To remain competitive in the new century, U.S. utilities will need to significantly alter their business model, according to a new report.
They will need to provide cleaner,
low-carbon electricity while enabling customers to better manage and
reduce their energy use. That’s the core finding of Ceres’ new report "The 21st Century Electric Utility: Positioning for a Low-Carbon Future," authored by Navigant Consulting. The report examines major trends reshaping the electric power sector, which is responsible for 40% of all U.S. greenhouse gas emissions.
The report also examines the implications for investors and utilities’ business strategies going forward.
“The economics of electric power generation in the U.S. are changing dramatically,” said Ceres President Mindy Lubber. “The traditional paradigm of building large fossil fuel power plants to sell ever-increasing amounts of electricity is fast becoming obsolete. New business models must include aggressive energy efficiency measures and delivery of cleaner, low-carbon energy through renewable and smart grid technologies. Realizing these changes, as a handful of utilities have begun to do, requires a fundamental rethinking of how we produce, transmit and use electricity in the U.S.”
“The modern utility must expand its vision and adapt to changing circumstances by providing energy sustainably for our customers, communities and shareholders,” said National Grid U.S. president Tom King, in a foreword to the report. “This begins with addressing climate change, the seminal issue that impacts our global environment and economy today. As public utilities, we should make our business decisions and set our financial targets with climate change issues and carbon reduction goals at the forefront.”
The report outlines key trends affecting the industry, roadblocks that must be overcome, and actions that utilities must take to ensure a successful transition to providing cleaner energy to their customers sooner, and on a significantly larger scale.
Among the key industry trends:
- Growing imperatives to reduce greenhouse gas emissions by upwards of 80 percent by 2050;
- Increasing policy and regulatory momentum at the state, regional and federal level that will make fossil-fuel based electricity generation, especially coal-based generation, less competitive;
- Ever-increasing utilization--and policy support--for cost-effective energy efficiency and smart grid technologies; and
- Declining renewable energy costs.
Key roadblocks preventing utilities from acting more quickly include:
- Uncertainty about the future price and responsibility for reducing carbon emissions;
- Rate models based primarily on electricity sales, thus undermining cost-effective measures such as energy efficiency;
- Limitations of conventional electricity delivery infrastructure to integrate large amounts of renewable energy and enable customer energy management.
The report includes specific recommendations for utilities to respond to these fast-changing industry shifts:
- Manage carbon emissions “across the enterprise” and align those costs and risks with existing and foreseeable carbon-reduction scenarios;
- Pursue all cost-effective energy efficiency;
- Integrate cost-effective renewable energy resources in the generation mix;
- Incorporate Smart Grid technologies for consumer and environmental benefit; and
- Conduct robust and transparent resource planning.
“Utilities and energy suppliers in the electric power sector are taking on multiple challenges simultaneously, each of which could create fundamental changes in the way we produce, deliver and consume electricity” said Forrest Small, a director with Navigant Consulting. “The ideas and recommendations presented in this report will assist the industry in providing affordable and secure electricity that meets the nation’s climate objectives.”
The report makes clear that the challenges facing utilities also present substantial opportunities--including opportunities in energy efficiency.
“Energy efficiency can cost as little as 3 cents per kilowatt hour saved, while electricity costs 6 to 12 cents per kilowatt hour. Despite these obvious advantages, we have historically grossly underinvested in energy efficiency as an industry,” wrote National Grid’s King in the report foreword. “Altering this course by investing in all cost-effective energy efficiency measures is the most effective way to both reduce greenhouse gas emissions and lower customer bills.”
The report concludes that utilities effectively implementing the practices highlighted above, while receiving sufficient support from regulators and legislators, will be better positioned to succeed in the 21st Century. Such utilities are also more likely to attract low-cost capital, enabling better returns for investors. On the other hand, utilities failing to effectively manage risk, including higher carbon exposure, may suffer greater financial impacts.
The full report is available for download at the link below.