The U.S. utility industry is confronting
major change that requires an unprecedented level of
innovation. Historically, the industry has not been
committed to innovation and, in fact, R&D
expenditures are at the lowest comparable level for virtually
all industries. They are so low that they don't even get
reported as a separate line item in utility company public
financial reporting. One commentator noted that the U.S.
per food industry spends more on R&D than the U.S. utility
industry. The areas involving new large levels of
innovation are:
U.S. Supreme Court affirmed
required emission reduction
Barclay’s downgrade of the entire
industry due to industry wide falling demand/sales
revenue
Smart grid and improved energy
storage and
Enhanced software including cyber
security, call center artificial intelligence and
cloud applications.
The Research &
Development Tax Credit
Enacted in 1981, the federal Research and
Development (R&D) Tax Credit allows a credit of up to 13%
of eligible spending for new and improved products and
processes. Qualified research must meet the following four
criteria:
New or improved products,
processes, or software
Technological in nature
Elimination of Uncertainty
Process of Elimination
Eligible costs include employee wages, cost of supplies, cost
of testing, contract research expenses, and costs associated
with developing a patent. On January 2, 2013 President
Obama signed the bill extending the R&D Tax Credit for the
2012 and 2013 tax years.
The Ancient Electrical
Grid
The U.S. utility network is practically the
eighth wonder of the world. The $876 billion asset
includes almost 7,000 power plants, 450,000 miles of
high-voltage transmission lines and 3,300 different utility
companies which serve over 150 million customers
–astonishingly referred to as “ratepayers”. Much of the
grid was built just after WWII and has not been updated since
the 1970’s. The basic design system was invented by
Thomas Edison over 130 years ago; and about half of the homes
on the grid still use mechanical meters that require a utility
worker to take a reading. These meters provide customers
with no details about their energy consumption other than a
monthly bill.
The chart below demonstrates the
increasing frequency of blackouts as the grid ages.
The main problem with the current grid is that it is highly
inefficient. Substantial energy is wasted because the
system doesn’t know exactly how much energy will be needed at
any given time. It currently relies on guesswork which
often results in overproduction and wasted electricity. The
American Society of Civil Engineers described the nation’s
electrical grid as a patchwork system that will ultimately
break down unless $673 billion is invested by 2020.
It is estimated that over the next 10 years more than $30
billion will need to be invested in New York’s electric system
alone to replace aging infrastructure and maintain generation
resources just to meet currently projected energy demand.
However, the need for this investment could be substantially
reduced through innovative and less costly alternatives.
The Rosenfeld thesis challenges the conventional belief that
energy demand and GNP work in tandem. With the conventional
belief, the consensus logic dictated the continuing need to
build more power plants. However, a group of leading
physicists led by Princeton University physics professor, Art
Rosenfeld, wouldn’t accept the conventional wisdom.
Rosenfeld and his colleagues proceeded to put together an
influential Princeton energy study which concluded that
systematic steps to improve energy efficiency could materially
reduce demand. These cost saving alternatives are
crucial to the utility industries survival as competing energy
sources begin to emerge.
Traditionally, the utility industry had no meaningful outside
competition forcing change. More recently, other sources
of power such as rooftop solar are becoming increasingly
practical and affordable, putting pressure on utility
companies to provide more cost efficient alternatives.
The government is compounding this pressure as well with its
recent Supreme Court decision requiring greenhouse gas
controls on power plants which emit above a certain threshold
of conventional pollutants.
U.S. Supreme Court
Affirmed Mandated Emission Reduction
The U.S. Supreme Court recently ruled that
the Environmental Protection Agency can require power plants
and other large stationary sources of pollution to obtain
permits and greenhouse gas controls when they modify an
existing facility or build a new one. (Utility Air Regulatory
Group v. EPA)
The ruling is a major concern for specific utility companies,
particularly coal burning plants, who have been largely
effected by the decision since their facilities are generally
the highest emitters. Prior to 2007 the EPA did
not have conclusive authority to regulate greenhouse gas
emissions. Up to this point the EPA only regulated those
emissions which caused a serious danger to the public
health. Carbon Dioxide was of lesser concern.
However, in Massachusetts v. Environmental Protection
Agency the court ruled that carbon dioxide emitted from
motor vehicles is an “air pollutant” causing “air pollution”
and can therefore be regulated under the Clean Air Act.
More recently, the power to regulate greenhouse gases was
expanded to include regulation of emissions from large power
plants and coal burning facilities in Utility Air Regulatory
Group v. EPA.
The decision was largely a victory for the EPA as the court
ruled that the EPA may issue “performance standards” limiting
carbon pollution from large stationary sources such as
electric power plants. On the other hand smaller emitters
received a marginal victory on the issue of whether or not the
power to regulate carbon emissions from motor vehicles extends
to all stationary sources. The court ruled that it did
not because such a ruling would “unreasonably place excessive
demands on limited government resources” iii as small
buildings such as schools and libraries would then be subject
to costly regulations.
Overall the decision served as a another source of pressure
forcing change on the utility industry because while the
EPA may not limit carbon-dioxide emissions from small
stationary sources, it may now require “best available control
technology” (BACT) limiting carbon-dioxide on end-of-stack
controls of larger sources which emit over a certain threshold
of conventional pollutants.
Justice Scalia, the author of the lead opinion said from the
bench that the “EPA is getting almost everything it wanted in
this case.” The EPA now has authority to cut back on
such pollution at eighty-three percent of the sources across
the country, which is only three percent less than they
originally sought. The ruling however serves as
only one of many sources of pressure on the utility industry
to keep up with the rest of the economy in terms of
innovation.
Barclays’ Downgrade of
the Entire U.S. Electrical Industry Based on Falling
Demand/Sales Revenue
Barclays, the leading global financial
services firm, recently issued a research note that has caught
the attention of the financial utility market. Presumably,
Barclay’s position as a European headquartered bank gave them
more insight regarding the U.S. utility challenge. Prior to
the Barclay’s note, the five leading European utilities have
reported steadily declining revenues and very poor financial
results. Barron’s recently produced this excerpt from
the Barclay’s research note:
“Electric utilities. . . are seen by many investors as a
sturdy and defensive subset of the investment grade
universe. Over the next few years, however, we believe
that a confluence of declining cost trends in distributed
solar photovoltaic (PV) power generation and residential-scale
power storage is likely to disrupt the status quo. Based
on our analysis, the cost of solar + storage for residential
consumers of electricity is already competitive with the price
of utility grid power in Hawaii. Of the major markets,
California could follow in 2017, New York and Arizona in 2018,
and many other states soon after. In the 100+ year
history of the electric utility industry, there has never
before been a truly cost-competitive substitute available for
grid power. We believe that solar + storage could reconfigure
the organization and regulation of the electric power business
over the coming decade. We see near-term risks to credit from
regulators and utilities falling behind the solar + storage
adoption curve and long-term risks from a comprehensive
re-imagining of the role utilities play in providing electric
power.”
In addition to increased solar capacity discussed in the
Barclay’s note, energy efficient LED lighting is also markedly
reducing overall electricity demand. Accordingly, the
U.S. utility industry is beginning to confront challenges
related to continuous revenue decline.
Smart Grid and
Improved Energy Storage
A new “smart grid” would involve two-way
communication between the utility company and its
customers. Like the “Internet of Things” the ideal
“smart grid” will consist of controls, computers, automation
and new technologies all working together and communicating
with each other in order to:
Improve the efficiency of electricity
Reduce operations and management
costs (ultimately lowering costs for consumers)
Reduce peak demand (which will
help lower electricity rates)
Increase integration of
large-scale renewable energy systems
Increase integration of customer
power generation systems
Reduce blackouts and;
Improve security
One important aspect of the “smart grid” is
that it gives consumers the tools and information they need in
order to make better decisions about energy use. For
example, customers who have energy storage capabilities will
be able to harness and store energy at night when the price of
electricity is cheaper. Moreover, the customer would not
have to wait for their monthly statement in order to gauge how
much energy they have used in order to adjust. “Smart
meters” and other mechanisms, will allow customers to see how
much electricity they have used along with its cost on a real
time basis.
With the help of digital sensors and intelligent communication
networks, utility companies can receive information about how
an asset is being used and allocated, what the condition of the asset is,
and how to best utilize resources to manage electrical
costs. Using a combination of location, intelligence,
and real-time network monitoring it is possible for companies
to reduce asset maintenance costs, improve network
reliability, and lower asset replacement costs.
Software, Software,
Software
The utility industry is poised to make
tremendous investments in enhanced software. Software is
the fastest growing R&D category in the United States and
many external and internal integration costs related to
software are potentially tax credit eligible. Perhaps
the cornerstone of the new smart-grid is in its ability to
give customers and systems operators information about energy consumption, storage, distribution, and other
situations which facilitate planning. Some smart devices
even do the planning for you.
The Honeywell Lyric thermostat knows when you’re not home and
when you’re approaching your home by tracking your location
via smart phone. The app draws a perimeter around the
house and turns up the heat or electricity when you enter the
zone. When you leave it turns it down.
Customers are becoming increasingly comfortable using these
types of devices as well. For example the chart below
shows the rise of smart meter installations in the U.S.
Utility Call Centers
and Artificial Intelligence
Conscientious utility consumers prefer to
have access to updated information from their providers at all
hours of the day and night.
However, online information, frequently asked questions and
site searches aren’t always capable of providing specific
additional answers to the narrow questions customers often
ask. These inquiries are often customer specific
involving questions related to billing, electronic payments,
service outages, installation times, repair service
scheduling, utility rebates and an assortment of other
issues. To handle the constantly-increasing demand for
service, companies can hire more staff, but there is a more
cost-efficient and potentially higher quality solution with
artificial intelligence.
Big data combined with artificial
intelligence and natural language processing allows computers
to answer repetitive questions so that human service workers
can focus on building customer relationships by providing a
personalized service in other areas. Technology
platforms are constantly evolving to improve the accuracy and
efficiency of this process. For example, when a question
has been answered successfully by the computer, the automation
system can store the conversation and compare it to a
subsequent question in order to generate another successful
response.
With machine self-learning capabilities these conversations
can then be sorted by the computer to gain insight into which
issues are most prevalent. This can help pinpoint trends
and opportunities that utility companies might not otherwise
realize.
Cyber Security
Electric power is the hub around which all
other critical infrastructure evolves, which means a cyber
attack impacting a utility can be potentially
devastating. A report from the Department of Homeland
Security’s Cyber Emergency Response Team disclosed that the
energy industry faced more cyber-attacks between October 2012
and May 2013 than any other sector. Con Edison
began disclosing the impact of cyber terrorism in their
quarterly financial reports in 2011 when they said:
“A Cyber Attack Could Adversely Affect the Companies. The
Utilities and other operators of critical energy
infrastructure may face a heightened risk of cyber attack. In
the event of such an attack, the Utilities and the competitive
energy businesses could have their operations disrupted,
property damaged and customer information stolen; experience
substantial loss of revenues, response costs and other
financial loss; and be subject to increased regulation,
litigation and damage to their reputation.”
Other large utilities in the U.S. are threatened by
cyber-attacks as well. The utilities, subsidiaries of
ITC Holdings Corp., Duke Energy Corp. and NRG Energy Inc. each
filed a report with the U.S. Department of Energy in the past
year detailing suspected cyber-attacks. The reports
highlight the interest by hackers in targeting energy firms,
and the vulnerabilities of IT systems used to run power
generation and distribution equipment.
Because of these threats, utility companies must continuously
evolve their cyber security programs. At Carnegie Mellon
Institute researchers are addressing cyber-security challenges
of the smart grid by applying their experience in secure
coding, resilience management, secure systems and other
areas. The plan is to develop actionable security
guidance for smart grid applications in the form of security
profiles. This work is part of the Advanced Security
Acceleration Project for Smart Grid (ASAP-SG), a public
private collaboration.
Cloud Applications for
Utilities
Smart meters, artificial intelligence,
cyber security systems and other software are substantially
increasing data. Recognizing the value and capabilities
of cloud storage our Federal government is exiting the
physical data storage business and utilizing the cloud.
Presumably electric utilities will also exit the data storage
business and look to constantly improving cloud
applications. The fact that the CIA is now utilizing
Amazon’s secure cloud should provide assurance to any utility
companies’ security concerns.
New York State Energy
Plan
The draft 2014 New York State Energy Plan
sets forth a vision for New York’s energy future which
integrates more renewable power sources—hydro, solar, wind,
and other carbon-free solutions. The NY plan may serve as a
national indicator. The objective is to provide clean,
reliable, and affordable power while creating jobs; and
producing other economic and environmental benefits that flow
from a clean energy economy.
Con Edison has moved ahead of the plan by asking residents in
Brooklyn and Queens to power down in order to avoid a $1
billion investment in a substation and related infrastructure
that would be needed to meet the expected electrical demand in
2019. The electrical demand is expected to occur as a
result of the growing NY population. The company’s plan
to invest in programs to reduce electricity consumption and
defer construction on the substation would only cost $100 -
$150 million vs. the billion dollar investment in the
substation.
Customers will benefit from incentives that compensate for
activities which contribute to grid efficiency. Appliances in
the home will autonomously monitor energy prices and shift
into sleep mode during peak hours in order to save
money. Homes will be equipped with solar panel systems
which will enable customers to sell unused energy to their
neighbors. This is all part of the plan to make the grid
more cost efficient, reliable and flexible.
Utility Industry
R&D Innovation Step Plan
In the new utility industry, environment
utilities must innovate. However, they cannot ask their
customers to shoulder the required R&D investment costs
without abandoning the high costs of unnecessary, legacy power
plant assets. Simply stated, low capacity power plants need to
be cannibalized or removed from the system to help pay for the
modern grid. Public service commissions and utility
management must jointly agree to and implement these types of
new dynamic strategies.
The Revenue Model
The first innovation process should be to produce a realistic
dynamic model that forecasts prospective electrical
demand. This revenue forecast should reflect economic
projections and the projected impact of energy efficiency such
as increased LED lighting installations and alternative energy
including solar and wind.
Capacity Utilization
For this element the utility needs to calculate the projected
operating capacity of each power plant asset consistently with
the demand/ revenue forecast.
Introducing Cost Impacts
The cost elements of the model should be conservative and
include all mandatory power plant emission reduction
investments, smart grid investments including enhanced battery
storage, and cyber security investments.
The Integrated Model
With the integrated model the utility should compare the
required investment at each plant with its projected operating
capacity. Low capacity plants that require high
investments should be carefully analyzed for potential planned
shutdown.
Closing the Investment Capacity
Gap
Here the utility should look at the required investment to
accelerate energy efficiency and alternative energy generation
to accelerate the closing of uneconomic facilities. LED
lighting is a very cost effective way to quickly reduce
aggregate electricity demand. Once the modeling process
is complete and the remaining power plant assets are
identified the utility will know which assets to focus on for
further R&D investments.
Conclusion
The U.S. utility industry is confronting
unprecedented challenges. Marked reductions in demand
will increase pressure to innovate. Research and
development will unlock the doors to innovative solutions in
smart grids, enhanced software, efficient call centers, cyber
security and cloud computing. Still, utility companies cannot
expect customers to shoulder the costs of this
innovation. To make room for new technology utilities
must abandon outdated power plants and expensive assets.
Federal and State tax credits are available to shoulder the
costs of some of the new solutions.
Improve the efficiency of electricity 
Big data combined with artificial
intelligence and natural language processing allows computers
to answer repetitive questions so that human service workers
can focus on building customer relationships by providing a
personalized service in other areas. Technology
platforms are constantly evolving to improve the accuracy and
efficiency of this process. For example, when a question
has been answered successfully by the computer, the automation
system can store the conversation and compare it to a
subsequent question in order to generate another successful
response.
