R & D for
a Competitive Power Industry
The secret lies in gaining exclusive-use rights to protect your product or process from your competitors.
The electric utility industry is inherently a high-technology business. Those who ignore this fact for long will fall behind (em not only in using the technology, but also in contending against their higher-tech competitors. This prospect demands the same close scrutiny for research and development (R&D) as is now visited on every other aspect of the electric utility business.
Some utilities have probably gone too far in downsizing their R&D functions. Their more progressive peers have recognized their dependence on identifying, evaluating, and using innovative new technology. Most of these utilities are now working to define their R&D priorities and set up an internal organization that can manage technology programs in the future.
Changing Business Priorities
How will industry leaders define their priorities? Although we can only speculate, the list will likely read something like this:
1) Solve today's crises
2) Trim costs in current operations
3) Boost market share in existing businesses
4) Expand into naturally allied businesses
5) Expand into wholly new businesses
6) Manage new opportunities.
Many utilities wonder how their R&D investments will differentiate their company from their emerging competitors. A major factor is the period of exclusive use offered by an R&D provider as part of its request for funding. Exclusive use means that one company or a small group of companies secures a significant period of time to work with project results before they become available to others. Equity agreements can support exclusive use, but often prove insufficient in and of themselves.
Of course, new priorities imply winners and losers. Thus, several traditional R&D areas stand as likely candidates for deemphasis in a competitive environment.
1. Demand-side Management. DSM technologies flourished in the past largely because of political pressures. In time, utility
supported R&D for DSM will diminish and may essentially disappear, because for a competitive business, a willing reduction in sales of the organization's principle product is an unnatural act. In a competitive environment, any use of stakeholder funds to shrink sales will prove increasingly difficult to justify. Exceptions may exist where political pressures remain high and related funding can be passed through to the utility's customers without jeopardizing the competitive position of the funding organization.
2. Mass-produced Products. Many of the products that come from R&D must be mass-produced to succeed commercially. Examples include power electronics, efficient transformers, and more efficient current limiters (em to name but a few. In such cases, all utilities will receive the benefits of these products at about the same time. Accordingly, relatively little value will accrue to companies who invest scarce funds in the related R&D, because they cannot obtain any differential advantage in doing so. Exceptions may exist where utilities find opportunities to make attractive venture capital investments, whose purpose is a payoff independent of the main business of the utility.
3. Electrotechnologies. In the past it was easy to justify
developing new technologies to promote the shift to electricity from other sources 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?
3. Prevailing Practice. What is the state-of-the-art for the technology in question? What are its strengths and weaknesses? What are the related capital and operating costs? How much will project success improve the situation?
4. Manufacturing Plan. In situations where manufacturing is required, a plan to show how it will be financed and managed will be essential.
5. Marketing Plan. In situations where the results of a project are to be broadly marketed, it will be necessary to provide a credible marketing plan for the product.
6. Competitors. A competitor analysis is a must. Who else is in the market in the area of the proposal? How are they positioned? Are they likely working on similar concepts?
7. Project Management. How will the research organization staff the project (em with what key individuals?
8. Contingencies. An honest assessment of possible surprises and unknowns will also be important.
9. Owners' Equity. Related income is usually small compared to the value of exclusive use. Even more important: Will the equity arrangements enable the project sponsors to use the results without fear of legal infringement? Will they help to inhibit use by competitors?
Addressing many of these issues will mark a new experience for many in the R&D community and utilities. But the payoffs can be enormous.
Indeed, if a project is aimed at producing commercial value, an inherent part of a credible proposal must be a description of how success will provide reasonable financial benefit. Also, can the project be completed in a credible manner and in a believable time period? Project proposers that cannot provide this information will not be taken seriously by funders that are oriented towards bottom-line results. It is indeed a stimulating exercise to think through the "whole problem" and to demonstrate (em if only to one's self (em that a project holds the potential to be completed and brought to practical fruition.
Results Soon
Time is money. More and more R&D sponsors will want projects that offer near-term commercialization potential. Time horizons of five years or less to first commercial application will command the greatest attention. For some companies time horizons have shrunk to a year or two.
But utilities are not monolithic. Each has a different planning horizon and payback need. Accordingly, diversity will rule the market. Topical interest and priorities will change, but the need for incisive business planning will grow. It's inescapable. t
Robert L. Hirsch is president of the Energy Technology Collaborative
(E-TEC) in Washington, DC, a company that solicits private, exclusive-use R&D projects for subscribing utilities. Hirsch has over 30 years' experience in energy technologies and helped restructure R&D at Atlantic Richfield in the mid-1980s, as vice president for research and technical services. Stephen O. Dean is vice president of E-TEC, and founder and former president of Fusion Power Associates. Roger Bezdek, founder and president of Management Systems, Inc., in Washington, DC, has extensive experience in energy technology and economic analysis.
Industrywide Needs
(Opportunities for Pooled Funding)
Despite much downsizing in R&D, support will likely continue for certain industry-wide needs:
. Health, Safety, Environment. Topics such as electromagnetic fields, global climate change, toxicology, and air quality studies will continue as industry-wide problems, attracting financial support from utilities, typically through multiple-funder projects.
. Nuclear Power. Plant owners and operators, will continue to need publicly accepted solutions to common problems, requiring continued R&D support, probably through large funding pools.
In the past the Electric Power Research Institute has performed an admirable job of attacking such problems, and it is expected in the future to provide the funding vehicle of choice for many such tasks.
Onsite Generation
Funding Fuel Cells
Distributed (onsite) generation marks the one area of power production that will likely continue to secure financial support from electric utilities for R&D. Among the various options, fuel cells appear of greatest interest:
. reliability (no moving parts)
. environmental advantages (low emissions when fueled by natural gas)
. versatility (providing onsite heating, for instance).
The government and utilities have supported fuel-cell R&D for decades, but the product has always lagged the market, remaining a modest increment away from being economical. However, the situation may change with the advent of PEM (proton exchange membrane) cells, which appear to offer a better potential for economic commercial application, possibly in the next five years or so.
In a competitive environment, the question for utilities is how and how much to fund fuel-cell development.
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