Opportunities up for grabs
Of all the markets across the world which are taking steps down liberalization lane, the USA remains the one to watch. The final destination of US power is still not clear, but one thing seems sure – the glittering prizes available to winners in this market will eclipse those found in all other markets around the world.
In the USA, all customer classes are currently being deregulated. However, deregulation is taking place on a state-by-state basis and it is likely to be a good many years before the market is fully open. This may change, of course, if the federal government can find the will, the legislative authority and the political authority to push through a bill. A more likely situation is that the current process of gradual state-by-state deregulation will continue and it will be these events which force the hand of the federal government rather than the reverse.
The strength of the states in the process of US deregulation is one of the reasons why energy companies adopt, for the most part, a regional strategy. In fact there are very few companies with the capacity or the will to pursue a national strategy.
The key role of states
In terms of deregulation, US state regulators are on a par with the federal institutions. Each state has its own regulatory authority, often called a Public Service Commission (PSC) or something similar. The jurisdictional coverage of the state regulators encompasses areas such as:
– Setting the retail price rates for the various rate classes (where these are still regulated)
– Determining the level of stranded cost recovery
– Approving new market entrants
– Approving restructuring plans – mandating unbundling, divestment and market power issues.
The kinds of decisions that are undertaken by the state regulatory authorities focus the attentions of the utilities. In addition there are two other characteristics of the US market which serve to enhance the attraction of the local market: the localized nature of transmission; and the size of the US market itself.
The US transmission market is not a national grid-type. Rather, transmission in the USA is owned by the vertically integrated investor-owned utilities (IOUs). At the broadest level the USA is broken into three interconnections: Western, Eastern and Ercot. In general, electricity cannot be wheeled between these areas. At the narrowest level, there are an increasing number of tight power pools such as PJM (Pennsylvania, New Jersey and Massachusetts).
The size of the US market also acts as an inhibitor on the development of a national strategy. For example, there are a great number of variations in the market across such a large area with four time zones and differing climates. An example of the diversity in the USA can be seen in Figure 1, which shows the response to linking a cash bonus with switching electricity supplier. This question was asked in a MarketLine survey of residential customers across the USA.
MarketLine has built up and maintains a database of major US energy users. The database forms the foundation of their Panel systems, which target key end-user sectors such as office buildings, hospitals, retailers and heavy industrial users. Each sector covers an approximate five per cent of the relevant market depending on its key parameters such as floorspace, beds, sites and usage, respectively. No fewer than 200 responses were used for any market sector.
Each end-user completed a mail questionnaire or a telephone interview, and these were undertaken during the first quarter of 1998. The questionnaire and subject matter were piloted with editorial advisers and approved by a select group of end-users and suppliers. All members of the databases are guaranteed (subject to waiver) protection from identification.
Using the results of the survey, we can look at some examples of how energy managers at facilities across the country are shaping up to increase their demands. This will present opportunities for new entrants to satisfy demand where the traditional utilities have not been active. The first case study is the potential market for auto-generation within the industrial sector.
Slightly over 50 per cent of the respondents intend to use some sort of on-site generation. There are a number of different reasons as to why end-users intend to use on-site generation. Depending on the reasons, distributed generation will cause a headache for wire companies and create an important window of opportunity for genset manufacturers.
As the US utility industry unbundles, each individual function will become aware of new success determinants. For the wire company, maintaining or increasing throughput will become one of the new drivers. To this end, the wire companies will not view an increase in distributed generation favourably. US state regulators will normally keep incumbent wirecos from using their expert knowledge of the local market. To mitigate this, it is likely to engage in measures to increase throughput but without the ability to market `beyond the meter`. Such methods include enhanced security lighting for car parks.
Reference to Figure 2 may provide some measure of reassurance to wirecos. Almost two-thirds of the end-users surveyed intend to use on-site generation mainly for back-up power. Just eight per cent of survey respondents intended to use their on-site facilities to generate base load.
As the diagram illustrates, the majority of users (53 per cent) intend to use auto-generation for backup. This point should be considered seriously because it indicates a large number of users with the capability to generate some of their own power but who have not yet really dipped into these resources yet. These backup energy users represent a large cross-section of users with the potential to reassess their energy purchases and to make better use of their on-site generation abilities.
There are several suppliers who currently offer incentives to customers who can implement on-site generation into their schedule, this is an integral service offering and one that would affect over 50 per cent of industrial customers. Suppliers need to facilitate the integration of on-site generation with their use of purchased electricity. Not only will this lower costs to the customer, but it will also relieve some of the demands put on supplier resources.
Some of the end-users who hold on-site facilities may find the cost of generation too high to use this plant in any situation other than during outages. Some portion of these users may find that a refurbishment of the generation assets will result in the ability to generate during periods of high prices.
It is also interesting to look at what type of on-site energy most users implement. Almost half of the respondents (47 per cent) indicated that cogeneration was the means by which they produced their on-site energy. Under a third (29 per cent) indicated that they used conventional thermal energy and about a quarter (24 per cent) did not specify a particular method.
The on-site generation market is likely to be one of several different areas where the break up of the traditional market structures opens opportunities for new companies. Some of these areas can be identified at an early stage whereas many others will only become apparent as deregulation continues its steady progress across the country.
There are, however, still many wildcards which could radically alter the direction of the game. The most important of these include the impact of an all-encompassing federal law, and voter dissatisfaction with the liberalization process.
Another impact of deregulation will be a certain level of aggregation in the market. Aggregation is likely to go further than simply unifying all of the end-user`s company consumption sites. In certain circumstances end-users may even aggregate with the sites of another company, a rival even. All user parties stand to gain from the benefits which the increased scale confers. Further- more, it is possible that a number of firms may seek to have their employees aggregated into the load, enabling workers to gain a service from the company, at no cost, in the form of lower utility bills.
While the latter option was not a survey question, a number of the end-users who offered opinions on the subject found it to be an extremely attractive option. This mechanism would allow suppliers to gain residential customers at a very low cost.
In the survey, some 67 per cent of the respondents in the commercial sector are expected to aggregate their own sites, while about five per cent will aggregate with other companies` sites. This proportion represents more than two-thirds of the potential market, making it an interesting and worthwhile topic to touch upon for both users and suppliers. Figure 3 shows a flow diagram for aggregation by energy end-users in the commercial marketplace. It outlines the overall user preferences for aggregated supplies. To the right of the flow chart is a list of the different forms of aggregation covered by aggregators whereas the left side gives the proportion of users who desire a single supplier without seeking aggregation.
A third case study involves the exploitable opportunities presented by differences between sub-sectors. Even when a particular usage class has been identified, the identification of opportunities does not end there. Within attractive user classes, there are a number of sub-sectors where focus may be directed.
For example, the commercial sector has a number of very important sub-sectors which can provide opportunities for increased business or new developments. Such sectors include the education, healthcare and government sectors, and opportunities will vary within each of these.
For example, in Table 1 we can see that there are a number of areas where hospitals are characteristically more likely to prefer certain energy services. Two such areas include Total Energy and Facilities Management (TEFM) and performance contracting.
The case studies highlighted show that there are several opportunities which are opening up in the deregulating energy markets of the USA. As liberalisation rolls out across the US, new entrants will begin to seek out these potential new revenue streams. Early preparation and local market knowledge will put entrants in a good position to take advantage of situations which promise big rewards for the winners
Figure 1. Variation in US regions for a supplier offering
Figure 2. Purpose and type of on-site generation, heavy industrial users
Figure 3. Forecasts for aggregation in the commercial buildings sector
Figure 4. Manufacturing is a key end-user of energy in the US