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By Elias Hinckley on Jul 14, 2014 with 10 responses

The Greatest Growth Opportunity for Electric Companies: Devour Oil’s Market

Energy use in the US can be split into two large (very, very large) pies. One is electricity for use in homes, buildings, and industry and the other is transportation, which is powered primarily by liquid fuels (gasoline and diesel) from oil. There are some exceptions, and small overlapping fuel uses – direct industrial use of liquid fuel (a fairly significant quantity), some liquids burned to make electricity (this used to be a significant amount, but is now only a very small amount), and now a very small amount of electricity used to power electric vehicles (“EVs”).

American consumers spend, on average more than $1 billion every day on each of these energy uses.

Daily U.S. Consumer Energy Spending

pies 1

Electric utilities have never made a serious effort to attack the transportation market at scale.  Historically this made sense.  Transportation infrastructure was built around liquid fuels and virtually the entire fleet of U.S. cars and trucks run on liquid fuels and there was no viable electric-drive alternative and fueling infrastructure was non-existent.

Within the past few years a tremendous technological transformation has occurred, and the barriers for an electric company to entertain unprecedented growth potential by devouring a large piece of the oil companies’ share of the U.S. energy market for transportation now sits clearly within reach.

There are now better batteries, faster charging options, and proven full electric vehicles led by Tesla and the Nissan’s Leaf, along with full electric or plug-in hybrid either in production or planned from virtually every auto manufacturer.   This evolution has happened independently of the electric utilities, and other than a handful of forays into replacing their own fleet vehicles or sponsoring a handful of EV charging stations, they have been little more than observers to this evolution.

Fighting the Wrong Battle?

The opportunity is hanging ripe in front of the electric industry.  Yet the industry seems more focused on something called (among many things) “the utility death spiral.” The risk to utilities is real – a combination of distributed energy, energy efficiency, changing behavior and weak economic growth has resulted in virtually no growth for new electricity demand since 2008, and going forward will force higher rates for each unit of electricity sold, which in turn makes the alternative technologies more attractive and accelerates consumer adoption.  While the risk is real it only relates to a (so far very small) portion of any utility’s total sales of electricity – the real threat is declining profitability, which will impair access to low cost capital, which is the life-blood of an asset-intense business like an electric utility.

An Unprecedented Opportunity

While electric utilities draw up battle lines and strategies for this changing energy landscape they have virtually ignored perhaps the greatest growth opportunity the industry has ever had.  By attacking the market for the energy used in transportation electric companies can not only offset slowly sinking demand, but can also drive huge new revenue growth throughout the industry, solving concerns over the demand threat from efficiency and on-site generation and providing more time to adapt.

By proactively and aggressively accelerating the wide-spread adoption of EVs and plug-in hybrids the electric industry can rapidly consume a significant portion of the revenue from the energy market for transportation.  A recent report from the United Nations went so far as to suggest that with enough support EVs could make up 100% of vehicle sales in the U.S. within 15 years.

 

pies 2 Electricity as a fuel source will actually cost consumers significantly less per mile than they currently pay for gasoline, so the increased share to electric companies won’t be dollar for dollar (though some demand rebound is quite possible).

 

There are of course challenges – range anxiety, insufficient vehicle charging infrastructure in many areas, limits on the affordability of better battery technology and a lack of consumer confidence in the new technology.  The solution to each of these challenges can, however, be accelerated or overcome through faster deployment of infrastructure and consumer education.

Electric utilities are perfectly positioned to manage both the infrastructure needs and to accelerate understanding and acceptance of EV technology. There are any number of ways this could be accomplished, but here are a few:

  • Free long-term financing for at-home high speed charging stations when a consumer buys an EV – utilities have access to low cost capital and direct billing to consumers.
  • A partnership between a utility and an EV manufacturer could allow for innovative financing options (e.g., an EV with loan payments collected as part of a Duke Energy bill). This has the primary benefit of accelerating adoption through easier financing for consumers, but also increases knowledge simply by promoting the plan.
  • For a utility like Exelon, with excess off-peak production due to its large nuclear fleet, a carefully crafted program could absorb some of this excess off-peak power while providing very low cost miles for consumers with EVs.
  • Rebates for EV buyers on some amount of additional electricity purchases as an incentive to EV buyers would be more than recovered over the life of vehicle use.

The key is that all of these strategies would lead to the likely permanent capture of consumers’ transport energy purchases, because the emotional hurdle and the infrastructure needs would both be solved.

About More Than Money

There are three reasons why accelerating this transition would be good for America, and not just utility owners.

  1. Despite an increasing output of liquid fuels in the U.S. the country still imports hundreds of billions of dollars in oil every year and will continue to unless there is a structural change in demand.
  2. Regardless of the geographic source, oil will continue to get more expensive, it is a global commodity and for as many wells as the U.S. might ever drill it will have little impact on the global supply/demand balance.
  3. This shift toward electrification would also significantly support efforts to manage global warming. There is no viable way to reduce carbon dioxide emissions from the life-cycle of a gallon of gasoline (and these per gallon emissions will actually rise as we pursue more unconventional sources of oil that requires more energy to extract and refine), while the U.S. electric grid already begun to reduce emissions per unit of electricity as inefficient coal plants are phased out and renewable energy use increases.

No Clear Path

Despite the clear benefits to the industry and to the nation it remains unclear how this evolution will play out.  The electrification of transportation is progressing, but there are threats, the potential for cheap biofuels or fuel cells could prevent wide-scale conversion to EVs, and other than Tesla, vehicle manufacturers can remain relatively agonistic to the change – it is electric companies with the most to gain by driving this transition.

Most utilities have been slow to react to rapidly changing technology (worth noting that under existing regulatory frameworks there is little incentive to do so). There are exceptions, NRG stands out, but no established electric company has been as proactive or aggressive as their owners should have demanded given the scale of the opportunity to take command of America’s energy market for transportation.

  1. By exdent11 on July 15, 2014 at 8:41 am

    Great piece on an opportunity for a transformation of the electric utility industry too little discussed .

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  2. By PBull on July 15, 2014 at 12:51 pm

    The opportunity is beyond EV cars, e.g. Leafs, Teslas, too. Beyond the EV consumer market, utilities can help spur investment in all kinds of efficient and clean electric-drive transportation abilities. Utilities have a unique and broad perspective on infrastructure assets, particularly in cities and across regions that can better inform integrated planning for 21st century infrastructure needs. Electric buses, bikes, more rail-transit (already electrically-powered) and smart EV taxi fleets are some options.

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  3. By Forrest on July 17, 2014 at 9:16 am

    In Michigan we split the power generators away from the power line and billing. My COOP electric utility is more interested in the newly acquired business of high speed internet fiber optic than traditional utility. They apparently received cheap or free fed money to make it happen. I guess it makes sense as the utility company business model in simplistic terms is hard line connections and billing. So, my utility wouldn’t benefit much from battery electric cars. However the utility would benefit from the transition of micro grid hard wire conversions. First, the utility doesn’t produce power and not threatened by the industrial, commercial, and residential power producers. This transition is technical and site specific, their is a market vacuum of business capable of tying all the separate components together to make it happen; something of which I would venture the utility company has much talent. If they acquired the education or talent necessary for solar, micro turbine, and other CHP generation equipment installations as well as controllers, converters, and battery storage this would be a tremendous opportunity for the utility to gain business dollars. This approach make a lot of sense for empowering a efficient, cost effective, and reliable power.

    I have read articles spouting tremendous BEV growth and articles claiming spartan growth. Overall the environmental benefits of the technology not that impressive per the low efficiency of grid. The grid will improve in future, however the improvement comes with a very high cost. It may be more cost efficient and productive to minimize grid power use to electrical devices/equipment and utilize natural gas and bio-mass for heavy lifting of heating and cooking. Cooling may be stay the dominion of electric, especially if operating withing the heat pump efficiencies, but natural gas most often with CHP installations utilizing the absorption, engine-driven, or desiccant technology more cost efficient and less harm to environment. Also, natural gas and bio fuel provides immediate and low cost improvements to transportation. Double that for fuel cell technology. Just a few days ago, Cummins announced a new 2.8L engine for delivery trucks that burns only E85 fuel (not a flex fuel engine). The engine reduces green house gas 80%. That would be a better and immediate benefit to environment as compared to BEV could accomplish for a very long time. Another example of harvesting the low hanging fruit at low cost, EPA is expected to coordinate with manufacturers latest advent of high efficiency wood stoves. This is expected to help environment more than all the green energy combined. Another troubling problem with green energy….the recent evaluation of $2 billion dollar investment in wind energy at meager benefit of 4% offset to grid power. A recent financial analysis of the real cost and real world operation of wind power very damming.

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    • By Forrest on July 19, 2014 at 8:27 am

      “the recent evaluation of $2 billion dollar investment in wind energy at meager benefit of 4% offset to grid power.”

      That would be 2013 year costs. Two billion dollar taxpayer cost to support a measly 4% offset in grid power.

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  4. By spec9 on July 18, 2014 at 5:47 pm

    I’m a bit mystified about why the utilities have not made much of an effort to push for EVs. Perhaps some regulations prevent them from doing so because it would be akin to increasing emissions? They should provide free or discounted charger installations.

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    • By Tom G. on July 18, 2014 at 11:43 pm

      Well I might be able to add a little insight into your posting spec9 since I worked for a public utility for about 21 years.

      1. Public utilities are usually very large organizations. The one I worked for started out at about 18,000 people. Organizations that size are not known to be nimble and quickly changed, LOL

      2. Public utilities are pretty old school meaning – they have been doing it the way for the last 30 years and it has worked well so why change now. Remember this is an industry that still uses steam turbines and gate valves. And things like digital instrumentation – even today you won’t find a whole bunch of that around.

      3. And finally, there just isn’t enough EV’s on the roads yet. Public utilities serve huge territories and millions of customers but EV’s are coming. In some locations like California public utilities are offering discounted rates for evening charging and do things like having approved discounted electrical contractors available so change is coming. Some are even beginning to mail information out doing exactly what you suggest – buy electric.

      But it is a very slow process when it comes to changing the culture of an organization when it contains 18,000 people. I can remember quite vividly when downsizing, rightsizing, layoffs and early retirements hit in the late 1990′s. In the end out 3,000 people either retired or were laid off and that event sent shock waves through the organization. I can remember vividly since I was one of the individuals responsible to carry the message to the masses. You would not want that job!

      When we begin to sell about 100,000 Ev’s or more every year you will see your public utility start its marketing campaign in earnest. It is a very highly skilled and talented workforce. Don’t worry, the better companies are already in the strategic planning stages and those companies will most likely do just fine.

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  5. By Forrest on July 19, 2014 at 9:54 am

    Is it wise to utilize the grid for heavy BTU energy needs of country? It would take a monstrous grid to supply the need; the cost would be extreme. For example Picken’s plan originally envisions a wealth of cheap wind energy powering the nation. Only upon hard number crunching did the math expose the futility upon the cost of constructing high voltage power lines. It’s cost prohibitive. Producing power as close as possible to the point of use is of major concern for efficiency and cost control. Wind can’t do that. For high BTU tasks, it is crucial to generate the power at point of use. It’s cheaper, more efficient, and practical to bring the fuel to point of use as compared to converting energy to power at great distances, then converting power back to energy. Natural gas can be utilized better for our energy needs upon home or micro grid use as compared to long distance power generation. Only site specific green power of hydro, and wind that is located close to point of use is practical. That would greatly reduce the availability. Solar is expensive, but very attractive per locating power generation just about on top of point of use and the fact it can be generated at retail benefit. BEV will fulfill a need as 2rd car short trip upon high density urban transportation needs and provide another revenue income for utilities, but I would venture the pollution benefits minimal for environment overall. The city dwellers will benefit from remote pollution stream, a good thing. Nuclear energy could be agame changer to this for grid solutions, but again so could fuel cell be a solution to point of use.

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  6. By Forrest on July 22, 2014 at 8:02 am

    BEV’s “big” environmental benefit: Current grid is 55% coal, 9% NG, 4% oil, and the rest hydro and small portion of wind, solar, geo. So, BEV will reduce GW emissions 17-22% over ICE current car fleet. But, ICE engine technology is rapidly improving to grid efficiency. Toyota has advertised 37% thermal efficiency on a recent 1L Yaris model. As of late the Cummins 2.8L engine with up to 80% GW gas reduction powered by E85 fuel. The grid is expected to improve efficiency and emissions, but at great cost and upon a long timeline. So, it appears upon most citizens interested in minimizing GW emissions, the BEV will be a costly choice to both taxpayers and owners. Unless, operating in zone of country with mostly hydro or nuclear power, the investment probably not worth the cost. Now, if you just excited upon the technology, go for it, but It’s not worth the taxpayer support for wealthy to enjoy yet another toy. If your purchasing green power realize it’s a faux effort as electrons do not discriminate upon powering your demand. You might as well send your contribution by US mail. It is apparent more can be accomplished for the environment by decreasing electrical demand and choosing natural gas, efficient ICE cars, biofuel, and biomass energy.

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    • By Forrest on July 22, 2014 at 8:16 am

      “Current grid is 55% coal, 9% NG, 4% oil, and the rest hydro”… should read “Current grid is 55% coal, 9% NG, 4% oil, and the rest nuclear, hydro”…

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    • By Gene_Frenkle on October 16, 2014 at 12:08 pm

      Consumers value performance, handling, convenience, and operating costs depending on oil price–Tesla proves that EVs are superior to ICE vehicles for passenger vehicles in every way but price. So based on past consumer habits EVs should win out if costs come down similar to how flat screens beat out CRT screens or laptops beat out desktops. The 2016 Volt will get the price to the level of an Camry/Accord (after tax credit) and I believe in the year 2016 it will be the top selling car in California.

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