The utilities want to embrace change. The hard part is figuring out how to go about it
In presentations and interviews with Greentech Media at DistribuTECH 2015,utility executives expressed various strategies for coping with the power industry's impending transformation.
Several recently released reports have also tried to get a handle on emerging trends in the power sector. Overall, the reports show that utilities are keen to embrace change in their industry and profit from new opportunities. The tricky part is figuring out how.
The biggest growth opportunities
According to a survey of 433 U.S. electric utility executives conducted by Utility Dive, the majority of respondents (31 percent) said that distributed energy resources -- which were long seen as a threat -- could become the biggest driver of industry growth. In contrast, only 8 percent of executives viewed centralized generation as a growth opportunity.
Executives listed enhancing the customer relationship as the second biggest growth opportunity (23 percent). New companies that have stepped in to offer distributed energy products and services, like rooftop solar, threaten to degrade ties between customers and the utility. In response, many utilities are adopting a more service-oriented business model to keep up with competitors.
Overall, the U.S. electric utility industry expects increased adoption of natural gas, wind, utility-scale solar and distributed energy resources over the next 20 years, spurred by new business opportunities and environmental regulations. Meanwhile, coal and oil use are expected to decline.
Energy storage is viewed as a particularly important new product, with 53 percent of utility executives saying they should invest more in the technology.
But while the report found that a majority of utilities in the U.S. see distributed energy as a business opportunity, 56 percent of respondents said they still aren’t sure how to build a business model around it.
Dated regulatory frameworks designed to encourage more sales make it even harder for utilities to capitalize on new opportunities. Most utility executives (56 percent) said they would prefer performance-based ratemaking over the traditional cost-of-service regulation.
What do consumers want?
Itron recently conducted a broader survey of 900 informed consumers and 900 executives from gas, water and electric utilities in 16 countries that found a similar emphasis on the need for change. A total of 83 percent of utility executives surveyed believe transformation is necessary, while 55 percent believe the industry is not running efficiently and 21 percent believe the state of infrastructure will be worse in five years.
The report found that each year, a whopping $40 billion is wasted in lost electricity, natural gas and water resources in the U.S. alone. By recapturing even a small portion of that, utilities could make significant investments in new technologies and infrastructure that increase resourcefulness and lay the groundwork for a future-proof business model.
Interestingly, informed consumers think the challenges facing the utility industry are more urgent than utility executives seem to. For instance, 29 percent of consumers think the inability to manage changing customer expectations is an urgent concern for the industry, versus 15 percent of utility executives. Consumers also think the adoption of new technologies is more urgent than do utility executives -- 32 percent versus 23 percent, respectively.
While some utilities are moving faster than others, it is clear that technology will play a key role in reshaping the customer-utility relationship and allowing service providers to improve their resource efficiency, cost management and sustainability, according to Black & Veatch’s 2015 Strategic Directions: Smart Utility report.
In some areas, there has already been a lot of activity. For instance, 64.5 percent of utilities surveyed by Black & Veatch said they’re already deploying smart electric grid technologies.
Justifying these investments can be difficult, however. Even if they recognize the need for technological advancement, stockholders still expect profitability, and customers and regulators still demand cost containment.
“Smart utility rollouts have been plagued by skepticism at the customer level, largely because they are misunderstood,” according to the report. “The past year has seen utilities struggle to convince residents of the required cost of smart grid updates and the steps customers can take at home -- often with the help of utility-provided devices -- to enable their own smarter choices.”
However, even if consumers don't fully understand the smart grid, they do like the benefits it can offer.
A recent report by the Smart Grid Consumer Collaborative found that most consumers -- across a spectrum of high, average and low engagement with energy products, services and programs -- want to lower their energy bills, conserve resources and believe that they’re energy-conscious.
What do regulators want?
Regulators have a somewhat different set of priorities.
In a UBS survey of 32 commissioners and commission staff, natural gas emerged as a top priority. Nearly 62 percent percent said that gas pipeline infrastructure and safety issues are either extremely important or a key initiative.
In a separate survey question, regulators ranked demand response/energy efficiency and environmental compliance as their top priorities. The neutral “new generation” option was third.
While demand response is a priority for several regulators, 24 percent of regulators think the biggest impediment will be to decide on appropriate compensation for demand response/energy efficiency providers. Another 24 percent think the biggest roadblock is insufficient markets for these products.
Creating “the grid of things”
In the face of global forces such as rapid technological development, demographic changes, urbanization, climate change and a shift in power to emerging economies, utilities must adapt in order to continue to grow, according to a recent power sector report from PricewaterhouseCoopers.
“Sector transformation could shrink the role of some power utility companies to providers of backup power,” according to the report. Successful companies will be ones that use innovative technologies, products, services, processes and business models to gain competitive advantage.
PwC foresees eight future business models that could emerge beyond the traditional utility model that vary in terms of their scope, basis for competition and source of earnings.
According to the Edison Foundation Institute for Electric Innovation (IEI), a utility industry-affiliated group, electric utilities will continue to play a pivotal role in powering the U.S. economy while experiencing significant changes.
IEI recently documented 55 case studies showing how the distribution grid platform is already evolving in real time to meet three critical needs: integrating new energy resources, optimizing the distribution grid platform and providing better customer solutions. As energy resources at the grid edgecontinue to grow, IEI believes utilities will expand their role as operators of a plug-and-play platform for integrating new energy services and technologies.
“It’s a future where the grid we operate serves as the platform to interconnect and enable all of the emerging energy technologies our customers want to pursue,” said Chris Johns, president of Pacific Gas and Electric Company and co-chair of the IEI management committee. “In other words, a ‘grid of things.’”
(This news story is from Green tech Media)