Posts tagged “utilities”
The following article was written by S. Michael Holly, the Chairman of Sorgo Fuels & Chemicals, Inc. Sorgo has developed technology for the production of ethanol, electricity and protein from sweet sorghum. Mike was formerly an alternative energy engineer and business analyst with the Minnesota Department of Energy and Economic Development. He holds masters degrees in chemical engineering and business administration from the University of Minnesota.
Many U.S. special interests are misrepresenting wind power costs, including the wind industry, environmental groups, utility monopolies, independent system operators, educational and research institutions, and even federal and state governments. On September 24, Bill Ritter, the current director of the Center for the New Energy Economy at Colorado State University and former Governor of Colorado, wrote in the Wall Street Journal that “Long-term contracts for wind energy are being signed by utilities in several states in the range of 3 cents per kWh over 20 years” (1). Xcel Energy, the nation’s leading wind-generating electric utility, declares “wind power is simply the cheapest resource” (2).
Last year Maryland Governor Martin O’Malley asked the Energy Future Coalition (EFC), a project of the UN Foundation, to design a multi-faceted and comprehensive pilot-project plan for the state’s utilities. EFC assembled a stakeholder group including two Maryland utilities, PEPCO and Baltimore Gas & Electric Company (BGE), to submit ideas for pilot projects that could build a “better utility future.” The resulting report, “Utility 2.0: Piloting the Future for Maryland’s Electric Utilities and their Customers,” takes a different path than typical electricity utility reform strategies. Rather than dictating a single pathway for higher renewable penetration, the report calls for a number of pilot projects designed to create an entirely new grid system that advances innovation, resilience, reliability, flexibility, and financial viability for customers.
Electric utilities are usually characterized as ‘anti-innovators’ as their ultimate goal is only to sell electricity at the lowest cost and highest reliability. Integrating and transmitting distributed renewable energy presents a challenge to the standard operation of utilities due to intermittency issues, distribution, and new infrastructure needs.
In the most recent issue of our subscriber-only newsletter, Energy Trends Report (ETR), I took a look at the lessons learned from the decline of the US coal industry. As we have done previously, we would like to share a story from ETR with regular readers of this column. Interested readers can find more information on the newsletter and subscribe for free at Energy Trends Report.
Lessons From the Beginning of the End of America’s Coal Industry
Only a few short years ago the U.S. coal industry enjoyed a mini-renaissance with several new large power plants brought on line in 2010 and 2011, which at the time firmly entrenched coal as the dominant source of electric generation in the U.S. Since then, coal’s share of the electric market has contracted sharply, and against the backdrop of the White House’s new position on climate change is why many see an industry in serious trouble.
The U.S. coal industry has been left to fight an uphill battle with the EPA over the agency’s authority to set rules on CO2 emissions from power plants. The coal industry is fighting this battle virtually alone, as traditional fossil fuel allies sit on the sidelines (oil) with no direct stake, or wait eagerly to absorb market share (natural gas). In parallel to this new policy reality, technology developments – from advances in unconventional gas extraction to startling declines in the cost of renewable energy generation and efficiency – are redefining the economics of electricity markets.
In our energy finance newsletter a few weeks back I wrote about some possible fallout after Energy Future Holdings (EFH), the massive private equity-owned Texas electric holding company and the result of one of the largest leveraged buy-outs ever, formally warned that it might need to seek bankruptcy protection.
Last week, EFH offered a restructuring plan to creditors in an effort to avoid bankruptcy. The restructuring offer will almost surely be rejected, but may lay the initial groundwork for some type of structured resolution outside (or even inside) of bankruptcy court.
A little more than five years ago EFH was created as the vehicle for the most expensive leveraged buy-out in history when a private equity group led by KKR, TPG and Goldman Sachs Capital Partners bought the Texas energy company at a price of $43.2 billion. The failure of EFH will be hugely important in terms of the direct impact on investors, lenders and the private equity market, but perhaps more important will be what this failure means for the broader energy landscape.
In my previous column, Energy Industry Capital Spending Reaching New Highs, we looked at how the industry continues to ramp up spending across its sectors. As I noted, this is no surprise given the enormous capital requirements to sustain its business models.
However, what is surprising is that despite the significant tailwind of high crude prices since 2010 to current, net free cash flows (operating cash flow less cash capital spending) have actually declined for the industry overall. Operating costs are increasing crimping margins, and investment spending is rising faster than top-line revenue growth. To put things into perspective, although total industry operating cash flow (OCF) dropped only 1% in 2012 from 2011, from 2007 to 2012 spending grew at a per annum rate of nearly 10% while OCF increased at a 5% per annum rate.
The worst offender has been the U.S. E&P sub-sector heavily weighted to natural gas production at low prices; the sector has seen its deficit cash flow grow. In 2012, despite spending decreasing 2% from 2011, OCF dropped a whopping 17%. From 2007 to 2012, capital spending grew at nearly a 7% per annum rate, while OCF increased only 3% per annum.
The value chain for the energy industry is a simple one: Resources to Production to Cash Flow to Value.
At first glance, higher capital spending in the energy industry may seem a paradox during a period of weak global economic growth. However, it requires enormous capital to maintain — let alone grow — its business model. To that end, several tailwinds have helped fuel the industry’s relentless re-investment, simulative monetary policy – low interest rates, high crude prices, rising costs, increasing demand from developing nations, increasingly remote and difficult regions to explore for oil driven by globally constrained light sweet crude oil.
Particularly, high crude prices are a major catalyst driving spending higher. Since 2011, on average, crude prices — whether WTI or Brent — have been at a consistently historically high level; WTI at roughly $94/bbl, and Brent at about $112/bbl.
Looking at the overall energy sector that includes the oil & gas (U.S. E&P, Western Majors and Canadians), refining, pipeline, utility, and oil services sectors, the industry spent over $450 billion, or 58% higher in 2012 compared to 2007 spending, and 6% above 2011, at a per annum growth rate of nearly 10% from 2007 to 2012.
Zachary Shahan just put together statistics on the amount of solar installed by state on a per capita basis through 2012.
The results are interesting (and the full post can be found here) but none of these results are more interesting than the curious case of Arizona.
Arizona has historically been a large coal producing and consuming state and despite recent growth in solar has not been a leader on renewable energy policy or deployment.
By Sam Shrank and Raphael Tehranian
Utilities find themselves in unfamiliar positions as they chart their course in areas such as alternative fuel vehicles, smart grid, and distributed generation. In this last piece of our four-part series (See Part I by Mat McDermid, Finding the Regulated Utility Role in a Shifting Energy Landscape; Part II by Sam Shrank, How Behavioral Science Can Increase Energy Efficiency Adoption; and Part III by Jill Bunting and Raphael Tehranian, How Utilities Can Better Source Innovation), we discuss how partnerships with individual large customers to test new offerings, alongside traditional pilots, can help utilities find solid ground. Partnerships can both demonstrate to regulators that customers benefit from utility involvement in these areas and help utilities scope their ideal role.
Utilities have a long and successful track record of using technology demonstration pilots to better understand new innovations, test their ability to solve problems, provide increased or new benefits, and gauge customer and stakeholder interest. In a changing business environment, however, expanding into more customer-centric pilots would greatly help utilities position themselves to protect and expand their market standing.
Customer-centric energy partnerships of this type cover a broad spectrum, but there are a few required elements. First, they must begin with the selection of a customer partner, not a technology or utility offering. Second, the customer’s goals should determine the expanded or new offering, or most likely suite of offerings, included. Third, rather than lasting for a predetermined and usually short amount of time, they are meant to be merely the beginning of an ongoing relationship.
By Jill Bunting and Raphael Tehranian
The speed of innovation outside the walls of utilities outstrips the speed of innovation within. As new and disruptive vendors, technologies, and business models enter the market, many utilities have seemed unsure about what their role is or should be. In the third in our four-part series (See Part I by Mat McDermid, Finding the Regulated Utility Role in a Shifting Energy Landscape; and Part II by Sam Shrank, How Behavioral Science Can Increase Energy Efficiency Adoption), we discuss how utilities can and should leverage their unique position to accelerate and manage the deployment of innovations for the benefits of all customers.
Here are three roles utilities can play to better manage innovation in a changing market.
The ambassador: help customers understand the benefits of new innovations
Technology advancements are broadening customer access to a wide range of new energy services. But technology alone is never enough: customers must feel comfortable incorporating these advancements into their daily lives. Utilities are well-suited to providing customers with answers on a wide range of energy services and moving them up the adoption curve. They have already achieved significant success in areas such as energy efficiency, where the average cost per kWh saved through utility energy efficiency programs is just 2.5 cents. Areas such as electric vehicles are opportunities for utilities to build on this success as ambassadors for new energy services.
By Sam Shrank/GreenOrder
Utility operations are being forced to evolve as customer expectations shift, technological change continues and new players enter adjacent markets. As utilities chart their course in areas such as energy efficiency, smart grid, and distributed generation, they find themselves in unfamiliar positions. The second in our four-part series (See Part I by my colleague, Mat McDermid, Finding the Regulated Utility Role in a Shifting Energy Landscape), we discuss how utilities can leverage behavioral science research as they expand into markets where they are not a monopoly and customers need to be convinced about the benefits of the products and services offered.
Since setting up auto-pay the day I moved into my apartment, I’ve given no thought to my utility bill. Given that my job is to analyze and advise utilities, I’d venture to say most people are no more engaged. However, with an evolving set of customer offerings—energy efficiency (EE), alternative fuel vehicles, demand response, and the like—many utilities are realizing that they may require better, different, or more communication. In short, they are discovering what it means to sell.
And not only are they beginning to market things customers may not feel they need, they now have competitors as well, particularly in the EE market. Various other entities are looking to advise large electricity and gas users about how to lower their bills and provide help with financing, sell devices directly to customers that increase automation and control, or take over the utility’s role as the provider of EE offerings funded through utility bill surcharges. All of these reduce both the direct benefit to utilities from performance incentives and the indirect benefits from higher customer satisfaction, improved regulatory relationships, and perceived leadership.