That is the great trilemma finding in PriceWaterhouseCooper’s 12th Global Power and Utility survey released in April.
I submit to you this is not new news! This trilemma is a recurring theme for the utility industry. It is merely being fought out on different battlefields today than it was in previous boom and bust power business cycles, when the major driver of change was bringing down high utility rates caused by inflation, nuclear construction programs, and oil embargoes.
In those battles, nuclear energy was seen as the great savior, reducing our dependence on imported oil then often used for power generation. Limited supplies of natural gas were prohibited from use in power generation by the Fuel Use Act from the Carter Administration era.
By the early 1990s, wholesale competition for power generation was seen as the way to break that utility power plant construction rate increase cycle. The Energy Policy Act of 1992 authorized exempt wholesale power generation competition. Later, stranded cost recovery and utility divestment of power plants ushered in the merchant generation growth in the last boom stage of the power business cycle. Renewable portfolio standards were created to make a place in this wholesale market for clean energy resources.
The PWC survey reminds us that competition, whether between wholesale power generators competing for utility procurement or big brands competing to aggregate customers from utilities to buy their own bundled solutions, is the same competition played out in different customer classes, different market battlefields with different weapons – but it is still competition in a segment of the regulated utility market.
Déjà vu all over again!
In 1997 at Cambridge Energy Research Associates (CERA), as Director of Global Power, I helped launch the CERA Retail Energy Forum. Our purpose was to bring together energy and utility executives with their peers at big consumer brand companies to discuss the opportunity and risk in retail energy competition. We had major brand names you would recognize as retainer clients of this new research advisory service including Sears, Meredith Corp’s Better Homes & Gardens brand, General Motors and others. Early on in this service we actually had more non-utilities than utilities as retainer clients.
As Research Director I met with many of these companies to understand their research interests and guide our research agenda. The answers to those questions bear a striking resemblance to the answers in the PWC survey today:
The Core Competency of Utilities is Regulatory Compliance. The utility culture sees customers as load and treats them as captive classes to be herded and managed. Success for utilities is defined as keeping the lights on at affordable rates and the regulators off your back.
The Core Competency of Big Brands is Living the Brand Promise. By creating a cachet and reputation in the market, big brands seek to grow market share against competing brands. As consumers, we buy products that fit our needs but we buy brands because the brand promise validates us, fits our perceptions of our life style or offers comfort, convenience, consistency, reliability and value that other brands lack. We are loyal to brands because the brand reinforces and is loyal to our expectations of value. Brand managers mess with the brand promise at their peril.
Competition Changes Everything. The PWC survey reminds us that competition whether between wholesale power generators competing for utility procurement or big brands competing to aggregate customers is the same competition played out in different contests. Competition brings uncertainty but it also brings opportunity. But competitive markets are demanding. They demand fair trade rules. They both challenge and seek market dominance. They constantly innovate to extend the brand promise and take market share by exploiting competitor weaknesses. Today, smart grid is the new competitive force at work bringing new technologies that both improve reliability and improve competition.
Looming Rate Increases, Conflicting Policy Goals and the Revenge of Markets
Today, sustainability costs from emissions reductions and renewable energy procurements often at above-market price to meet goals are driving up utility rates, just like the EPA’s war on fossil fuels is also driving change – but not in the way it expected. The new rules are designed to increase the cost of fossil fuels and thus encourage more renewable energy. They are hammering coal. But the growth of unconventional natural gas has decoupled oil and gas prices and driven down natural gas prices as supply increases. The truth is even if EPA has done nothing on emissions reduction rules the markets would have savaged coal market share as a result of low sustained natural gas prices. The rules have had the unintended consequence of stimulating natural gas development more than we would have seen otherwise.
Competition and the revenge of markets is rationalizing our power generation portfolio for the future in ways that are profound and better than we expected. Cleaner natural gas is displacing dirtier coal. More wind and solar energy is being built but the fierce competition of falling priced Chinese photovoltaic panel and wind turbine exports and lower natural gas prices are driving down the grid parity price renewables must meet to be competitive. Natural gas is stored everywhere. This should all be good news except for one thing – utility rates are going up to pay the cumulative cost of politicians’ promises and regulatory orders – ratepayers will only take so much before we have another revolt. This is the big fear of utilities – the revenge of customers, customer aggregation by big brands – what is new this power business cycle is smart grid technologies enabling scalable growth of new entrants, all coming together in a net zero distributed energy world where all the smart meters count backward!
Hunt is President, TCLABZ, a pure play B2B predictive energy analytics platforms company working in collaboration with software, data and technology firms. He previously served as VP-Global Analytics & Data at IHS/CERA; global Division President at Ventyx, now an ABB company; and Assistant City Manager-Austin Texas responsible for Austin Energy and Austin Water