FORTNIGHTLY PUBLIC UTILITIES Reliability Standards A fresh look at benefits, costs, and consequences. January 2015 ENERGY, MONEY, POWER PLUS A Role for Coal Falling Demand New York s Distributed Future
Demand Disruption Utilities should think hard about business models. Ahead BY GREG BOLINO 30 PUBLIC UTILITIES FORTNIGHTLY JANUARY 2015
Can Stock Photo Inc. / focalpoint A ccelerating growth of new energy technologies is already having a profound impact on energy demand and on the utilities industry. Over the next decade, this trend, driven by policies, technology innovation, rising electricity prices, shifting consumer behavior and other macroeconomic factors, will force a transformation of utility business models. There already are numerous popular reports of a looming utilities death spiral of customers migrating off the grid or using the grid only as a backup, forcing utilities to increase rates for their remaining customers, thereby pushing more customers off the grid, creating a vicious cycle. To determine the likelihood of this scenario and to assess the impact and the extent of the disruption to the utilities industry in the coming years, Accenture conducted extensive research and modelled several potential scenarios. This analysis found that the death spiral, as commonly defined, is a myth. It is unlikely that customers will defect from the grid due to physical constraints and because the economics of doing so will remain prohibitive in the foreseeable future. We do, however, see major effects on load as a result of accelerating adoption of energy demand-disrupting technologies, such as photovoltaics (PV), electricity storage, electrification of heating and transport, energy efficiency, and demand response. The impact of these technologies on load will significantly impact utilities revenues. According to Accenture s Digitally Enabled Grid research, 1 these technologies are evolving rapidly and could reduce demand by as much as 15 percent by 2025. Current State of Play In terms of energy technologies, the biggest changes in adoption are in four main areas: 1. Distributed Generation. 2. Energy Efficiency. 3. Energy Conservation and Demand Response. 4. Energy Substitution. First, with the rise of distributed generation, energy from solar PV, better storage technologies, and the proliferation of miniand micro-combined heat and power (CHP), or co-generation stations, are all reducing grid demand. For example, German 1. Accenture research estimates that energy technologies could reduce demand by more than 15% by 2025. Moreover, continued adoption of technologies capable of disrupting energy demand could drive down utility revenues by an amount between $18 billion and $48 billion a year in the United States, and between 39 billion to 61 billion a year in Europe by 2025, according to the latest Accenture research. See, Accenture Digitally Enabled Grid Research : How Can Utilities Survive Energy Demand Disruption? Posted Dec. 8,, at www.accenture.com/us-en/pages/insight-digitally-enabled-grid-utilities-surviveenergy-demand-disruption.aspx. 2. The soaring cost of tech s next big thing; Window on Wall Street, International New York Times, January 23, ; Energy efficiency is the biggest emission reduction contributor in the EU energy roadmap to 2050, Energy Roadmap 2050, European Commission, December 2011; UK Government commits 500 million to electric vehicles - Nick Clegg launches 500m scheme to boost electric cars in Britain, Independent Online, April 29, ; German output from solar PV reached 23.1 GW on 9.06., German solar PV generation peaks at over half of demand on June 9th,, Energy Monitor Worldwide, June 19, ; PV provided 10% of demand in Italy from Jan to Aug - Italy Faces Legal Backlash Over Renewables Subsidy Cuts, World Gas Intelligence, September 24,. 3. ibid 4. ibid The Death Spiral is a myth, but we do see demand falling maybe 15 percent over the next ten years. output from solar PV reached 25 GW in June and, from January to August, solar PV sources provided 10 percent of power demand in Italy. 2 Second, energy efficiency leads to adoption of more efficient lighting and services to manage automation and energy use, which also are driving reductions in energy consumption. In addition, homebuilders, appliance makers and other manufacturers are creating ever more efficient ways to insulate homes and reduce power usage. In the EU energy roadmap to 2050, energy efficiency is the biggest emissions reduction contributor. 3 Third, with advances in energy conservation and demand response, many companies are seeking ways to help consumers exert more control over their energy demand and the timing of power consumption. Fourth, the electrification of transport and heating is accelerating, leading to increased energy substitution. For example, the UK government recently committed 500 million to electric vehicles (EVs). 4 Just as energy technologies are evolving, so are perceptions among utility executives of the threat that they pose. Our research found that utility executives are notably growing more concerned Greg Bolino is a managing director in Accenture s Strategy practice and the digital lead for its utilities industry group. JANUARY 2015 PUBLIC UTILITIES FORTNIGHTLY 31
FIG. 1 FAULTS, SHORTS & POWER QUALITY Utilities anticipate additional complexity in grid operations which could negatively impact reliability. Our Survey Asked: Do you expect grid faults to increase by 2020 (i.e., shorted circuits, bi-directional power flows, power quality issues) due to the following assets? Base: All respondents. Large-/utility-scale renewables (medium-voltage connection)? Distributed renewable generation (low-volage connection)? Source: Accenture s Digitally Enabled Grid* program, and executive surveys 41% 33% 53% 61% * Accenture s Digitally Enabled Grid program source for these findings provides actionable insights and recommendations around the challenges and opportunities utilities face along the path to a smarter grid. Drawing upon primary research insights from utilities executives around the world as well as Accenture analysis, The Digitally Enabled Grid examines how utilities executives expect smart grid technologies and solutions to contribute to their future networks. For more information on Accenture s Digitally Enabled Grid program, go to www.accenture.com/digitallyenabledgrid. about the impact of these technologies on future revenue streams, with 61 percent saying that they expect significant or moderate revenue reductions as a result of distributed generation, such as solar PV, compared to 43 percent last year. Additionally, as a result of distributed generation, 61 percent of executives expect an increase in grid faults in low-voltage connections by 2020, such as shorted circuits, bi-directional power flows, and power quality issues up from 41 percent last year. In, 53 percent of respondents said that large, utility-scale renewables and medium-voltage connections would cause grid faults to increase, up from 33 percent last year (see Figure 1). Executives also anticipate more competition in multiple areas of their business such as data-related services. One of the biggest changes was in expected competition growth in plug-in electric vehicles (PEVs) and the associated charging infrastructure: 81 percent of respondents said competition in this area will increase over the next five years, up from just 59 percent in (see Figure 2). And, although unlikely, the concept of a death spiral is very real in the minds of utilities executives. Among those we surveyed, 60 percent said they thought the death spiral will materialize in the next 10 years, although most also indicated that customers were unlikely to become entirely self-sufficient. Alternative Scenarios for Utilities We developed and analyzed three scenarios to assess the impact of technology adoption on load and on current utilities business models (see Figure 3). Among the major drivers of adoption we evaluated were regulations, technology innovation and cost curves, electricity and commodity prices, macroeconomic factors, and changing consumer behaviors. Ultimately, we believe energy technologies will be adopted more aggressively than in our Status Quo scenario because of underlying economics. In many markets, solar PV with subsidies is already at parity with the grid, or it will be very soon. In our survey, 17 percent of executives forecast that solar PV with storage will reach parity without any subsidies by 2020, 23 percent by 2025 and 29 percent by 2030. Similarly, 14 percent of respondents said that PV costs alone were at grid parity for domestic customers without any subsidies today, while 29 percent said grid parity would be reached by 2020, and 24 percent said it would happen by 2025. The economics of solar and other technologies suggest that the Status Quo assumptions are too conservative. On the other hand, the Perfect Storm scenario is also unlikely because of natural limitations on the effectiveness of distributed generation for many consumers (see Figure 4). In the U.S., for example, only about two-thirds (67 percent) of households live in 32 PUBLIC UTILITIES FORTNIGHTLY JANUARY 2015
FIG. 2 RISING COMPETITION Already-high expectations for new competition in the next five years across a number of areas have increased. Our Survey Asked: Do you believe competition from new entrants will increase in the following areas in the next five years? Base: All respondents. Competition in data-related services? Competition in plug-in vehicles and associated charging infrastructure services? Competition in power electronics hardware and services? Source: Accenture s Digitally Enabled Grid program, and executive surveys 85% 59% 46% 92% 81% 73% single-occupancy buildings, and only about 45 percent of those own, rather than rent, such buildings. Even among households that own a single-occupancy dwelling, only 29 percent have the right roof orientation for direct generation via solar PV. Further to this, the economics of going off grid also remain prohibitive for most customers. The quantity of storage needed to become energy self-sufficient is too large for most customers to contemplate, both financially and in terms of physical space requirements. No Regrets Capabilities So while the Perfect Storm scenario appears less likely, the impact of the more conservative Demand Disruption scenario is still significant and would pose challenges to utilities from both a financial perspective and also an operational one. And, as should be noted, the more devastating Perfect Storm scenario should not be ruled out. These scenarios raise a few key questions for utilities executives. The first question: What operating capabilities should they invest in now, given the changes that are likely to occur? Above all, utilities have to develop, what we call no regrets capabilities, driving performance improvement in today s context while also providing a foundation for emerging utilities models. Given the three scenarios, we believe utilities should focus on three main areas, which will be important in any new business model. Grid optimization. Utilities should invest in capabilities that will help run the grid in a more optimal way, such as real-time grid analytics, power optimization, grid automation, and sensing devices. These will support more Just as technologies are evolving, perceptions are growing about the threat they pose. effective decision-making and control optimization, and eventually enable dynamic integration with demand response. Our research indicates that utilities executives are stepping up investments in key control solutions. In, 68 percent of respondents said that distribution sensing and automation solutions were a top priority for investment, up from 58 percent in. Nearly as many respondents (61 percent) identified distribution management systems as a top priority in, up from 46 percent in. Predictive and control analytics using data from intelligent grid devices were named as a top priority by 60 percent of respondents in and. Regulations and tariffs. Companies need to protect their earnings in the current model while developing their earnings stream JANUARY 2015 PUBLIC UTILITIES FORTNIGHTLY 33
FIG. 3 THREE POSSIBLE SCENARIOS Status quo Long-term trends in energy demand and electricity price No major breakthrough on technology costs Withdrawal of subsidies by 2018 Low-consumer interest in the uptake of new energy products and services Demand disruption Energy efficiency and distributed generation possible without subsidies Falling technology costs Moderate rise in electricity prices Greater penetration from shifting consumer sentiment Moderate reduction in load Perfect storm Subsidies continue to early 2020s Technology costs plummet Electricity prices rise (to cover the subsidy and integration costs) Customers accelerate energy technology deployment Significant load reduction and revenue losses FIG. 4 All households Single occupancy (not apartments) Owned (not rented) SOLAR FEASIBILITY Accenture assessment of market size, USA residential PV example. Roof orientation (South, SE or SW) 100% 67% 45% 29% in the new model. In order to do this, utilities need to map out regulatory policies that will help accomplish these objectives and work with regulators to shape the direction of these policies. As many as 56 percent of utilities executives expect to seek tariff changes to ensure viability of the grid. Digital customer models and services. To prepare for growth in energy-related services, utilities need to inject their customer interaction models with digital capabilities. This will not only improve customer satisfaction and lower the cost to serve, but also establish a viable platform for providing and managing Source: Accenture analysis additional services. A majority of utility executives expect to provide storage solutions, distributed generation installation services, micro-grid and data-related services, and 4 percent expect to provide home-automation solutions. A Path Forward The second question utilities executives must answer is this: What are the new business model options for utilities in the future? When telecommunications companies faced threats from voice-over-ip competitors, they made critical strategic choices in terms of technology and scope. For example, Verizon launched a fiber-optic media service called FIOS and AT&T launched a home services package called the Digital Life. More than ever, utilities now face similar choices about their role, and the scope of services they will offer in their markets. Several utilities in Europe and Asia are already making strategic bets to restructure their company. The evolving business models will focus far greater emphasis on the optimization of the distribution system and integration with the customer, including services to manage more complex and distributed energy resources. We see a new model displacing the traditional obligation to serve, which was a foundation principle for utilities for decades, with a duty to optimize the commitment to optimize energy resources on all sides of the network. As the industry continues on its course of evolutionary change, flexibility will be critical to balancing the priorities of managing stability and prosperity, while charting a course for a new business model. And recognizing the potential risk to the utilities business model is the first step. New operating capabilities, like analytics and automation, take time to implement and mature, and there is inherently a need to balance risks of acting now with waiting for more clarity on a future model. However, while there is indeed an element of risk in moving forward now, the risk in betting on the status quo is far greater. F 34 PUBLIC UTILITIES FORTNIGHTLY JANUARY 2015