Assessing the Challenges and Strategizing for Success
It is hard to frame the magnitude of disruption now descending on the world of energy.
In a few years, half of the consumers of America will have new digital eyes installed on their homes in the form of smart meters that will peer closely at their use of energy. Energy companies will have a flood of information that will disrupt the way they normally conduct business in a way it never has before.
Many will rise to the challenge of creating new services and business models around that information. Many will face a competitive threat from those more adept at taking that information and crafting new services that the energy consumer today may not even know he wants.
At the same time, utilities are spending money at a record pace. Their capital expenditures total is running at a torrid $80 billion a year clip, double the spending of just eight years ago. As their need for capital soars, they are finding that demand for their product, coursing electrons, is flat or growing at a fraction of the pace of a few years ago, a result of both the shifting economic winds and the new passion for energy efficiency.
A vast ocean of newly discovered and retrievable natural gas from shale rock has halved electricity prices since 2008. As a direct result, developers are shelving plans for new coal generation, wind turbines and nuclear power plants.
If sea changes in technology and commodity pricing were not enough, there are also the challenges of government policies. Utilities are wrestling with some of the most expensive rules ever issued by the U.S. Environmental Protection Agency as they enter a new era of restrictions on power plant emissions.
Given this unprecedented turmoil in the electric industry, which is one-tenth of the U.S. economy, EnergyBiz will explore in-depth how threats can be addressed and surmounted at its fourth annual EnergyBiz Leadership Forum in Washington, March 19-21. To learn more about the event and register, please visit www.energybizforum.com.
We have assembled a group of industry leaders to thoroughly explore the key threats confronting the utility sector and how they can best be addressed by you, your company and policymakers. As homework for this challenging assignment, those leaders have helped chart the ground to be covered at the conference.
Utilities being businesses, a top-of-mind concern is how to best recover costs when federal and state policies are imposing enormous pressures on them.
Joseph Rigby, Pepco Holdings chairman, president and chief executive, said, “The thing I'm most concerned about is the alignment of state and federal policy with the economic realities utilities face — either to replace/upgrade infrastructure or comply with environmental regulations.” There must be a reality check. “Simply put, these policies cost money and consumers will have to pay. Having policies that recognize this reality and work to mitigate the cost impacts will be essential."
Recovering costs is one challenge. Policy inconsistencies pose other challenges, according to Thomas F. Farrell II, Dominion chairman, president and chief executive officer, and chairman of the Edison Electric Institute. “The single most disruptive issue facing the industry is the complete lack of consensus on how to move forward and the accompanying lack of a coherent, logical strategy for ensuring adequate energy in the future.
“This injects tremendous uncertainty into the energy business, and it is not too harsh to call the current situation absolute chaos. Policymaking is fragmented, divided into silos, with individual agencies making decisions in isolation, without adequate input from other stakeholders, including other regulators.’’
Susan N. Story, Southern Company Services president and chief executive officer, agreed that discordant policies must be harmonized. “What we have right now is a patchwork quilt of one-off laws and overreaching regulation which will likely cause continued pressure on employment levels and rising energy prices that will burden this already challenged economy,” Story said. “Electricity is important to American families, communities and businesses. The issue of a national energy policy is not a Democrat or Republican issue. This is an American issue.”
While policy inconsistencies need to be addressed, the clock is ticking on aging energy infrastructure that must be dealt with now, said Anthony F. Earley Jr., Pacific Gas & Electric chairman, president and chief executive officer. “When we think about disruption, we typically think first about new and emerging technologies,” Earley said. “But the most disruptive issue may not stem from new technology at all. It may be the huge wave of basic infrastructure that’s coming due for replacement and upgrade as older systems and equipment age. By some estimates, the investment needed is going to top $1 trillion nationwide. How utilities and regulators work together to stay ahead of this challenge — and how it impacts consumers — is going to have enormous implications for the industry. It’s going to demand a tremendous amount of innovation. It’s also going to create incredible opportunities.”
While infrastructure rebuilds and upgrades are taken care of, new technology has an important role to play in the industry’s future, according to Robert S. Shapard, Oncor chairman and chief executive officer. “Much of the electricity grid is older technology than tube televisions and rotary phones,” Shapard said. “We can dramatically improve the electric delivery system, lowering costs and enabling the technologies consumers will need to change the way we consume energy. This includes improved reliable, self-healing networks and a grid that allows consumers to lower costs, improve efficiency, remotely generate power, and better control devices and consumption. It will also enable widespread deployment of electric vehicles. A key technology will be battery and storage advances. These will not only transform electric transportation but will make renewable energy, such as wind and solar, a viable part of our energy future.’’
The challenges are diverse and profound, according to Arun Majumdar, director of ARPA-E and acting under secretary of energy. “Whether we consider the input of fuel and electricity to our society, or the output of emissions, either way we have a long-term problem,” Majumdar said. “On one hand, we’ve got economic and national security risks as they relate to our access to energy, and on the other hand, we’ve got environmental risks. That’s the paradigm that we live in, and in the long run, with the growing global population, it’s unsustainable.”
One important game changer is the promise of vast natural gas resources in shale rock, in the view of John W. Rowe, Exelon chairman and chief executive officer. “The utility industry has faced a number of disruptive issues over the past three decades: PURPA power procurement requirements, the advent of the high-efficiency gas turbine power plant, and the onset of retail competition,” Rowe said. “However, the impact of shale gas development may be larger than any of the others going forward. Natural gas prices have long been the wild card in the power industry, but now it appears that the wild card may be low for a very long time. This affects profits for market-based generators, stranded investment for coal-based generators, and new generation decisions for everyone. More than that, the electricity industry will face new bypass threats as local generation becomes more economic.”
Like a tidal wave, the advent of an era of cheap gas extending as far as the eye can see will make it difficult to continue to pursue a policy of generation supply diversity, Rowe said. “Personally, I believe that cheap natural gas, while a bane to Exelon, is a great boon to the U.S. economy, its energy security and our environment. Slowly but decisively increasing the role of natural gas in our energy supply is the strategy that the market is compelling. While keenly aware that the gods of the marketplace are fickle, I would rather worship them than defy them.”
Farrell, however, maintains that the future is usually more complicated than we anticipate. “Unless we forge a structure to promote a coherent and rational debate on energy, and develop policy based on those rational assessments, energy producers and consumers alike face a very confusing and risky future. These are hard choices, but they must be made.”
Industry thought leaders will be discussing this topic and more at the upcoming EnergyBiz Leadership Forum, Harnessing Disruption, taking place in Washington D.C., March 19-21, 2012. Review full conference details by going to www.energybizforum.com.