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R&D for a Competitive Power Industry

Fortnightly Magazine - July 1 1996

of energy. This strategy represented a long-term investment in market expansion for all utilities. Since the funds for related R&D could be passed through to the customers, costs to the utilities were essentially zero. In addition, such projects won political support through a promise of greater energy efficiency and fewer environmental impacts. Both results were considered public goods. In the future competitive environment, it is not clear that utilities will succeed in passing along to customers the necessary funding costs, and it may prove difficult to justify such funding as a stakeholder investment. Moreover, such technologies will not likely supply any differential value to any one company.

4. New Power Product Technologies. Existing natural gas and coal-fired systems are very attractive as is, and suppliers continue to make incremental improvements on their own. No new nuclear power plants are likely to be ordered in the foreseeable future, so interest in advanced nuclear technology is rapidly decreasing. Renewables are not going to be utilized to any significant degree, because of inherently poor economics, so pursuit of those technologies will occur only when political pressures so require.

A New Design

for Project Proposals

In years past, any R&D proposals offered to individual utilities (em or to small groups of utilities or the Electric Power Research Institute (EPRI) (em typically dealt primarily with the technical detail. The proposals often had relatively little to say about the business rationale for doing the work. In some ways this design marked an effective way of doing business: It placed the emphasis on technical ideas and the R&D as a kind of "natural good." Indeed, this philosophy lead to all kinds of wonderful developments over the years, some of which were foreseen and some of which followed naturally from giving funding and freedom to good researchers. EPRI performed some outstanding work under this paradigm, which was well suited to its "Institute" character. At the Energy Technology Collaborative (E-TEC), we help our utility subscribers differentiate themselves from their competitors through tailored R&D and analysis projects. We believe that in the future most utility R&D proposals will come to feature content that is more business-, market-, and profit-oriented. Those asked to come up with funding will want to know how they will benefit from project success: Projections of bottom-line enhancement will overwhelm interest in publication in technical journals in most cases. We will likely see less interest in esoteric technologies and technical detail in all but environmental and policy studies. Technical substance will prove "necessary but not sufficient," to use the popular jargon.

So what will likely be required in the business plan for these future R&D proposals? While no universal format fits all projects, a number of topics will often prove essential:

1. Cash Flow. How will success in the R&D project affect the sponsor's business, both financially and operationally? What improvements beyond current practice might be possible? Include estimates of dollar value and discounted cash flows.

2. Competitive Advantage. How will the project funders gain a differential advantage over the competition? Will they win exclusive-use rights? For how long?