Energy transition:
Utilities take center stage
The World Bank tells us that the current global electrification rate is sitting at about 90% and has risen by over 15% in just 20 years. It is utility companies around the globe that are delivering that energy and – no strangers to disruption and change – they have been keeping our power flowing for well over a century. But as the post-pandemic dust begins to settle, key players in the utilities industry are taking a good look around and realizing that they’re operating in a very different landscape than ever before. If the energy sector wishes to meet its net-zero goals and still remain profitable, it will mean addressing new players and practices and responding to rapidly changing customer demands and behaviors.
When it comes to clean energy transition, the world will be looking to the utilities sector for leadership and technological innovation as we collectively strive for decarbonization.
What is energy transition?
Energy transition refers to the shift from fossil-based systems of energy production and consumption – including oil, natural gas, and coal – to renewable energy sources such as wind and solar. The shift also encompasses the trend toward a connected network of distributed energy sources and away from traditionally centralized utilities and single sources of power.
Decarbonization and the economic shift toward sustainable energy
In their extensive Carbonomics report, Goldman Sachs notes that, in 2021, spending on renewable energy projects is predicted to surpass upstream oil and gas spending for the first time in history. Part of the reason these projects are so attractive is that the cost of delivering renewable energy is rapidly decreasing. A recent International Renewable Energy Agency (IRENA) report takes a look at the global weighted average levelized cost of electricity (LCOE) of renewable energy projects and finds that in the past 10 years “utility-scale solar photovoltaics (PV) fell 82%; concentrated solar power (CSP) by 47%; onshore wind by 39%; and offshore wind down more than 29%.”
The report goes on to state that oil and gas spending is down more than 60% from 2014 and that the global oil reserve life (ratio of oil reserves to oil production) has also dropped significantly. In response to these trends, Forbes tells us that in the past year “many private investment banks, including Deutsche Bank, Morgan Stanley MS, and Citi Bank, have also announced their strategies to reduce their exposure to the oil and gas sector. Additionally, big private equity firms are now increasingly putting their investments into decarbonization technologies.”
At the moment, utilities companies find themselves in a time of increased investor appetite for renewables projects and continually lowering costs of related infrastructure and start-up costs.
Sustainability and business performance
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Utility-scale renewable energy sources and technologies
In the long-term quest to eliminate fossil fuel dependency, there are several arenas of human activity that will need to be decarbonized over time including transport, heavy industry, manufacturing, and the built environment. However, as the provider of energy to most of those other industries, the utilities sector is on point for clean energy transition initiatives.
What is utility-scale?
We are seeing growing networks of smaller, more widely scattered energy generators and distributors, as well as greater overall demand for renewable energy sources like solar and wind.
The term “utility-scale” serves as a yardstick by which we measure the capacity of all these resources. To be considered utility-scale, an energy system or network should be able to generate at least 10 megawatts or more – with reliability and consistency.
Below are some of the most common renewable energy sources and the pros and cons their utility-scale implementation may present.
- Solar energy: Traditional solar modules use concentrating solar power (CSP) technologies and are limited due to their functional need for direct sunlight. However, the technologies around photovoltaic (PV) solar modules (that can use both direct and diffuse sunlight) have been advancing at a rapid pace. And their cost has been declining at an equally speedy rate, seeing the price of crystalline silicon PV modules drop by over 80% since 2010. When you factor in the $0.00 price of sunshine and the steadily lowering balance of system (BoS) costs, solar is becoming an increasingly profitable option within the utilities industry.
- Hydropower: This is, of course, the backbone of energy production for many of the world’s largest utilities sector players. Hydroelectric power is clean, abundant, and pairs well with other renewable energy sources to fill intermittency gaps. Problem is: the building of utilities-grade dams involves engineering projects of epic cost and proportion. It also typically involves contentious land reclamation efforts and the potential for disasters of equally epic proportion if anything should ever fail or burst. In other words, if the infrastructure already exists, hydropower is great for the utilities industry. But if it doesn’t, it can be unfeasible to develop.
- Wind energy: Since 2010, the cost of wind turbines has lowered significantly, with IRENA predicting an ongoing drop in both set-up and O&M costs over the next 10 years. Additionally, improvements in turbine technology have led to larger rotor diameters and higher hub heights, meaning that more energy can be harvested from the same wind speeds and space allocation. Wind power projects often elicit complaints of noise and wildlife threat, but they can also result in homegrown profits for landowners so they are also seen as a good opportunity for regional economic growth. A major challenge for the utilities sector is the unreliability of wind. Due to its intermittency, wind power must either be stored in high-capacity batteries or paired with more reliable (often fossil-based) energy sources to sustain the grid during times of low generation. Nonetheless, the energy sector’s reliance on wind power has risen by about 25% per year for the past decade.
- Geothermal energy: Where available, this can be a highly efficient source of energy due to its “always-on” nature. And compared to wind or solar farms, it has a relatively small geographic footprint. But from the point of view of the utilities sector, this power source is limited due to the price of establishing geothermal power infrastructures and the limited availability of these sources around the world. Furthermore, the constant circulation of hot water in and out of the ground can cause seismic disruptions and lead to earthquakes – especially as geothermal power sources tend to exist primarily in areas of already-high levels of seismic activity.
- Bioenergy: Biomass is plentiful – often existing as a byproduct of other agricultural or production industries (corn husks, manure, landfill gas). But there is a bit of contention around biomass as a fuel source. The “carbon neutrality” of certain biofuels is achieved because the plants or trees involved – when alive – contributed sufficient oxygen production during their lifetimes to offset the CO2 generated by their eventual combustion. Many also question the assertion that forests are entirely renewable resources given that they can take up to a hundred years to regrow. For utilities companies in developing nations or largely rural areas, biomass options can be interesting, but when it comes to the urban power grids, the cost and complexity of biomass as a power source makes it challenging to implement on a large scale.
- Tidal and wave energy: In areas of dense coastal population, there are utilities companies currently making headway with tidal energy projects. However, these energy technologies are still in their infancy. The potential benefit of tidal power is enormous and virtually limitless so it definitely represents an interesting area of exploration for the energy sector. But at the moment, there is still uncertainty over the long-term environmental impact of such projects. Furthermore, the technology is not yet streamlined enough to produce sufficient wattage to justify the enormous expense of initiating ocean energy projects.
- Batteries: The challenge of many renewable energy sources is the fact that they can be unreliable and intermittent. Utility-scale batteries can enhance grid reliability to protect against unexpected demand or shortage. Battery integration can also allow power companies to gradually wean themselves off fossil fuels with minimal disruption. However, such industrial batteries are currently produced by only a few specialist manufacturers, and while they are definitely lowering in price, they are still expensive to purchase and maintain.
- Smart, cloud-based technologies: The application of artificial intelligence (AI)-powered smart technologies and metering in utilities can improve efficiency, collect and analyze valuable data, minimize waste, and help to protect against (and anticipate) risk. Internet of Things (IoT) networks and connected systems can also help to automate and monetize prosumer and distributed power generation networks.
Net-zero emissions goals in a complex utilities market
In the U.S., investor-owned utilities (IOUs) provide energy to over 70% of the population. But as Greentech Media reminds us, they are under extreme pressure to “turn enough profit to retain their investors in a difficult, constrained, low-margin business.” As the utilities industry prepares for energy transformation, IOUs must address some old and familiar challenges, as well as some new factors that are affecting their sector.
- Natural and political disruptions: The World Meteorological Organization tells us that weather-related disasters have increased five-fold in the past 50 years, making disaster and climate change preparedness a costly but necessary priority for the utilities sector. Also, as one of the most heavily regulated of all industries (more so than even automobiles, banking, or air traffic), the utilities industry is especially vulnerable to global and regional political shifts, which can often add to the pressure to remain profitable.
- Changing customer expectations and behaviors: Decarbonization, digitalization, and decentralization are changing a century-old relationship between customers and energy providers. Demand response and smart meter technologies let utilities customers reduce their power consumption at peak times in return for lower, off-peak electricity. Improvements in energy storage capacity for electric vehicles (EV) and solar panel batteries also mean that customers can generate and distribute their own power – hence the rise of the “prosumer” (producer/consumer).
- Less control over power sources and greater complexity within the grid: In one of the world’s most regulated industries, Texas stands out for having an unregulated power grid. As a result, many renewable energy players are flocking to the state, intent on disrupting the industry with clean energy startups. In fact, as Bloomberg Green informs us, Tesla has quietly been building a 100 megawatt storage battery near Houston and, in August 2021, filed with the Public Utility Commission of Texas to sell electricity on the retail market. With the growing availability and capacity of AI-powered digital technologies – and rapid advancement of battery technologies – it has become increasingly feasible for small-scale players to connect with millions of prosumers to create highly viable power storage and distribution stations. Further, the rise of prosumers alone can lead to hundreds of thousands of power generation and storage points being added to the grid, making it exponentially more complex for utilities companies to manage and operate.
Sustainable and renewable energy: Change is the only way forward
In the 2020s, it’s no longer a matter of “if” we should transition to more sustainable energy sources, but “how” and “when.”
Utilities companies are uniquely positioned with the scope, experience, and existing customer base to rethink their business models and begin a profitable journey toward net zero. Here are some examples of competitive strategies:
- Lean into the DER and prosumer markets and build new partnerships. Based upon what we’re seeing around the world (and even in Texas), the digital technology and engineering capacity now exists for clean energy startups to begin to proliferate – scooping up both residential and industrial prosumers and becoming energy retailers and DER providers. For utilities companies, this can either shake out as a risk or an opportunity, depending upon their appetite for innovation and willingness to partner with new players in the market.
- Invest in smart digital solutions and nurture data-driven business practices. In the energy sector of the future, it will be data that becomes an especially valuable commodity. Companies will achieve a competitive edge by leveraging AI and powerful database and ERP technologies to make sense of their data and to deliver actionable insights. From managing prosumers and multiple renewable energy sources to economical energy distribution and storage, utilities companies will increasingly rely on advanced analytics and data-driven practices to remain profitable and meet a rapidly shifting market and consumer base. The growth in smart technologies also has the potential to improve customers’ ability to self serve and personalize their services and usage.
- Improve communication and customer experience strategies. The latest survey data from both the UK and U.S. shows unimpressive levels of consumer satisfaction and points to the fact that utilities companies may have some work to do on the customer relations front. Just as it’s a time of great change and upheaval for the energy sector, it’s also a time of confusion for consumers trying to figure out the best way to manage their power usage, what options are available to them as prosumers, and how to optimize the intel available from smart meter technologies. Energy providers need to partner with their own customers, just as they may need to partner with disruptive startups in order to best compete. Doing so, they can not only advertise and promote their brand but share information, increase communications relevance, and generally throw back the curtain on their ongoing plans for energy transition.
In the power and utilities sector, shifting business models, energy options, and the potential for new competitors to enter the market are creating an urgency to improve the relationship with customers.
Digital utilities transformation and clean energy transition
In his novel The World Without Us, Alan Weisman describes what would happen to the world around us if humans disappeared. The book gives an account of what would occur in New York City within hours of the power being shut off. The subways would be flooded and, almost immediately, the city’s infrastructures would begin to collapse like dominos. While an extreme example, this nonetheless reminds us of how much our survival depends upon reliable and accessible sources of power – and how over the past hundred years utility companies have created marvels of engineering and invention to fuel those needs.
In the 2020s, this industry is under unprecedented pressure to innovate and reform, for the benefit of the earth and all of us on it. The good news: with this pressure comes tremendous opportunity to build on an impressive legacy and blaze the trail to a more sustainable future.
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