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KEMA's Utility of the Future: Getting from Here to There
By Brian Pugliese
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The United States faces unprecedented short and long-term challenges in meeting the country’s growing need for energy. The U.S. Department of Energy’s (DOE), Energy Information Administration (EIA), forecasts an annual growth rate of 1.5 percent for electric power demand for the next 22 years - leading to a 40-percent increase over current levels by 2030.
Additional challenges of upgrading or replacing an aging infrastructure, as well as a growing sense of environmental responsibility, add dimensions of complexity to capacity issues. Distributed generation (DG), renewable energy (RE), energy efficiency (EE), and demand response (DR) - as well as the re-emergence of nuclear power - are all assumed to be major approaches toward addressing the country’s forecasted energy and environmental requirements.
However, those approaches add other dimensions of complexity in terms of creating and adopting new public policy and regulatory rules, re-inventing utility business models, and introducing new technologies for which few or no standards presently exist. In addition, success in DG, RE, EE, and DR may result in lower electricity volumes and, therefore, lower sales for utilities at a time when the financial community, which needs to minimize risk and optimize ROI, will be asked to invest in enabling Smart Grid technologies.
With these issues in mind, nearly 60 utility executives, regulators, industry stakeholders, and senior KEMA consultants met recently in Dallas for the inaugural KEMA Utility of the Future Forum. KEMA assembled this executive forum to discuss not only these challenges, but also to set in motion an ongoing dialog to find a path toward solutions.
Seven panel presentations, three special addresses, and networking activities revealed an underlying theme about the Utility of the Future: business as usual and incremental change will not be equal to the United States’ economic and societal needs. Utilities, lawmakers, and regulators will need to adopt new business models and forge new relationships with customers, many of whom are not presently aware of the implications of the Utility of the Future.
In his welcoming remarks, Thijs Aarten, KEMA Executive Board Member, said that the United States and the rest of the world face similar risks and opportunities. The world’s response to environmental concerns and increasing energy demands will be transformational because those conditions will bring about a third industrial revolution. “The keys to success in the face of these challenges will be innovation and leadership,” said Mr. Aarten.
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“Bold” Action Needed
To address the country’s future energy needs and infrastructure, “we need to be bold,” said former New York State Governor, George E. Pataki, whose special address set the stage for the forum. He added, “No realm is more important for the future of our country than energy, as it holds potential solutions for climate change, national security, and economic growth.”
Having garnered the reputation as an environmentalist, Pataki, now with Chadbourne & Parke, LLP, focuses on energy, environmental, and corporate matters. He explained that energy is at the nexus of three trouble areas – national security, the environment, and the economy - which, if left unattended, could be catastrophic to the country.
Pataki indicated that one-half trillion U.S. dollars are being sent overseas for oil, and many of the countries receiving the money are opposed to, or at least unfriendly with, the United States and its interests. These dollars would be better spent domestically rather than supporting governments and policies opposed to the United States.
Pataki also argued that for the United States, participation in the Kyoto Protocol would have been bad policy. However, when the treaty expires in 2012, the United States would be well-advised to lead a multinational carbon cap-and-trade accord.
Domestically, because regions of the country vary widely in their ability to access renewables such as hydro, solar, and wind, Gov. Pataki thinks it is unfeasible for federal legislators to establish national renewable portfolio standards. However, as all three presidential candidates support cap and trade policies, it is likely, said Gov. Pataki, that there will be national guidelines within the next three years. He said, “A national cap and trade policy gives the industry an advantage because utilities can be proactive in working with legislators in the development of policy.”
Finally, he challenged the United States to build its economic strength by changing regulations for transmission, creating incentives for automakers to promote increased fuel efficiency, and recognizing that coal should be a part of the country’s energy portfolio.
The former governor also advocated a new law for interstate siting of transmission lines. Current guidelines complicate and draw out the process of building or expanding transmission. A properly designed federal law could facilitate decision making and construction of much needed transmission capacity.
Corporate Average Fuel Economy (CAFE) standards for automobiles set incremental targets for fossil fuel efficiency. Gov. Pataki suggested that a national policy providing incentives for breakthrough technologies dramatically improving mileage are needed. Rewards for breakthrough technologies carry the double benefit of bolstering energy independence and supporting the U.S. goal to be an international marketer of innovation.
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Staggering Investments
Of course, being bold to satisfy demand and assure reliable service comes with a price tag. Panelists speaking about utility capital sourcing estimated an industry need for between $60 billion and $100 billion annually over the next 10 to 20 years for capital expenditures. The context of these levels of investment was further outlined as a number of utilities were confirmed with having capital spending requirements over five years at least double their current market capitalization. Because infrastructure and generation investments have long returns, utilities will be seeking investments from non-traditional sources such as sovereign wealth and private equity funds.
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Cost and Benefits of Environmentalism
No longer considered a subject to debate, utility support and participation in carbon mitigation and reduction strategies will also be required, according to panelists at the Forum. To stabilize atmospheric CO2 to an internationally recognized ceiling (450 ppm), total CO2 emissions must drop 40 percent by 2050. An objective such as that might seem overwhelming because in order to meet the expected needs, electric generating capacity will need to increase and transportation demand is forecasted to double over the same period. The cost of technologies (e.g., renewables, carbon sequestration, distributed generation) and regulations (e.g., cap and trade) are not known, but will likely be passed to consumers through rates or some other mechanism. The key question is, “How will consumers balance their demands for more reliable and efficient energy and a clean environment against their pocketbook interests?”
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Changing Regulatory Role
The Utility of the Future vision often includes a self-diagnosing and self-healing grid that is in continual bi-directional communication with the utility and grid operators. Enabling technology, such as advanced metering infrastructure (AMI), permits two-way communications to customer locations extending to devices behind the meter. Dramatic investments, environmental concerns, and unprecedented interactions with customers imply additional pressures for rate recovery and an unknown set of regulatory rules and regulations to be formulated.
Increasingly, regulators may be in the position of becoming more involved in environmental policy implementation and communication with ratepayers on the value of upcoming improvements to generation, transmission, and distribution systems. In rate cases, they will likely find themselves asking not only for cost recovery on improvements, but also for the consequences to ratepayers if those improvements are not made. Customers today live in an on-demand, round-the-clock world where control and access to information and services will soon include energy and greater expectations for reliability. The role of regulators will evolve as they will be integral in communicating what it will take for utilities to deliver greater amounts of control and dependability to consumers.
Another key area of uncertainty is how regulators should prioritize infrastructure improvements when there are apparent gaps between states and federal agencies, particularly over transmission corridors. Will there need to be new guidelines that? For example, is any transmission line over 230 kV the purview of the federal government? How would the states and their constituents react to eventual federal siting and licensing of transmission assets?
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Mobile Storage
As transportation fuel costs soar and the quest to abate elevating CO2 emissions advances, the discussion about Plug in Hybrid Electric Vehicles (PHEV) will gain more attention. According to one analysis, if 60 percent of cars on the road by 2050 were PHEVs, the US could save 3 million to 4 million barrels of oil per day, and 450 metric tons of CO2.
Additionally, charged batteries provide a source for distributed and mobile energy storage that utilities can access when additional electricity is needed, presumably during daylight hours. “Intelligence” built into battery technology would sense optimal times for charging versus discharging when connected to the grid.
The anticipated benefits are attractive, but limitations such as battery size and weight, the premium cost to consumers for batteries in vehicles, access to plug-in points for millions of cars, battery life, re-use and recycling, all need to be addressed. Of course, consumers also have to adopt and embrace PHEVs on a widespread basis. Notwithstanding technical and regulatory impacts, some forum participants reasoned that battery technology must be developed and its costs are made more reasonable before subsequent benefits to the grid can be realized. Because the technology touches two of the largest industries in the country -- utilities and automobile – unprecedented cooperation and coordination between the two will be required.
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Building Automation
Commercial buildings pose create unexpected impacts on the grid and on the environment as their operations consume 40 percent of the generated electricity and contribute more CO2 than either transportation or industry, according to Architecture 2030. Building architects and managers recently have been turning their attention to energy consumption and carbon impacts. They have concluded that improving building design and supporting energy efficiency will yield the greatest benefit to the grid and the environment. Building energy efficiency could become a “fifth fuel,” but nascent building automation technologies will need to be supported by a coordinated system of sensor networks, smart devices, business logic integration, and price signals will provide the tools to achieve lower energy consumption.
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Great Need for Solutions
The complexity of these issues is enormous. Any of these solutions would require great investments, changes in traditional relationships, and consideration for the environment. But the need for solutions is greater.
“We developed this event specifically to facilitate innovative, visionary paths for the future utility,” said Hugo van Nispen, president and managing director of KEMA, Inc. “At the turn of the 19th century electrification was a major, transformative development. But for the past half century, while utilities have focused on making incremental enhancements to keep costs down and maintain an aging infrastructure, the digital revolution has driven customer expectations of service and quality exponentially ahead of existing capabilities. Evolving policies and strategies to address global warming and manage carbon emissions also will have a significant impact on utility operations. Business models are being shaken to their core. If we are to meet and adapt to the emerging demands of the 21st century, now is the time for boldness and for a move away from incrementalism.”
KEMA plans to conduct further Utility of the Future executive forums, and to continue to facilitate discussions among industry thought leaders. Until then, KEMA will publish white papers on the topics explored during the meeting.
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Download the May 2008 Issue
Use the link below to download the PDF of the full issue of the May 2008 Automation Insight for the complete print versions of the articles.
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[download] Automation Insight - May 2008 (.pdf 130 kb)
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