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What Utility Future, Which Business Model?
Electricity Currents A Survey of Current Industry News and Developments
Tesla’s New Battery: The Future Is on the Wall On May 1, 2015, at the company’s design studio in Hawthorne, Calif., Elon Musk, the mercurial CEO of Tesla Motors Inc., unveiled a battery pack that can store electricity for homes and small businesses, boasting, ‘‘Our goal here is to fundamentally change the way the world uses energy.’’ He added: ‘‘We’re talking at the terawatt scale. The goal is complete transformation of the entire energy infrastructure of the world.’’ Nobody can accuse Musk of being modest. The company he founded in 2003 now has a market capitalization of $31 billion. Needless to say, the news went viral. Tesla’s home battery, named Powerwall, is a rechargeable lithium-ion battery that mounts on the wall and comes in 7 to 10 kWh versions with deliveries starting in late summer at prices starting from $3,000. What makes Powerwall battery exciting is that it allows customers to shift load by charging during times when electricity prices are low and discharging when prices are high. In its home state of California, there is now serious talk about super-off-peak and super-peak time-of-use (TOU) tariffs – with significant differentials between
Continued on page 4
July 2015, Vol. 28, Issue 6
In Electricity Currents This Month: Tesla’s New Battery: The Future Is on the Wall . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 What Utility Future, Which Business Model? . . 1 Count UC Berkeley’s Borenstein as Skeptic on Distributed Future . . . . . . . . . . . . 3
Electricity Currents is compiled from the monthly newsletter EEnergy Informer published by Fereidoon P. Sioshansi, President of Menlo Energy Economics, a consultancy based in San Francisco. He can be reached at [email protected].
What Utility Future, Which Business Model? For utility operators, it’s a scary scenario: Even as greater efficiency among appliances, lighting, motors and the like continue to reduce electricity demand growth, a sub-class of consumers has been generating some or all of its electricity needs through distributed self-generation, say from rooftop photovoltaic systems (PVs). As distributed generation continues to ride the cost curve downward and storage technologies become affordable, more consumers may be enticed to become prosumers. Since regulation in many parts of the world currently provides generous subsidies, such as net energy metering (NEM) schemes, distributed self-generation is not only cost-effective; it is a bargain few consumers can resist. 1
The combination of consuming less while producing more is likely to result in lower sales volume and falling revenues for the incumbent utilities. There is no parallel in the case of oil, natural gas, or coal since virtually no customer can self-generate. Many within and outside the industry, of course, are sympathetic to the plight of the incumbents – generators as well as those in transmission and distribution – who, by and large, historically recovered their costs through volumetric tariffs. Fewer kWh means lower sales and falling profits. Though there are parallels to the oil industry, also suffering from the plateauing of demand, these break down quickly since certain segments of the power sector are considered natural monopolies and are universally regulated, even in so-called deregulated or competitive markets. In the oil business, on the other hand, companies like Exxon, Chevron, or BP do not charge monthly service fees to recover the substantial costs associated with their extensive distribution and retailing networks. Nor, in the transportation realm, another source of parallels, can United Airlines or Lufthansa charge a fixed fee for maintaining their extensive global network. Naturally, a great deal of effort is going into predicting how these developments may define the future of the power sector, impact incumbent players while creating opportunities for new entrants. Among these is a report by PwC Global Power & Utilities entitled The Road Ahead: Gaining Momentum from Energy Transformation, which describes the main drivers of industry transformation and how they may interact with one another over time. According to the PwC, ‘‘Global megatrends – such as technological breakthroughs, rapid urbanization and resource shifts – are creating new opportunities and challenges in customer behavior, new forms of competition, different generation models, and regulatory changes that could quickly eclipse current company and country strategies.‘‘ 2
Clearly, the power sector is entering unchartered territory where the outcome is not entirely predictable. In fact, PwC claims that the future is virtually unpredictable depending on what assumptions are made and which country or part of the world one is dealing with. What applies in Germany or Denmark may not be the same as in Texas, California, or New York, for example. Since the important variables are likely to play differently in different regimes and be influenced differently by the prevailing regulatory and policy framework, the outcome is likely to differ widely. Moreover, depending on how incumbents and new entrants play their cards and position themselves the winners and losers will differ. The PwC report observes: First, existing generation assets could be left stranded as local energy systems and self-generation by customers ‘‘eat away at’’ the traditional centralized grid and large-scale generation model; Second, the expected transformation could shrink the role of some utility companies to providers of backup power; Third, developing countries may ‘‘leapfrog’’ conventional centralized system models in favor of local energy systems; and Fourth, existing grid and network systems may be unable to rapidly evolve to meet the needs of decentralized assets – delaying the adoption of advanced technologies. According to the PwC: ‘‘It’s not a question of whether new market models will take shape, as this is already happening, but which new business models will be pursued in the sector and what countries and regulators will do to increase access to reliable electricity supply and what existing power utilities will do to keep up with the change and alter their course.’’ Any number of market models could emerge including: Markets in which governments own and operate certain aspects of the business while mandating the adoption of renewable generation; Ultra-distributed generation markets where generators invest in distributed generation; The Electricity Journal
Localized energy markets where local communities demand greater control over their energy supply; or Regional super grids with large-scale renewable generation, storage and transmission capacity. As PwC sees it, one of these models will not necessarily win out over the others or different models may emerge in different countries depending on the circumstances. It speculates that incumbent players may not be as nimble or focused as some new entrants – a polite way to say they may be disadvantaged relative to the new players. On the other hand, the incumbents currently enjoy a number of advantages – e.g., existing assets, customer relationships – which may prove valuable in fostering new partnerships.& http://dx.doi.org/10.1016/j.tej.2015.06.012
Count UC Berkeley’s Borenstein As Skeptic on Distributed Future In a blog posted on May 4, 2015, Severin Borenstein, a professor at the University of California Berkeley’s Haas School, asks, ‘‘Is the future of electricity generation really distributed?’’ From the way the question is posed, one can surmise that the answer is: not necessarily. And Borenstein makes a number of insightful observations to support his conclusion. The blog is certainly worth a read. Excerpts follow. To start off, Borenstein declares that he is not fond of distributed generation: I’m sorry, but count me among the people who get no special thrill from making our own shoes, roasting our own coffee, or generating our own electricity. I don’t think my house should be energy independent any more than it should be food independent or clothing independent. Advanced economies around the world have gotten to be advanced economies by taking advantage of economies of scale, not by encouraging every household to be self-sufficient.
July 2015, Vol. 28, Issue 6
That’s not to say that distributed generation (DG) couldn’t be the best way for some people at some locations to adopt renewables, but simply that DG should not be the goal in itself. Compared to grid-scale renewables, DG solar has many advantages. Generating and consuming power onsite means no line losses, which typically dissipate 7–9% of gridgenerated electricity before the power gets to your house. But DG also has some serious drawbacks. The first and foremost is that design, installation, and maintenance of solar PV small rooftop by small rooftop costs a lot more per kilowatt-hour generated than grid-scale solar, probably about twice as much these days. How do these pros and cons sort out? Right now, I believe that residential solar loses to grid scale. But I’m not convinced that will always be true. And I don’t think that means households should be impeded from adopting DG solar today, just that we shouldn’t be giving it special incentives. We need to recognize that DG’s role in the electricity future is uncertain and locking in on this (or any other) technology is unwise. Well, then, how should we decide whether to go with DG renewables or grid-scale technologies? We shouldn’t decide. Instead we should design incentives that reflect the real benefits and costs of each type of system and then let them battle it out. This has two big advantages. First, it reduces the political fighting that comes with policymakers choosing one technology over another . . .. Second, it pushes all alternative technologies to keep innovating and lowering their costs. . . . we should craft incentives that accurately reflect the net benefits each alternative technology offers. I’m not sure exactly how those incentives should be structured. But I can tell you that they don’t involve paying households retail rates for power injected into the system as net metering policies currently do. They (should) include much greater use of time-varying pricing and, probably, location-varying pricing to reflect the real value of power on the grid. If DG solar with incentives that reflect its true benefits wins, that will be great, because we will know we’ve got the least-cost approach to reducing the externalities of electricity generation. If it sputters, that will be fine too, because it will indicate that there are other less-expensive ways to achieve our environmental goals. Either way, it’s time for incentives that are truly calibrated to costs and benefits, not to achieving penetration of one low-carbon technology over another.& http://dx.doi.org/10.1016/j.tej.2015.06.013
3
Tesla’s New Battery: The Future Is on the Wall On May 1, 2015, at the company’s design studio in Hawthorne, Calif., Elon Musk, the mercurial CEO of Tesla Motors Inc., unveiled a battery pack that can store electricity for homes and small businesses, boasting, ‘‘Our goal here is to fundamentally change the way the world uses energy.’’ He added: ‘‘We’re talking at the terawatt scale. The goal is complete transformation of the entire energy infrastructure of the world.’’ Nobody can accuse Musk of being modest. The company he founded in 2003 now has a market capitalization of $31 billion. Needless to say, the news went viral. Tesla’s home battery, named Powerwall, is a rechargeable lithium-ion battery that mounts on the wall and comes in 7 to 10 kWh versions with deliveries starting in late summer at prices starting from $3,000. What makes Powerwall battery exciting is that it allows customers to shift load by charging during times when electricity prices are low and discharging when prices are high. In its home state of California, there is now serious talk about super-off-peak and super-peak time-of-use (TOU) tariffs – with significant differentials between
Continued on page 4
July 2015, Vol. 28, Issue 6
In Electricity Currents This Month: Tesla’s New Battery: The Future Is on the Wall . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 What Utility Future, Which Business Model? . . 1 Count UC Berkeley’s Borenstein as Skeptic on Distributed Future . . . . . . . . . . . . 3
Electricity Currents is compiled from the monthly newsletter EEnergy Informer published by Fereidoon P. Sioshansi, President of Menlo Energy Economics, a consultancy based in San Francisco. He can be reached at [email protected].
What Utility Future, Which Business Model? For utility operators, it’s a scary scenario: Even as greater efficiency among appliances, lighting, motors and the like continue to reduce electricity demand growth, a sub-class of consumers has been generating some or all of its electricity needs through distributed self-generation, say from rooftop photovoltaic systems (PVs). As distributed generation continues to ride the cost curve downward and storage technologies become affordable, more consumers may be enticed to become prosumers. Since regulation in many parts of the world currently provides generous subsidies, such as net energy metering (NEM) schemes, distributed self-generation is not only cost-effective; it is a bargain few consumers can resist. 1
The combination of consuming less while producing more is likely to result in lower sales volume and falling revenues for the incumbent utilities. There is no parallel in the case of oil, natural gas, or coal since virtually no customer can self-generate. Many within and outside the industry, of course, are sympathetic to the plight of the incumbents – generators as well as those in transmission and distribution – who, by and large, historically recovered their costs through volumetric tariffs. Fewer kWh means lower sales and falling profits. Though there are parallels to the oil industry, also suffering from the plateauing of demand, these break down quickly since certain segments of the power sector are considered natural monopolies and are universally regulated, even in so-called deregulated or competitive markets. In the oil business, on the other hand, companies like Exxon, Chevron, or BP do not charge monthly service fees to recover the substantial costs associated with their extensive distribution and retailing networks. Nor, in the transportation realm, another source of parallels, can United Airlines or Lufthansa charge a fixed fee for maintaining their extensive global network. Naturally, a great deal of effort is going into predicting how these developments may define the future of the power sector, impact incumbent players while creating opportunities for new entrants. Among these is a report by PwC Global Power & Utilities entitled The Road Ahead: Gaining Momentum from Energy Transformation, which describes the main drivers of industry transformation and how they may interact with one another over time. According to the PwC, ‘‘Global megatrends – such as technological breakthroughs, rapid urbanization and resource shifts – are creating new opportunities and challenges in customer behavior, new forms of competition, different generation models, and regulatory changes that could quickly eclipse current company and country strategies.‘‘ 2
Clearly, the power sector is entering unchartered territory where the outcome is not entirely predictable. In fact, PwC claims that the future is virtually unpredictable depending on what assumptions are made and which country or part of the world one is dealing with. What applies in Germany or Denmark may not be the same as in Texas, California, or New York, for example. Since the important variables are likely to play differently in different regimes and be influenced differently by the prevailing regulatory and policy framework, the outcome is likely to differ widely. Moreover, depending on how incumbents and new entrants play their cards and position themselves the winners and losers will differ. The PwC report observes: First, existing generation assets could be left stranded as local energy systems and self-generation by customers ‘‘eat away at’’ the traditional centralized grid and large-scale generation model; Second, the expected transformation could shrink the role of some utility companies to providers of backup power; Third, developing countries may ‘‘leapfrog’’ conventional centralized system models in favor of local energy systems; and Fourth, existing grid and network systems may be unable to rapidly evolve to meet the needs of decentralized assets – delaying the adoption of advanced technologies. According to the PwC: ‘‘It’s not a question of whether new market models will take shape, as this is already happening, but which new business models will be pursued in the sector and what countries and regulators will do to increase access to reliable electricity supply and what existing power utilities will do to keep up with the change and alter their course.’’ Any number of market models could emerge including: Markets in which governments own and operate certain aspects of the business while mandating the adoption of renewable generation; Ultra-distributed generation markets where generators invest in distributed generation; The Electricity Journal
Localized energy markets where local communities demand greater control over their energy supply; or Regional super grids with large-scale renewable generation, storage and transmission capacity. As PwC sees it, one of these models will not necessarily win out over the others or different models may emerge in different countries depending on the circumstances. It speculates that incumbent players may not be as nimble or focused as some new entrants – a polite way to say they may be disadvantaged relative to the new players. On the other hand, the incumbents currently enjoy a number of advantages – e.g., existing assets, customer relationships – which may prove valuable in fostering new partnerships.& http://dx.doi.org/10.1016/j.tej.2015.06.012
Count UC Berkeley’s Borenstein As Skeptic on Distributed Future In a blog posted on May 4, 2015, Severin Borenstein, a professor at the University of California Berkeley’s Haas School, asks, ‘‘Is the future of electricity generation really distributed?’’ From the way the question is posed, one can surmise that the answer is: not necessarily. And Borenstein makes a number of insightful observations to support his conclusion. The blog is certainly worth a read. Excerpts follow. To start off, Borenstein declares that he is not fond of distributed generation: I’m sorry, but count me among the people who get no special thrill from making our own shoes, roasting our own coffee, or generating our own electricity. I don’t think my house should be energy independent any more than it should be food independent or clothing independent. Advanced economies around the world have gotten to be advanced economies by taking advantage of economies of scale, not by encouraging every household to be self-sufficient.
July 2015, Vol. 28, Issue 6
That’s not to say that distributed generation (DG) couldn’t be the best way for some people at some locations to adopt renewables, but simply that DG should not be the goal in itself. Compared to grid-scale renewables, DG solar has many advantages. Generating and consuming power onsite means no line losses, which typically dissipate 7–9% of gridgenerated electricity before the power gets to your house. But DG also has some serious drawbacks. The first and foremost is that design, installation, and maintenance of solar PV small rooftop by small rooftop costs a lot more per kilowatt-hour generated than grid-scale solar, probably about twice as much these days. How do these pros and cons sort out? Right now, I believe that residential solar loses to grid scale. But I’m not convinced that will always be true. And I don’t think that means households should be impeded from adopting DG solar today, just that we shouldn’t be giving it special incentives. We need to recognize that DG’s role in the electricity future is uncertain and locking in on this (or any other) technology is unwise. Well, then, how should we decide whether to go with DG renewables or grid-scale technologies? We shouldn’t decide. Instead we should design incentives that reflect the real benefits and costs of each type of system and then let them battle it out. This has two big advantages. First, it reduces the political fighting that comes with policymakers choosing one technology over another . . .. Second, it pushes all alternative technologies to keep innovating and lowering their costs. . . . we should craft incentives that accurately reflect the net benefits each alternative technology offers. I’m not sure exactly how those incentives should be structured. But I can tell you that they don’t involve paying households retail rates for power injected into the system as net metering policies currently do. They (should) include much greater use of time-varying pricing and, probably, location-varying pricing to reflect the real value of power on the grid. If DG solar with incentives that reflect its true benefits wins, that will be great, because we will know we’ve got the least-cost approach to reducing the externalities of electricity generation. If it sputters, that will be fine too, because it will indicate that there are other less-expensive ways to achieve our environmental goals. Either way, it’s time for incentives that are truly calibrated to costs and benefits, not to achieving penetration of one low-carbon technology over another.& http://dx.doi.org/10.1016/j.tej.2015.06.013
3