The Great Transformers

A New Era for The U.S. Utility Industry

By Robert C. Bellemare, P.E.
Chief Operating Officer
UtiliPoint International, Inc.

Trillions of dollars: That is the amount the electric utility industry will invest globally to build a more efficient system in the coming decades. What fundamental changes do energy leaders think must be made along the entire electric value chain—from wholesale, where low- or zero-emissions generation resources are expected to become mainstream, to retail, where technology innovation is opening doors to practical ways of empowering customers to better control how and when they use energy?

In the words of Michael Yackira, president and chief executive officer of NV Energy, Inc., “It is the evolution of technology that is going to change this industry forever. Ten years from now, this industry will be perceived differently and will interact with its customers differently, very much because of that technology change.”

Power Generation

The incorporation of nontraditional power-generation resources such as wind and other renewable energy systems is creating new technical challenges within the industry. Some resources, such as rooftop photovoltaic systems, are being placed in parts of the electric system where power generation resources never existed before—for example, a house or commercial building.

Gordon van Welie, president and chief executive officer of the Independent System Operator New England (ISONE), explains the issue. “Over the next 10 to 20 years, the power system will have a much greater penetration of intermittent resources like renewable energy resources, demand resources and distributed generation. It wouldn’t surprise me to see that, 10 years from now, 20% to 30% of our power will be generated from alternative resources, which will be less predictable and will increase the complexity of the system operator’s job. Development and implementation of smart grid technology will help us manage that complexity and operational risks, in particular, by increasing the speed and granularity of data acquisition, as well as improved software tools that will enhance the operator’s ability to ensure power system reliability.”

Traditional resources such as coal, nuclear and natural gas plants will also continue to play an important role. Despite its high carbon dioxide and other emissions, most industry analysts expect coal, which currently supplies 50% of the electricity generated in the U.S., to continue being the workhorse of the industry. In the view of Michael Morris, chairman, president and chief executive officer of American Electric Power, one of the largest utilities and owners of generation assets in the country, “I am clear in my mind that carbon-control technology will be deployed in the 2020–2030 timeline.

I still think that a captured-carbon, energy-efficient cleanair-act-compliant coal facility will be cost competitive in the marketplace.”

In addition, nuclear power may well see a rebirth. Over two dozen new reactors are in various stages of being permitted in the U.S. Nuclear power offers the ability to generate large amounts of power with zero greenhouse gas emissions, but these capital-intensive plants are difficult to finance. Take, for example, Tennessee Valley Authority (TVA). Its Watts Barr nuclear power plant had a generator that was 80% complete in the late 1980s when the project was shelved, and it is now spending $2.5 billion to finish the job and have the unit online in 2013.

Natural gas will continue to play an important role in filling any gaps in the supply-demand picture. This relatively clean-burning fossil fuel has been plagued with volatile energy prices because of tight supply-demand margin in the fuel supply markets. However, relief is in sight as recent advancements in extracting natural gas from unconventional sources such as shale deposits are causing a buzz in the industry, with some estimates showing there may be supplies for 100 years or more in such formations.

At the same time, the generation sector will continue to be a portfolio of resources. Too often the debate in the public eye appears to be “wind or solar or coal or nuclear or gas,” when in reality all resources are needed to provide a reliable generation supply at affordable prices.

Power Transmission

Moving power over long distances requires the use of high-voltage transmission lines. While transmission makes up only 5% to 10% of a customer’s electric bill, it is critical to the overall reliability and economic operation of the electric system. Investment is fl owing into this sector to modernize the system and to gain access to remote wind regions. For example, North Dakota alone is capable of producing enough wind-generated power to meet more than one-fourth of U.S. electricity demand.

This need for investment is not lost on federal regulators. Jon Wellinghoff, chairman of the Federal Energy Regulatory Commission (FERC), explains, “We need to revitalize our bulk transmissions systems so we can start to move energy across this country in a way that makes it more competitive. We can integrate much more of our renewable resources that are economically developable in remote locations throughout the Midwest, where we have wind, and the Southwest, where we have substantial solar resources. All of that potential cannot be realized until we really update the transmission system, and again, that is an area we need to move in on very rapidly.”

Joseph Welch, president and chief executive officer of the independent transmission company ITC Corporation, sees the wisdom in this approach: “Once we start the transformation of that high-voltage grid, it will be analogous to what happened in the country after we built the interstate highway system. We will start to do commerce in the electric space totally differently than the way we do it today.” Welch is also a strong supporter of a larger role for the federal government in interstate transmission projects. “This system will have to come under the jurisdiction of the Federal Energy Regulatory Commission,” he says.

“We need a business model where we can invest in our customers and help defer energy use and make a return on that investment, the same way we make a return on our capital investment.”

Michael Chesser, Chairman and Chief Executive Officer, Great Plains Energy and KCP&L

Deep in the heart of Texas, the outcome of this industry change is being felt today. Texas is a wind-rich state with most of its commercial wind resources located in the western part of the state, distant from urban areas. On the drawing board for the next five years are over $8 billion and 5,729 circuit miles of investment in new transmission lines in the Electric Reliability Council of Texas (ERCOT), which is responsible for the transmission system in most of the state. ERCOT is also investing over $640 million to revamp its wholesale markets, where electricity will be priced almost at a neighborhood level. Pricing soon will be done at more than 4,000 transmission nodes, in contrast to just a handful of regions within Texas today.

Customer Empowerment

Smartphones, home area networks (HANs) and smart appliances capable of responding in real time to electricity prices are just some of the technologies revolutionizing how consumers manage their electricity usage. The Department of Energy recently designated $3.4 billion in cost-matching funds for projects designed for “smart” electricity management, through which customers will no longer need to wait a month to find out what electricity they used and at what cost. UtiliPoint forecasts that in ten years 55% of households will have “smart meters” capable of monitoring electric use in real time. It’s all adding up to customers being empowered to control their own energy usage and expenditures.

As Dr. George Arnold, national coordinator for smart grid interoperability at the National Institute of Standards and Technology (NIST), explains, “The major new ingredients here are the information technology and communications that provide real-time visibility into conditions in the grid. The ability to integrate all this data and act on it is going to be a major, major transformation for the electric utilities. The smart grid will also help to provide consumers with the information, automation and tools they need to control and optimize energy use.”

“Once we start the transformation of that high-voltage grid, it will be analogous to what happened
in the country after we built the interstate highway system. We will start to do commerce
in the electric space totally differently than the way we do it today.”

Joseph Welch, President and Chief Executive Officer, ITC Corporation

Carl Chapman, president and chief operating officer of Vectren Corporation, a Midwestern electric and gas utility, also sees this as an important shift in the industry: “We are really focused on how we can help our customers lower their bills. There will continue to be pressure on energy costs, so we have been looking at energy efficiency programs and decoupling in our electric territory, and we already have those in our gas territories.”

Decoupling is a financial framework in which a utility’s earnings are not tied to consumption, and the utility is given financial incentives to help customers use electricity more efficiently. Changing the financial framework for how the industry operates is key to removing any barriers to the adoption of these technologies, as Michael Chesser, chairman and chief executive officer of Great Plains Energy and KCP&L, explains: “We need to be able to help our customers conserve energy, pay them incentives and make as much along those incentives as when we are building a power plant. That is a 180-degree shift. We need a business model where we can invest in our customers and help defer energy use and make a return on that investment, the same way we make a return on our capital investment.”

A 180-degree shift? Yes, that is what we are witnessing, and it may take billions or even a trillion dollars or more in the U.S. to get there. But imagine a world where you receive an alert on your smartphone telling you your hot water tank might have just failed, or that someone turned on a light when no one should be in the house. The year 2020 will be a time of choice, both in how your electricity is generated and transmitted, and in how you program your appliances to consume electricity.

The next decade will see the utility industry’s transformation to a consumer-driven environment.