2013 trends for the power industry

Even if the Mayans are wrong about the world ending, there isn't much left of 2012. So before we all rush off to relatives' houses or office holiday parties, let's take some time to consider the year ahead and what it might hold for the electric utility industry.

I had the opportunity recently to ask a few quick questions to Andre Begosso, managing director of Accenture's Utilities North America strategy practice. Thanks to Andre's expertise, we can flesh out what might happen in the coming weeks and months.

Trend No. 1: The "Dash for Gas" will continue, but don't count coal out

This year, hydraulic fracking and other developments in fossil fuel extraction have tipped the scales in favor of natural gas, thus leading power companies to exploit the record low prices of natural gas-fired generation. Andre said he expects this trend to continue into 2013.

"The price of gas will continue to fluctuate and there is a reason for that," he said. "Price is driven by marginal demand, which in turn is driven mostly by the power generation sector."

Along with the Dash for Gas, another phrase that gained notoriety was the "War on Coal." Energy lobbyists and politicians from coal-producing countries have been among those who claim that the president, the EPA and Congress have it in for coal and are putting the industry at risk deliberately. For his part though, Andre said he doesn't buy this hype.

"The price of gas is the single biggest pressure on the coal sector," he said. "Worse than any regulation or legislation from the government."

Regardless of why coal is feeling the pinch, though, there will always be a need for the baseload power it provides, he said.

"Even in the best case scenarios, we don't have enough gas to completely replace coal," he said. "Not only that, but we have some upcoming technologies currently under development that will allow us to use less coal. Coal will never go away."

Trend No. 2: Utilities get back to their bread and butter

With the American Recovery and Reinvestment Act funding spent and Congress not in a spending mood, I wondered where smart grid pilot programs and smart meter rollouts were going to get their funding. "The ratepayers," predicts Andre.

"In terms of the smart grid, there was a wave of construction, and now people are getting better at applying the technology. We will continue to learn more about how to apply it and how to keep the technology viable," he said.

Some of the more exotic technologies, such as energy storage, that have yet to be firmly proven in the field, utilities will take a rain check on — waiting to see how the technologies evolve over time.

"Utilities will continue to invest in their bread and butter technologies, like AMI. There is no reason for them not to invest in those," he said.

Trend No. 3: Has renewable energy deployment hit a peak?

FERC announced what I thought were some surprising numbers about renewable generation. Biomass, geothermal, solar, wind and hydropower, taken together, accounted for more than 41 percent of new generation put online in the U.S. in 2012.

This is thanks to a variety of factors, Andre said. Government support, in the form of the production tax credit, is one factor, as are state-level renewable portfolio standards.

"A lot of states have a looming 2015 deadline to meet their portfolio standards. Michigan is one of them. So they needed to meet those standards," he said.

In the absence of some major advance in energy storage, Andre said, he expects that renewable energy installation will probably start to slow as its shortcomings become more apparent to utilities and power companies.

"I would not expect these trends to continue because of the tremendous limitation that renewable technologies have. You cannot break the laws of physics or the laws of chemistry. The wind doesn't blow all the time and it never will, and the sun doesn't always shine and it never will," he said.

Trend No. 4: Energy back on the agenda

In my last blog post, I speculated about what it might take to get energy policy back on the agenda. When I asked about this, Andre said energy already is back on the agenda.

"Over the next 3 years, over $220 billion in new infrastructure will be built. But the problem with infrastructure is Rome wasn't built in a day. It takes time," he said.

This new wave of infrastructure upgrades will require a level of patience and understanding on the part of ratepayers that Andre wonders whether the average person is capable of. During Hurricane Sandy, for example, Con Edison had one of the most sophisticated electric grids available — yet it still failed, and people wonder why.

"As much as people hate outages, I don't think they understand them," he said. "If we had to build everything to withstand every possible disaster that could happen, it would never be built. It would be too expensive."

As far as utilities are concerned in this, Andre compares adopting new infrastructure improvements to how consumers usually approach the release of flashy new electronic gizmos.

"Remember when BluRay players were $400? Some people did pay for them, but the average Joe looked at it and said, 'Well, I can still watch movies on my old DVD player.' The infrastructure problem isn't much different from that."

Trend No 5: Growth opportunities will come from new start-ups

Maybe one of the biggest long-term changes the utility industry has ever seen is the reversal of the status quo of energy use. Energy companies are realizing they have a vested interest in getting customers to use less of their product, and this trend in turn is leading to a market for all kinds of consumer gadgets that will help people use less energy.

"The regulatory model of the U.S. was built around capital. The underlying assumption was we'd always have growth and we'd always consume more energy," he said. "What we may see in the future is that assumption might not be true... If you have a good understanding of the way the market works, you will be successful."

Small start-up companies that have a good idea and a way to market it might make a bigger splash in the energy sector with it comes to growth than the older, more established players.

"I just got a new smart thermostat called the Nest, and it's one of the coolest things I've ever bought," he said. "I installed it myself and I'm not a very handy person."

My thanks to Andre Begosso for his help with this post. Andre is a managing director in the Accenture management consulting practice and is focused on the resources operating group. He has more than seventeen years of experience in the utility and energy industries and advises clients in the alternative energy, power generation and oil and gas sectors. Andre has a B.S. in industrial engineering from the university of Sao Paulo, Brazil and an MBA from the Ross School of Business at the University of Michigan.

Utilities, elections, government and grading the stimulus

With about 80 days left to go, the 2012 presidential election is shaping up to be a question of how much the government can or should get involved with the economy, with business and in people's individual lives. Both President Barack Obama and his challenger Gov. Mitt Romney have their own ideas about the role of government, but in the utility industry people demand results.

One of the biggest things the government did for the power industry since the 2008 election is the American Recovery and Reinvestment Act of 2009. While not always popular with voters, the so-called "stimulus act" allotted a fair chunk of change to the industry, and it's fair to say there are many infrastructure projects that might not have gotten off the ground without that money.

If the utility industry were to give the Recovery Act a three-year report card, it might look something like the points shared with me by Ron Chebra, who is vice president of management and operations consulting with DNV KEMA.

Looking back over the past three years, Chebra said, it's helpful to remember what the point of it all was. The Recovery Act was intended to stabilize state and local government budgets, invest in technological advances, assist those impacted by the recession, boost infrastructure and — most importantly — create jobs and promote recovery.

The Recovery Act included the Smart Grid Investment Grants (SGIG), which were supposed to "accelerate the modernization of the nation's electric transmission and distribution systems and promote investments in smart grid technologies, tools and techniques that increase flexibility, functionality, interoperability, cyber-security, situational awareness and operational efficiency."

In Chebra's analysis, "It is my belief that many energy jobs were created as a result of the stimulus. The greatest areas of positive impact have been in the manufacturing and installation sectors where the rush to build and install millions of smart meters formed a great need for these resources."

But the question that only time can answer is how long will these jobs last? Will they plateaued along with the end of their subsidy, or will they get the ball rolling on something lasting?

"Certainly, with the step change that stimulus created, there seems to be some sluggishness in new U.S. smart meter orders," he writes.

When it comes to helping those affected by the recession and the worldwide credit crunch, the stimulus "definitely" helped spur growth in domestic manufacturing, which had been brought to a near standstill and was at risk of being out-competed by businesses in Europe and China, among others.

Technology innovation, another goal of the act, were accelerated by the flow of money that went into research and development, he said.

"For some time, some of the investments made in the electric infrastructure were directed toward meeting the increasing need for supply; through the initiatives funded by these grants, many of the investments focused on the delivery and demand side," he said.

How to get customers involved and educated when it comes to smart meters has always been a key aspect of smart grid rollouts, and "As we await the tally of realized net benefits of these investments, the trends now show that many of these programs have resulted in greater customer awareness and participation in demand management efforts that will result in sustainable long-term economic benefits."

Some of the bad news that might result from the Department of Energy-funded projects include stumbles in customer engagement. Because of the smart meter rollouts made possible in places like California, there are now grassroots citizens groups advocating against the use of smart meters and their efforts have led to opt-outs.

There's also the problem of utility "haves" and "have-nots." So in the wake of the stimulus, there's now a gap between those whose projects got government funding and those who didn't.

Another problem is the creation of "islands" of automation in the rush to be shovel-ready. These islands now need to be integrated to achieve the benefits anticipated in the business cases, he said.