, more an investor, a central exchange that redeploys capital and manages changes in government energy policy. “Or I’d go a step further and say we need to anticipate those changes, help shape the changes, and be an early mover in terms of investing in the new areas,” adds Rogers.
LaRossa sees the utility as suited well to deploy capital in underserved markets. “If the capital market will go ahead and fund something, go for it, you don’t need utility involvement. But if there is a subsidy involved in some way, shape or form, we are a good way to attract that capital and deploy that capital for the consumer. It is that simple.”
So, as an investor, and as a purveyor of public policy, the new utility is on the lookout for technology investments that can serve the changing grid. Decentralized energy is definitely high on the list.
One storm changed everything
Why are utilities so interested in distributed energy now? One word: Sandy. The 2012 superstorm left a deep impression on the industry and its regulators, after knocking out power to parts of New York City and other areas in the Northeast and Mid-Atlantic for as long as two weeks.
“I was in a basement in Newark and the lights went out in our general office,” says PSEG’s LaRossa. “The world changed for me, for the 10,000 people that work for the company. No ifs, ands or buts about it, the way that people think about reliability changed after Sandy came through New Jersey.”
Like other utilities hit by the storm – or informed by the magnitude of its destruction – PSEG is now focused on grid resiliency. The company finds itself “looking for every solution, every distributed generation solution, every centralized generation solution, every solution to keep this system up and running as best we can,” he says. “We are building redundancy into substations. We are strengthening the pole lines. We’re undergrounding where it make sense. And, yes, we are looking for distributed generation from combined heat and power type solutions and microgrids.”
Among other things, PSEG is installing a microgrid in the city of Hoboken, New Jersey, which was hit particularly hard by Sandy. The system includes a large gas turbine at a downtown hotel that will support the hotel, a college, municipal government and a hospital. The idea is to keep the city’s core services operating should another severe storm hit, LaRossa says.
The project is being built by a partnership that includes the City of Hoboken, the US Department of Energy, the New Jersey Board of Public Utilities, and PSE&G – PSEG’s regulated subsidiary that serves three quarters of New Jersey’s population, about 2.2 million electricity and 1.8 million gas consumers. “That small microgrid will hopefully become a microcosm of what we can do and deploy in other places,” LaRossa says.
But one large problem remains. If utilities transition into the 2.0 role, how will they earn revenue? As more customers leave the system for self or distributed generation, utilities will see electricity sales drop. This is bad news, especially now, given that electricity sales are already anemic in the US because of a weakened economy and aggressive energy efficiency measures. In fact, the US Energy Information Administration forecasts US electricity use falling by 1.1% this year in its January 2014 Short-Term Energy Outlook.
Some warn that the increase in distributed energy could lead to a utility death spiral, in which utilities lose so many customers that they must raise rates on their shrinking base to cover sunk costs. This causes more customers to flee and forces utilities to raise rates more, and the cycle continues until the utility is bankrupt.
The death spiral may represent an extreme. Still, utilities worry about their financial position as distributed generation grows, and as they simultaneously struggle to meet other new requirements – such as the need to bolster the grid for storms and replace aging infrastructure. It’s still unclear what financial mode best suits Utility 2.0. But it is clear that the repercussions of any decision will extend beyond just utilities. Rogers says that finding a successful model for utilities “is in the best interest” of decentralized energy too.
These problems are not uniquely American. European utilities face similar issues, according to Christoph Burger, who with Jens Weinmann co-authored the book, The Decentralized Energy Revolution: Business Strategies for a New Paradigm.
“Even if North American and European electricity markets remain geographically and technically dissociated and the shale gas boom in the USA is not at all paralleled in Europe, the challenges that utilities face seem to have some striking similarities,” he says. “Major European power utilities have started realizing that their core business model is under threat: Generating electricity in large fossil-fired or nuclear power plants and selling it on wholesale markets is not as lucrative as it used to be,” he concludes.
Utilities have to adapt their business strategies to the new realities – decentralized energy supply will remain a core element of the future energy system, and it will even increase in importance in the years to come, according to Burger. Power companies must find new sources of revenue, and as in most industries, any change in the business model requires an overhaul of the corporate culture, he adds.
He points to Germany-based RWE, one of Europe’s five leading electricity and gas companies, as an example. The company has developed and patented a public charging system for electric vehicles that allows for roaming across countries and charging technologies. So far, the company has reportedly installed more than 2500 charging stations across Germany and its neighboring countries, he observes.
Other companies have changed their business models so that they act as operator, not owner, of renewable energy installations. They offer an integrated service package to investors and energy co-operatives who own the plants, he says
“The utilities’ expertise in managing a system as complex as electricity supply will most likely become one unique selling proposition. For example E.ON, the other large German utility, has teamed up with a Munich-based startup Entelios to offer demand-side management with interruptible loads to commercial and smaller industrial customers. E.ON is also actively targeting the micro CHP market. The company has already installed around 4000 cogeneration plants,” Burger says.
Of course, more than one economic model will likely develop, given the fact that the US handles its electricity policy as if it were 50 different countries, each state with its own regulations.
“I tell people I am steeped in international relations because I deal with North Carolina versus South Carolina,” Rogers jokes again.
More seriously, he says, “The reality is that today the market is a muddled hybrid. You have 19 states that have deregulated generation. You have 29 states that have an RPS. Virtually all of the utilities in the US, except some of the utilities in the old South, have joined RTOs and ISOs. There is not one size fits all in terms of the power sector in the US.”
So in the US, Utility 2.0 might be more aptly called Utility 2.0 divided by 50.
Beyond cathedral ideas
But this is “cathedral” thinking, points out David Sweet, WADE’s executive director. The Utility 2.0 model is still emerging. What kind of deal-making is available now for decentralized companies?
Immediate opportunities are in play. It comes as little surprise to distributed generators to hear that these are in areas with high electricity prices and pro-distributed generation government policies.
With PSEG taking over management of the Long Island Power Authority’s transmission and distribution system under a 12-year contract on 1 January, LaRossa says:”I’ll give you a heads up. Come to Long Island. New York State is out actively talking about Utility 2.0 and opportunity there.” He continues: “Prices are high on Long Island. Bring a solution that comes in at 10 [US] cents [per kWh], you’ll wind up getting business.”
Other areas of New York also offer immediate business prospects. The state has budgeted US$100 million for combined heat and power with the goal of improving grid resiliency, according to Dana Levy, programme manager at the New York State Energy and Research Development Authority. About half of the money will go towards projects that can be operating in New York City within two years.
New York has developed an innovative catalog of prequalified CHP equipment vendors that have undergone rigorous NYSERDA review. Those listed are allowed a dedicated rebate based on system size. By way of example, Levy says a 300 kW system would receive a $510,000 rebate when installed and in operation in the state. It receives an additional 10 per cent bonus payment if installed at a ‘mission critical’ facility, such as an evacuation shelter, hospital, supermarket, or telecommunications installation. That would bring the system incentive to $561,000. Incentives also are available for absorption chillers based on the electricity they displace. Under a separate schedule, fuel cells can receive as much as $1 million for a 300 kW system.
The catalog includes 64 CHP modules from ten vendors, including Aegis Energy Services, Veolia’s Cogenco CHP, Ener-G Cogen, Ener-G Rudox, Gem Energy, Intelligen Power Systems, Kraft Power, RSP Systems, Tecogen and Unison Energy. NYSERDA continues to review equipment with the intent of adding additional vendors and products, too.
Levy says that he hopes other states will adopt the catalog approach and a unified national list eventually emerges.
This year, WADE will also start a certification programme aimed at promoting best practices. “If we’re going to do distributed energy right, we have to look at all of these new technologies coming into the space,” says Steve Zilonis, WADE chairman.
Hope of technology
“We’ve got technology changing everywhere. There are hundreds of solutions in this room. There are hundreds of solutions in somebody’s mind someplace else,” LaRossa says.
It is that technology that will determine the shape of Utility 2.0, according to Rogers, especially with Congress unwilling to take action on climate change.
“It is almost impossible to build a consensus on anything in Congress, I don’t think policy is a solution,” Rogers says. “My hope is really in the innovation of new technologies.”
He points to the US’ new plentiful gas supply, as an example of technology shaping the industry.
“Shale gas was the greatest example of innovation. It wasn’t done by a major oil company. It was done by an independent, not a big guy, a little guy,” he says.
The resulting drop in natural gas prices shifted the way we think about clean fuels, he says. Existing paradigm had been that a cleaner fuel was a more expensive fuel. The shale gas revolution proved that energy can be both cleaner and cheaper, Rogers says.
Low natural gas prices are a particular boon to the US CHP industry, since natural gas fuels 71% of the country’s 82 GW of CHP capacity. This accounts for 18% of annual natural gas demand, according to a recent report by the American Gas Association (AGA) and ICF International, The Opportunity for CHP in the US.
“The elephant in the room is natural gas,” says Zilonis. “We can lose power in this country for six months and natural gas will still flow. So DE on the back of that can be a very important thing.”
According to Richard Murphy of the AGA, the report found a technical potential of 123,303 MW for CHP plants under 100 MW. Of that, 6355 MW offers strong economic potential with a payback of less than five years and 35,257 MW offers moderate economic potential with a payback of between five and ten years.
Unfortunately, potential CHP users prefer a shorter payback of one to two years, according to the report. A little more than half would reject a project with a payback of two years. So the report suggests that the gas industry take proactive steps to encourage CHP adoption. Gas utilities, for example, might offer financing for CHP projects or even develop CHP projects where this is allowed under state rules.
2014 and beyond
With the 2013 WADE conference attracting about 300 people to Boston, the organization hopes to triple attendance at this year’s event in New York City, in conjunction with NYSERDA.
|Duke Energy’s Rogers believes the utility and decentralized energy sectors should work more closely together|
This expectation comes as the face of changes in the decentralized energy sector, Zilonis says. “We know we want better reliability and resiliency. We want clean energy. But we need to be diligent in our own ability to perform best practices for DE and CHP as an industry,” he notes.
Zilonis points to examples of best approaches, such as the NYSERDA model, the recommendations made by AGA, and the work of the Environmental Protection Agency’s CHP Partnership and the Department of Energy’s Technical Assistance Partnerships.
Of course, energy sector change is happening so quickly, it is hard to know exactly what forms power and heat production will take in the coming decades.
PSEG’s LaRossa gives a hint of what he envisions when he holds up his cell phone and says: “I can guarantee you that the only generation my kids care about is what’s in here. I don’t know how we’re going to generate power from in here (the cell phone). But some day you all will be sitting in a room and there will be a bunch of other people who will be talking about how we will generate everything from this little device.”
A CHP plant that you can carry in your pocket? Who knows? It’s hard to imagine. But then so was the day when US utilities would befriend decentralized energy. Yet, it seems that day has arrived based on the vision offered at WADE’s annual conference.