Electric Utilities Need to Make Bigger Bets

What happens when an industry born and bred for speedy risk-taking does business with an industry known for slow, cautious behavior? Eventually, the speedster will likely bypass the slowpoke to race ahead with a faster-moving partner. Increasingly, electric utilities with large customers, especially big-name technology and internet companies, are being bypassed. Even traditional large manufacturing enterprises like Toyota are looking for alternative energy partners. That’s just one reason utilities and other power generators need to be making bigger bets to future-proof their business.

Customers Are Making Bigger Bets

Despite the recent battles over net metering for (mostly residential) customers with rooftop solar generation, a bigger renewables revolution is being led by large customers who are demanding higher percentages of carbon-neutral energy. Many large customers, especially campuses and energy-intensive industrial operations, have historically supplied their own power, but today’s large energy users have a different physical footprint and desire a different carbon footprint.

Especially where global technology firms are concerned, operations and server facilities are geographically dispersed. Generating clean, reliable, affordable onsite power in a wide variety of locations is challenging, while power from local utilities is unlikely to be as clean and affordable (at least over the long term) as desired by the likes of Alphabet, Amazon, and Apple—to name just the As. So they are turning to third-party suppliers or getting into the renewable power generation business themselves.

Most recently, Microsoft sought regulatory approval to essentially divorce its hometown utility provider, Puget Sound Energy, in order to buy power on the wholesale market so it can fulfill corporate carbon-neutral commitments.

And Apple recently announced that three more of its suppliers will be buying only renewable power. Lisa Jackson, Apple’s vice president for sustainability and government affairs, told Bloomberg that Apple itself currently gets 96% of its energy from renewables. What’s more, Apple is just one example of a major global tech giant developing its own renewable power projects and selling (or preparing to sell) generation in excess of its own needs to the market.

Others contract with third-party developers to build new capacity to back long-term renewable power purchase agreements. Pattern Energy even put a customer’s name on one such project recently, the Amazon Wind Farm Fowler Ridge project built for Amazon Web Services.

Such moves by large energy users have helped spur growth in the renewables sector and have resulted in the addition of large (what would traditionally have been called “utility-scale”) solar and wind power facilities.

It’s difficult to envision a scenario under which the building corporate demand for carbon-neutral power slows or flattens, especially when Salesforce just announced it reached its goal of global net zero carbon emissions—33 years early.

Whether to participate in providing that cleaner power, or to respond to the consequences of customer defection (plus other market challenges), utilities will need to be making some bigger bets in the near future.

The Value of Big Bets

I began thinking about what constitutes a big bet for utilities and other power generators after reading The Journey of Not Knowing: How 21st Century Leaders Can Chart a Course Where There Is None. I met the author, Julie Benezet, at an event earlier this month, where we shared an interesting conversation. Before we parted ways, she gave me a copy of her book, which I started reading on the flight home.

As a former Amazon leader, Benezet knows all about charting a course where there is none. For three years in the ecommerce giant’s early days, she was its first global real estate executive. As she describes her circumstances at Amazon in the late 1990s, substitute “power” for “real estate” and see if it sounds familiar: “From my perch of figuring out how to deliver large chunks of real estate and other essential infrastructure to Amazon workers worldwide, I had to operate in the middle of the company’s thrash through a sea of forever-changing information. To justify long-term investment of hundreds of millions of dollars in real estate, we had to develop credible underlying business-growth strategies without the benefit of existing business plans or even the mechanisms to develop them.”

Electric utilities value stability and predictability more than just about any industry out there. Instead, over the past decade, they have faced an accelerating set of unpredictable changes, from fuel price reversals that moved gas ahead of coal, to technology breakthroughs that are empowering customers to challenge utility business models, and now see-saw federal environmental policies.

As Benezet observes, “Twenty years after Amazon opened its cyber doors, business everywhere has evolved to a state where chaos is the norm, and confronting it is both creative and essential.”

Even though it’s one of the least “cyber” businesses, the power generation and distribution business is being forced by the renewable energy requirements of cyber leaders like Amazon, its internet technology peers, and others to confront the chaos of constant change and “not knowing.” That’s in addition to the unknowns of new technologies, chaotic federal regulatory maneuvers, and fuel price unpredictability.

Benezet says that before she worked at Amazon, she equated leadership with strategy, but when conventional strategy doesn’t exist for a new scenario, a leadership “mindset” is necessary. One of her four core components for navigating business through unknowns is to take “bigger bets.”

Before you write off big bets as dangerous for a business providing an essential service like electricity, consider that Benezet defines a bigger bet as “a new strategic idea that lifts the organization into the future by making it better. It can touch any facet of business, such as strategic positioning in the market, a new approach to execution, corporate culture, or a structure that facilitates smarter work. It does not have to be radical or huge. It does have to be better than what is directly in front of you to leverage the possibilities of the emerging future and compel others to act.”

The emerging future facing the power industry—where renewables compete economically with fossil fuels, where energy storage and digital technologies enable a more dynamic grid, and where customers have non-utility options for power—certainly argues for making a bet on something other than “what is directly in front of you.”

And that’s just what some leaders are doing.

Take Kentucky, in the heart of coal country. Jim Gardner, a former Kentucky Public Service Commission member, recently told NPR, “The future is renewables and the large corporations that want renewables.” Two years ago, a local Facebook employee told Gardner that large corporations were deciding where to locate based on the availability of renewable power. “He made it seem like there was literally a list with a lot of states with big X’s marked in,” Gardner told NPR, “so that Facebook and others were not looking because [some states] were not going to be open to renewables.” Kentucky subsequently made arrangements to “cut a special deal” to offer renewable power if large customers want it, but offering it economically could be challenging.

The Kentucky example is instructive for a couple of reasons. With their global footprint and purchasing power, companies like Facebook and Amazon have altered the balance of power with utilities. Furthermore, “cheap power”—until recently synonymous with coal-fired power—is no longer the most important attribute of this commodity.

The Changing Nature of Power Sector Bets

The challenge large customer defection poses to utilities sits alongside the familiar ones of fuel price volatility and environmental policy uncertainties. To address those latter unknowns, utilities have traditionally employed various hedging bets, like tweaking the balance of their generating portfolio or, more recently, acquiring natural gas assets.

But until recently, the biggest bet a U.S. utility could make was deciding to build a new nuclear plant. Proof: federal loan guarantees, without which no utility will now consider building new units. With construction delays, cost overruns, and a supplier bankruptcy filing dogging the two most recent nuclear development sites, that bet is looking bigger and riskier every day.

Size and complexity are part of the problem for large conventional nuclear projects. Smaller modular reactors that promise improved safety could be the answer, but they present a different type of bet: a bet on unproven technology.

More recently, pre-combustion and post-combustion carbon capture technology at coal-fired power plants has been the new big bet. In anticipation of federal greenhouse gas regulations and global climate agreements, utilities in the U.S. and Canada have brought online projects designed to have their cake (avoid the release of greenhouse gases) and eat it too (continue to burn coal). To date, these carbon capture and sequestration (CCS) bets have paid off unpredictably.

Duke’s Edwardsport integrated gasification combined cycle (IGCC) plant and Southern Company’s Kemper County IGCC project both suffered time and cost overuns, followed by significant operational challenges. The companies have noted that IGCC, which enables pre-combustion capture of the greenhouse gas carbon dioxide, is still considered relatively new technology Nevertheless, given the growing pains for lower-carbon coal generation, it’s likely a bet others will shy away from—at least in North America.

Bet Big: Go Small

The power industry and media have long given priority to large projects. When I was managing editor and then editor of POWER, we fell into that pattern. After all, a huge project is more complex to execute—and makes for better photos—than a dozen smaller ones.

But what if the best bigger bet for utilities is actually going smaller? From nuclear to solar to natural gas–fueled facilities, smaller installations, closer to new load or transmission and distribution pinch points, could be faster to site and commission as well as more cost-effective—at least across the U.S., where demand for electricity is flat or falling.

Economies of scale can provide long-term advantage when making big bets on nuclear or CCS projects. But you don’t need to go big to see a big impact when deploying today’s latest technologies, like drones, digital diagnostic systems, and containerized energy storage.

When it comes to bets on new technology or new business models, smaller entities are among the leaders. From smart grid technology to community power to microgrids, municipal and co-operative utilities have proven that small can be savvy. True, the capital expenditures for these new options are lower than for nuclear and CCS, but the size of a bet is relative to the size of the organization. (That’s not to suggest large entities are ignoring the latest approaches. Earlier this month, Bryan Hanson, president and chief nuclear officer for Exelon Generation, explained that his company realized, “We needed to think bigger” to stay competitive. Exelon’s solution was to deploy a range of new digital technologies and create a culture of innovation.)

As the recent example of a solar-plus-batteries microgrid developed by the Sterling Municipal Light Department in Massachusetts demonstrates, relatively small new bets can pay off in both the short and long run. The small muni, which worked with Sandia National Laboratories to design the project, used the concept of stacking benefits to ensure its viability. The 2-MW/3.9-MWh microgrid can provide up to 12 hours of electricity to emergency services in the case of a grid outage. That’s the “energy surety” part of the plan.

In the meantime, the installation is expected to save customers big bucks. According to a forthcoming paper from Sandia, as reported by Renewable Energy World (REW), “the biggest energy cost savings potential from the batteries comes from reducing Sterling’s electricity demand during a single annual peak demand hour for the New England region.” The utility will also use the microgrid to avoid peak transmission charges and for price arbitrage, drawing on battery power when prices are highest.

REW reports that the $2.7 million battery system has a payback of about two years thanks to grant funding from the Massachusetts Department of Energy Resources and the U.S. Department of Energy Office of Electricity. Even without those grants, the payback is under seven years. Given that the batteries have a 10-year performance warranty “and are expected to continue to function significantly longer than that,” the Sterling microgrid looks like a surer bet than recent nuclear and CCS bets placed by bigger players.

How might something like a microgrid future-proof any utility from customer defection and other unknowns? Not by itself of course, but as part of a larger strategy to provide energy security to a community or region, it could position a provider as both essential and adaptable.

Next Utility Bets?

What’s the next big bet for utilities and power generators? On the infrastructure side, it’s likely to be more widespread leveraging of digital technologies from end to end of the enterprise—from the connected plant to customer care. The biggest risk with the bet in this domain concerns cybersecurity. The good news is that there’s job growth in cybersecurity.

Another place to watch for the next big bets are in the regulatory and business model realm. Battles over customer rooftop solar installations and net metering were just the beginning for shakeups there.

—Gail Reitenbach, PhD (follow her on Twitter @GailReit) is a communicator, creator, and hiker who lives in Santa Fe, N.M. She is the former editor of POWER and the current editor and publisher at Right Hand Communications LLC (righthandcom.com), where she is preparing to make her next big bet.