October 13, 2014 at 9:46 am ET
In late September, the hippies over at Citi Research, the insights arm of the third largest bank in the United States, made this prediction:
“Energy storage [is] a technological advancement that can tie together all the other disruptive changes we’ve seen in the past decade. On one hand, it is going to create a new revenue stream for technology companies, but on the other it could permanently alter the utilities’ business models, with very negative repercussions for conventional power generation and end user supply…” – Citi Research, “Energy Darwinism II”, September 25, 2014
Pretty striking stuff, and certainly not the first time someone has suggested such things. The utility industry’s own trade group warned of sector disruption late last year, “Without fundamental changes to regulatory rules and recovery paradigms, one can speculate as to the adverse impact of disruptive challenges on electric utilities…” And in May, 2014, Barclays downgraded the high-grade bond market for the entire electric utility sector on the premise that “new technology will replace the 100 year old model in which fuel is burned in a central location, converted to electricity and sent across wires to the various points of use.”
And indeed, the phrase “utility business model of the future” has been brought into vogue as the Next Big Thing™ for many in the energy sector. After all, when a major Wall Street bank is predicting a fundamental shift in your business model, it might be time to start listening.
Some are already paying attention. NRG’s David Crane has spent the last several years telling anyone who will listen that “Renewables are a fact of life” and that the power industry “has done almost nothing to prepare for the future, even though the challenges are plain to see.” And admittedly, he’s probably earned the right. NRG has aggressively moved into forward-looking business models, including their well-known eVgo network for electric vehicle charging, a demand response acquisition and a company-wide emphasis on renewables and gas for wholesale generation.
Does this mean that the utility sector, and their increasingly documented pushback against evolving business models is doomed to fail at the hands of independent power producers? Will the U.S. suddenly become a nation powered by rooftops alone? Unlikely, of course. The utility sector is still worth something in the neighborhood of $1.10T and electric utility equities are up 32% in the past five years.
But this brings us back to the Citi report.
Written in bold on page 30 is a second, important prediction: “US utilities will ‘eventually’ adapt and join the party. Why? Several reasons, including: (1) it makes economic sense to do so, (2) fuel diversity needs [to decouple power prices from gas prices] and, (3) good hedge against upcoming EPA environmental legislation”
Again, it’s hard to overstate the importance of this sentiment. Through a combination of true market economics, and prevailing wisdom – notably on climate and the concept of ‘power management’ – the evolution of the U.S. power system is not a question of if, but rather a question of when.
Disruptions will come in numerous forms (Citi focused on storage in their latest report) and sure, some percentage of the utility sector will probably push back on evolution. But the broader takeaway from Citi’s and many others’ reports pointing to a shift in the power sector is that we must stop attempting to shoehorn new technology into an old system. This is fundamental change – nothing less.
While a $1.1T market won’t disappear overnight, there are a few steps that industry players can start with to better prepare for the fundamental differences between where we’ve been and where we’re going.
First, it’s time to lay political sentiment aside and take realistic stock of the disruptors in front of us. From generation to end-user, the economics of DG, demand response, other approaches to efficiency and a diversified generation mix necessitates a new approach to power systems. This is not something that can be captured in political or rhetorical arguments. The fact is, Citi cites large-scale storage as one tipping point that could force major systems change in the next 15 years. As long as the battery market continues to grow, this technology will arrive whether the incumbent energy industries like it or not – fights over “subsidies” be damned.
Second, we need to pay close attention to the multi-tiered consumer support system that ranges from the utility/IPP component, to arbitrage players like energy brokers and commodity markets, the role of governmental entities like PUCs/PSCs, and emerging technologies like demand response, DG and microgrid application. The consumer is getting closer and closer to their energy usage than ever before – literally in the case of rooftop solar, and figuratively in terms of awareness about climate impact and usage habits. By recognizing the growing complexity and opportunity of how these entities interact, the energy sector writ large can better adapt to emerging trends and make this fundamental change and economic opportunity instead of what Citi calls “significant – and in some cases terminal – challenges.”
Simply put, it’s no longer good enough to think of power generation and delivery as a liner process with select, siloed offshoot services – as we’ve experienced more or less uninterrupted for nearly 100 years. Instead, regardless of what the new ‘utility business model of the future’ looks like, preparations for an entirely new power system must be made. Yes, will take place politically, at the regulatory level, through rapid growth in the private sector and yes, also in the existing utility space. But allowing for true systems innovation early on will give a serious competitive edge to the U.S. economy as these technologies scale globally.
Those who recognize and take advantage of the coming change early, could very well find themselves on the front of a Wall Street equity research report. Those who don’t, may not find themselves anywhere at all.
Kevin Haley is the Director of Communications for the American Council On Renewable Energy (ACORE). You can reach him on twitter at @kevinhaleyACORE.