The Road not taken?

Energy Strategy: The Road Not Taken’ by Amory Lovins, the founder of the Rocky Mountain Institute, explores two different electrical infrastructure paths for the coming 50 years. The first path is a continuation of present federal policy. The second involves a serious commitment to energy efficiency, renewables, and transitional fossil fuels. Lovins argued, convincingly, that the two roads are mutually exclusive; the year was 1976!

Forty-four years later– and renewables are finally being connected to the US grid at scale.

However, the grid was originally designed to distribute electricity in one direction and supply and demand were predictable. Renewable power, though, has changed the paradigm on multiple fronts. Renewable power generation can be large or small and can be connected to either the transmission or distribution grid. Electricity now flows in both directions in the distribution grid, and supply is less predictable. The most significant shift, perhaps, is with consumers.  They are no longer passive. Many now have their own generation and storage stations with intelligent monitoring systems to optimize loads in real-time across complex rate plans. Consumers are becoming prosumers.

On the Edge

The electrical infrastructure in the United States and many other countries is not equipped to handle this new power model. While needs have evolved, the electricity utility has not, and their traditional business model is under threat. Coal and nuclear plants have been closed, leaving balance sheets saddled with stranded assets.  At the same time, new market entrants have clean, sustainable (in more ways than one) balance sheets, strong customer engagement, and the intention to disrupt the undisrupted.

Can the utility survive without a major transformation? Read up on the “Steel Mini Mills” case, how Netflix beat Blockbuster, or how the Ubers and AirBNBs of the world fulfilled consumer needs. The main difference, though, is that the electricity utility cannot fail. Bailouts are used to keep the lights on, but in the end, the bill is footed by residential consumers and taxpayers. To avoid another Fannie Mae, Freddie Mac, or General Motors, something has to change. The distribution grid must become smarter, anticipating supply and demand and then, sourcing and optimizing, accordingly.  The transmission grid needs new, more efficient lines – linking regions with less costly renewable power to the major load centers. Overall, the grids must become more resilient to natural disasters and cyber and physical attacks and require less hands-on maintenance.

The Utility is Dead, Long Live the Utility

Utilities are faced with changing technical requirements, and consumers are demanding cleaner power and advanced services. While government regulation should encourage utilities to adapt to a changing market and accelerate progress toward emissions targets, state regulatory systems and the jigsaw of regulated and unregulated markets have often hampered meaningful transformation of the sector. Federal rollbacks have created uncertainty and further slowed progress and investment.  Underinvestment in areas like smart distribution infrastructure is combined with write-offs of generation assets.

Even so, technology and mass production have finally achieved grid parity (or better) for renewables. Additionally, prosumers, digitalization, and changing regulation have dramatically affected the grid’s requirements and value proposition. In response, a radical pivot with thoughtful leadership and coordinated planning across multiple stakeholders is beginning to take place in the utilities’ C-suite. Utility 2.0 is coming, but its final form is still unknown.

There will be winners, and there will be losers; PG&E and JEA serve as cautionary tales. Utility 2.0 will require a much clearer value proposition for the consumers served. It will need to develop engaging services, embrace continuous digital innovation, and improve operational efficiency.

And while some utilities are struggling, external players see an opportunity. Decarbonization has forced O&G companies to reinvent themselves, viewing the utility space as the new frontier. Danish Oil & Natural Gas (DONG) was a state-owned company founded in 1972 to manage offshore O&G resources. In 2002, DONG built the world’s first large-scale offshore wind farm, and today, it is the largest power producer in Denmark (a leader in renewables deployment) and the largest offshore wind company in the world. By 2017, DONG had divested all its O&G assets and renamed itself Ørsted. The reincarnation was complete. In the last two years, Ørsted‘s share price has more than doubled, and its success has not gone unnoticed. Several O&G majors are actively building a presence in the electricity sector; most prominently, Royal Dutch Shell announced plans in 2019 to enter the power market, attempting to displace incumbents with more money, more scale, and more power.

Now for the Challenge: A Hands-on Approach, Financial Mobility, and Permitting

To remain relevant and profitable, can a utility revise its business model and embrace innovation? Let’s assume “yes,” because there is no alternative. The critical question then becomes: who pays for the transformation as the consumers’ need changes, and with captive customers, who ensures this is done effectively?

Grid (and utility) modernization will require a unique blend of public and private capital. The US must learn from and improve upon best practice examples from utilities around the world and successes in transformation in adjacent sectors. Public Private Partnerships (PPPs) funding of new toll roads, for example, provides many valuable lessons for improvement. In addition to PPPs, the bond markets have examples (e.g. Mosaic, Dividend,
and Sunnova) which leverage asset-backed securitizations and Commercial PACE (Property Assessed Clean Energy) to catalyze residential and commercial solar + storage growth. Nevertheless, commercial finance for SMEs (small & medium enterprises) remains a bottleneck alongside trade professional shortages.

There are, however, a surprising number of grid upgrade projects that already make techno-economic sense and for which enough funding is already available. These projects are not (yet) moving forward due to roadblocks in permitting.  For example, in New England, several independent projects are seeking to build new HVDC lines to transport cheap carbon-free Canadian hydro power to major load centers in the Northeast US. The most advanced of these is the New England Clean Energy Project (NECEC), where the permitting process has been ongoing since 2017. The permitting process was expected to be complete by Q4-2019, but as of January 2020, most of the required permits had still not been granted.

The Crossroads

State governments, policymakers, and utilities face many of the same challenges and decisions that they faced 50 years ago.  However, the consequences of apathy or indecision are becoming far too dire to do nothing; Australia and California are just two examples. There is no longer a dichotomy of paths – renewable vs. fossil, digital vs. analog, smart vs… The road to modernization is complex. We need coordination between knowledgeable stakeholders to guide state legislators towards equitable cost allocation for consumers. At the same time, the industry must encourage competition, reduce the risk of stranded costs, and promote innovation to create a comprehensive grid modernization roadmap.  We are at a crossroads. Which road will we take in 2020?

Stay tuned as we explore lessons learned and illustrate the technology an innovation pathway towards a modern grid and utility model.

About the Authors:

Andrew Bright is an expert in the changing dynamics in the grid sector. He is currently a Board Member of several start-ups in the sustainable energy space and until recently he was Group VP Head of Corporate Development at ABB Power Grids.

Paul C Watson is a Venture Partner at Climate Impact Capital (CIC) and focuses on power, utility infrastructure and new energy innovation.  CIC’s mission is to identify and invest into strategic venture opportunities with corporate venture and institutional partners.