Energy microgrids have emerged as more than just a curiosity. The technology is improving, costs are falling, and developers are lining up to build projects. How will microgrids overcome the...
Building the Next Generation Utility
Fundamental changes require bold strategies.
The regulated utility industry in the United States faces an unprecedented dilemma, caught between the conflicting demands needed to address the requirements of its shareholders, the environment and society. While environmental and societal pressures will continue to intensify, the targets remain uncertain and the methods for meeting and financing these requirements are less than clear. What is clear is the magnitude of the challenge ahead. The United States is facing a massive demand for investment in its electric system, from generation to distribution. An estimated $400 billion to $1 trillion will be needed over the next 20 years to upgrade our electrical infrastructure. The rate impact to the average retail customer would run between $75 and $200 per year, and that does not even consider any additional cost resulting from stricter environmental legislation. Rate increases of this magnitude are untenable.
The current credit crisis also complicates the challenge of powering the future. Not only will that have an immediate impact on bad debt and revenue recovery but like many other businesses, a utility needs financing to build and upgrade its asset base. What is unique about this industry, however, is that within the current regulatory construct, the deployment of capital is the most prominent avenue for growth. The credit crisis could result in delays to any proposed infrastructure investments, thus reducing rate-base growth and, with that, earnings per-share growth.
In addition, utilities must prepare for an inevitable decline in energy sales as societal demand for energy efficiency mounts. Consumer awareness of energy consumption is increasing and empowered consumers will demand more services (from their utilities or other providers) to allow them effectively to curtail peak loads and manage consumption. As a result, the consumer will move from being a price taker to a price setter.
In light of such challenges, utilities are faced with an unprecedented and conflicting set of demands. They must be a significant part of the carbon solution, while also solving the asset infrastructure challenge economically. They must identify and steward sustainable, economically viable energy resources through the next decades, and proactively assist customers’ efforts to manage their energy costs. They must renew their organizations’ skills and talent base, and continue providing reasonably predictable earnings growth.
While many utilities have embarked upon efforts to define a path toward the next generation utility, these efforts often are siloed initiatives driven by the generation, transmission and distribution (T&D) or customer segments of the organization. Addressing the upcoming challenge will require a coordinated and integrated set of decisions so as not to sub-optimize the end-to-end value chain. Eight critical themes across the generation, T&D and customer elements of the value chain will shape the future of our industry.
The Generation Dilemma
With the elections behind us, the country is