Today, I am grateful to have been able to present some aspects of the electricity business to business students at McGill University, where I did my MBA many years ago. It was great fun.
Here is the short deck that I presented.
Today, I am grateful to have been able to present some aspects of the electricity business to business students at McGill University, where I did my MBA many years ago. It was great fun.
Here is the short deck that I presented.
A majority of Canadian households and small businesses are in provinces where time-varying rates or peak pricing or rebates are available or proposed, thanks to smart meters installed over the last few years. Tariffs for large business already include a demand charge that makes up a big chunk of their bills, inciting them to have a constant power draw. Many businesses also have critical peak pricing or rebates. Therefore, most of the electricity in Canada is sold to people having financial incentives to not only be energy efficient (i.e., consume fewer kWh overall), but to manage when electric power is drawn from their utility. However, with the possible exception of large electricity users, most customers simply do not want (or can’t) manage the minutia of consuming electricity on an hourly or daily basis. This is to be expected, as it’s a lot of work and inconvenience for little pay: running the dishwater off-peak rather than on-peak may save a dime, but it means noise when people are trying to sleep and emptying it during the morning rush to school or work. Although all the saved dimes may add up to significant dollars at the end of a year, human nature makes us lazy, and we just go on whining about high hydro cost instead.
In aggregate, everybody’s dimes also add up to a lot of money for the society. For most people and businesses, electricity is not something to get passionate about. It is a significant – but not the largest – component in the budget. We mostly notice electricity when it is not there, as we can’t do much without it. Most people don’t know or care how electricity get to them, as long as they can benefit from it and that its rates appear to be fair. The significant yet stealthy nature of electricity makes it the perfect commodity. Electrons have no brand, no color, no flavor. It becomes easy to rationalize outsourcing the management of electricity to a third party if it reduces cost and make our lifes easier.
Time-varying rates and peak pricing or rebates thus create the financial incentives for new energy services to emerge and help individual customers save money – they are a Trojan horse inside the utility castle. Essentially, energy service companies are introducing themselves in the value chain – it’s a form of value-added intermediation, although energy service companies are not allowed to resell in most provinces. In addition to rate arbitrage, the business model of energy service companies leverages the dropping cost of rooftop solar power and energy storage, supported by mass-market smart home devices (for residences) or off-the-shelf building management systems (for businesses) connected over the Internet. Lower electricity costs with cool gadgets and better comfort. Voilà! A competitor is born.
Energy service companies are offering what amounts to a partial substitute for electric utility services. Rooftop solar panels, batteries, smart home thermostats, water heaters and lighting, building management systems, EV chargers, thermal storage and other technologies marketed by energy services companies, engineering firms and solar developersdo not replace mains electricity. However, energy service companies provide financing and remove the complexity of managing electricity rates and provide other benefits such as comfort or backup during outages. In the process, energy service companies capture a decent chunk of the electricity value stream as they turn electricity service into even more of a commodity service. Less energy (kWh) gets delivered by utilities, pushing rates up for all, although few customers will actually go off the grid.
Storms on the horizon. Ouch. That’s competition, and it is new for many in electricity utilities.
Energy service companies are not directly competing with utilities – not like, say, Bell or Telus competing with Rogers or Vidéotron – but it is competition nevertheless – a bit like Bell being in a strange love-hate relationship with Google. In fact, customers must buy still their electricity from their local utility in most provinces[i]. If energy service companies are not direct competition, it has almost the same effect: skimming profitable segments.
Canadian generation, transmission and distribution utilities are affected at different levels and in varying ways, depending on provincial regulations and on their position along the electricity value chain.
One issue is that the tariffs structure for electricity generators and for T&D networks poorly reflects the underlying system cost structure. If rates along the electricity value chain were perfectly set, then utilities should not care if customers shift their energy consumption – after all, that’s the objective of time-varying rates and demand charges. In practice, rates are far from perfectly matching costs. For example, demand charges for small business accounts are typically set for a year or two based on the peak power demand (in kVA) in a past month. This rate structure is essentially a leftover from electromechanical meters where a meter reader would come to a business every month to read energy (kWh) and power (kVA), and then reset the power register on the meter with an actual physical key – the power register would ratchet up until the next read, when they would be reset again. That’s as good as it could be with electromechanical meters, but the maximum demand that was registered didn’t likely coincide with the peak demand on the system. The resultant tariffs structure incites business customers to minimize monthly maximum demand (and, hence, demand charges), but still allow them to draw a lot of power during a system peak, although energy management systems could have reduced demand during the peak and shift it to a different time. Working on behalf of their customers, energy service companies may end up optimizing customer demand around prevailing tariffs to minimize customer charges but may increase overall system costs in the process.
Upstream in the value chain, traditional generators and independent power producers are affected by energy efficiency and demand management initiatives that can potentially reduce energy and power demand of customers. The effects vary depending on the market structure in each province. Contracted generators are less exposed; in Ontario, the “global adjustment” mechanism compensates large generators, while Alberta has a capacity market. However, spot generators may face large variations in prices. Overall, generators are at risk of having stranded assets as energy efficiency improves in the economy and as customers contract with energy service providers to better manage power demand.
Many distribution-only utilities in Canada are partially shielded[ii]. They charge their customers a energy and power rates set by the province and a separate distribution charge that is intended to pay for the costs of their stations and network. The energy and power generation charges are pass-through, and transmitters and generators bear any issues. The distribution charge is often allocated on a per-kWh basis, plus a fixed monthly charge. Because of the per-kWh allocation of their costs, local distributors are somewhat exposed to the vagaries of energy service companies. However, the distributors have more operating costs and lower capital costs than transmitters and generators, meaning that a per-kWh distribution charge is not as far off the mark.
Mid-size municipal utilities also face a different reality than large integrated provincial utilities. Owned by the city, they are accountable local actors, close to their customers (or constituents), using their agility to respond to issues in a way that is just not happening with large integrated utilities. Municipal utilities become instruments of the local mayor and city council, like water, sewers, snow removal and other municipal services. Mayors’ challenges are about their constituents getting sick, having clean water, being warm or cool, holding productive jobs, commuting efficiently, surviving disasters. They see that the local utility supports the needs of a smart city, to be both resilient to face increasing disasters and be sustainable to reduce its environmental impact and to improve quality of life – while being financially affordable. In this context, working with third parties, like energy service companies, just becomes another means to satisfy the needs of citizens and local businesses[iii].
Large vertically integrated provincial utilities face more complex challenges than municipal utilities: the impact of energy service companies on generation can be significant, the feedback loop from constituents to the government and the utility is more tenuous, the customer base has more varied needs, and the integrated utility has a large impact on the finances of the province. Not surprisingly, they tend to prefer to maintain a greater control over the relationship with customers. Whether they can maintain control and reduce choice without antagonizing customers is uncertain, especially when consumers get used to energy service alternatives ranging from large telecom companies to Google and Amazon.
[i] The exceptions are Alberta, the most deregulated market in Canada, and Ontario, although wholesale and retail rates in Ontario are such that about95% of Ontarians choose to buy electricity from their local utility. See https://business.directenergy.com/what-is-deregulation#deregmarketand https://www.oeb.ca/about-us/mission-and-mandate/ontarios-energy-sector, retrieved 20181023.
[ii] However, municipal utilities in Québec pay large business rates, with demand charges.
[iii] And, perhaps, in the process, help the mayor get re-elected.
I wrote this piece with my friend Denis Chartrand as a companion document for my CEA presentation back in February 2018 (See http://benoit.marcoux.ca/blog/cea-tigers-den-workshop/) but I now realize that I never published it. So, here it is!
This mouthful title was the title of my presentation today at the Smart Grid Canada conference in Montréal.
As usual, it is written in my somewhat funky style and provocative, but was well received.
Let me know what you think!
Traditional utility wisdom in Canada is that customers are satisfied with the current level of reliability and that improving reliability would only increase costs and push rates up.
The new reality of electric utilities upends this traditional wisdom.
Customers are redefining what is meant by quality. Traditionally, Canadian Utilities used duration of interruptions per year, or SAIDI[i], as their main measure of reliability. Some utilities report the frequency of interruptions per year, SAIFI, as well. A limitation of SAIDI and SAIFI is that interruptions of less than a minute are not included, presumably under the assumption that customers do not care that much about short interruptions. This might have been true in the analog world of years past, but it is not anymore, with even a short interruption resetting our electronic devices. Furthermore, with the fuse saving protection strategy that most Canadian Utilities have adopted on their distribution feeders, short interruptions happen more frequently than longer ones, and are therefore noticed more.
Even a short interruption resets common electronics, like my microwave oven above. This gave birth to the “blinking clock” syndrome, a stark reminder to residential customers that an outage occurred and that their utility has failed them – again. (Photo by the author)
ENMAX, when justifying its distribution automation projects within the performance-based regulation scheme of Alberta, based its analysis on the cost of sustained and momentary service interruptions, with the values for its various customer classes as shown in the table below.[ii]
Table: Estimated ENMAX Customer Class Interruption Costs
(% vs. 30-Min.)
|$2.71 (90%)||$757 (76%)||$2,354(65%)||$69.12(75%)|
The table is interesting for two reasons:
This situation is likely to get worse with widespread customer-owned distributed energy resources: owners of distributed energy resources actually lose money during power disturbance. Distributed generators or resources may be thrown offline often for minutes, for safety reasons and to protect the equipment. This results in loss revenue for owners of distributed generators selling back to the grid, or additional costs for those who were offsetting power otherwise purchased from the grid. Overall, the percentage of time when distributed generators are offline because of service interruptions is relatively small, and so is the unsold energy or the energy additionally bought by the customers while waiting for generation to come back online. However, those interruptions may also cause power generation or grid support contracts to be broken, which may carry penalties. Customers may also have to pay additional demand charges, often a large share of the utility costs of business customers.
Service interruptions also cost money, to utilities which is ultimately paid for by customers through higher rates – another key determinant of customer un-satisfaction. First, service interruptions cause power flow and voltage fluctuations as distributed generators trip and come back, and loss of generation and dynamic resources for the grid operator. In an electric network relying partly on distributed energy resources, service interruptions mean additional complexity to maintain stability of the grid and higher costs for network operators who then have to rely on backup resources. Service interruptions even increase operating costs. Fuse saving does not always work: on average, about half of fuse replacements have unknown causes or causes that should normally have been eliminated by fuse saving, such as animal contact.
By the way, the telecom industry also went through a redefinition of what customers mean by quality. It used to be that the main quality measure was voice sound quality during a call[v]. However, voice sound quality has actually gone down in the last decades – the rotary black phone in your grandmother’s old house sounded better than your new iPhone. Nowadays, customer satisfaction is driven more by the convenience of mobility and the possibility of easily doing videoconferencing or multiple parties calls.
In summary, with increasing dependence on reliable power for modern way of life, plus distributed generation earning revenue for customers, outage frequency will become a more and more important factor for customer satisfaction. All this being said, there is hope – new smart grid approaches and protection strategies can result in fewer service interruptions, leading to higher customer satisfaction and lower cost for utilities.
[i] SAIDI means System Average Interruption Duration Index. SAIDI is the average duration of all the outages seen by customers over the course of a year. In Canada, only interruption durations of more than 1 minutes accrue to SAIDI. Interruptions of less than a minute are considered momentary and do not count toward SAIDI.
[ii] Evaluation of PowerMax Distribution Automation Strategy, ENMAX Power Corporation, prepared by Quanta Technology, November 29, 2011, page 23.
[iii] Assessing Residential Customer Satisfaction for Large Electric Utilities, Lea Kosnik et al., Department of Economics, University of Missouri—St. Louis, May 2014.
[iv] Fuse saving is an electrical protection strategy used on many distribution feeders in Canada. The objective is to avoid that fuses installed on lateral taps blow for a non-persistent fault, such as an animal contact or a lightning strike. With fuse saving, a mainline or station a circuit breaker or recloser is used to operate faster than the lateral tap fuses. A few seconds after an initial fault, the breaker reclose, re-establishing power. If the fault is non-persistent, power will be restored. If not, it may retry later. If the fault is persistent, the breaker will eventually reclose and let the lateral fuse blow, isolating the fault. Because most faults are non-persistent, fuse saving prevents needless fuse blow, avoiding sustained service interruption for customers on the affected lateral. The main disadvantage of fuse saving is that all customers on the circuit see a momentary interruption for lateral faults.
[v] The quality of a call is given by its Mean Opinion Score (MOS), a subjective measurement where listeners sit in a quiet room and rate a telephone call on a scale of 1 to 5. It has been in use in the telephony industry for decades and was standardized in an International Telecommunication Union (ITU) recommendation.
Reduction in installed costs and operation costs (per kW or MW – see http://benoit.marcoux.ca/blog/the-costs-of-wind-and-solar-pv-systems-are-down-way-down/), coupled with free “fuel” converted into electricity at increasing efficiency, translate directly into lower and lower cost of energy (kWh or MWh). The dropping cost of wind and solar energy can be followed in 2 ways. First, analysts compute the costs over the expected life of a plant, estimate energy production and allocate a fair return for owners to come up with the Levelized Cost Of Energy (LCOE). Second, real-life auctions leading to long-term Power Purchase Agreements (PPA) from utility-scale plants provide actual price data.
At the global level, the International Renewable Energy Agency (IRENA) has built a Renewable Cost Database containing the project level details for almost 15,000 utility-scale renewable power generation projects around the world, from large GW-scale hydropower projects to small solar PV projects, down to 1 MW. IRENA also has an Auctions Database which tracks the results of competitive procurement of renewable power generation capacity that are in the public domain. The Auctions Database currently contains auction results for around 7,000 projects, totaling 293 GW. Figure 1 shows the LCOE and auction data for onshore wind and solar PV, illustrating the sharp decline in the cost of electricity experienced from 2010 to 2017, and signaling prices for 2020 from auction data. Auctions are particularly useful to estimate cost trends in the near future. In essence, just like computer designers are forward-pricing based on Moore’s Law, wind and solar PV developers are forward-pricing installed costs for up to 3 years.
Figure 1 Global levelized cost of electricity and auction price show downward trends for utility-scale onshore wind and solar PV.[i]
Based on LCOE, the average cost of electricity from onshore wind fell by 23% from 2010 to 2017. Based on auction price, we can expect the average cost of electricity from onshore wind farms to decline a further 17% by 2020, to US4.7¢ per kWh. Overall, from 2010 to 2020, the cost of electricity from onshore wind has seen an average reduction of almost 6% per year, or 55% per decade.
Based on LCOE, the average cost of electricity from utility-scale solar PV fell by 73% from 2010 to 2017. Looking forward with auction prices, we can expect the average cost of electricity from utility-scale solar PV to decline a further 47% by 2019, to US4.7¢ per kWh. From 2010 to 2019, the cost of electricity from utility-scale solar PV has seen an average reduction of 20% per year, or 87% per decade.
By 2019 or 2020, the best onshore wind and solar PV projects will be delivering electricity for less than 2¢ or 3¢ per kWh, as shown by the record-low auction prices for solar PV in Dubai, Mexico, Peru, Chile and Saudi Arabia.[ii]This is not missed by leading industry executives. During the January 2018 investor call, Jim Robo, Chairman and Chief Executive Officer of NextEra Energy, noted:
This executive is saying that generating energy from wind and solar PV will cost less than just burning fuel in existing plants.
In December 2017, the Government of Alberta announced the results of its Renewable Electricity Program, for nearly 600 MW of wind generation to be operational in 2019, at prices ranging from 3.09¢ to 4.33¢ per kWh, setting a new record in Canada.[iv]Those wind farms will be located in Southern Alberta, where the onshore wind resources are the best in Canada.
Already now, and increasingly in coming years, some wind and solar PV power generation projects can undercut fossil fuel-fired electricity generation, without financial incentives, and this is coming to Canada very quickly.
Global averages do not reflect the broad variation in the quality of solar or wind resources at any given location. For example, Figure 11shows the LCOE in 3 U.S. cities for utility-scale solar PV: Phoenix, AZ (a southern high-insolation area), Kansas City, MO (an average city in the U.S.), and New York, NY (typical of the North-East). A utility-scale solar PV plant in a high-insolation area like Phoenix can produce electricity for approximately 30% less than a plant in New York. However, all geographies have seen a decline in the cost of generation. Given the average decline of 20% per year, costs in New York are about 18 months behind costs in Phoenix.
Figure 2 Cost of electricity generated from utility-scale (one-axis tracking) solar PV increases at higher latitudes[v]
Cities with better isolation can be expected to have better solar PV capacity factor, and this is true when comparing U.S. and Canadian cities, as shown in Table 1.
Table 1 Approximate annual generation of a 100-MW tracking solar PV systems in various North American cities[vi]
|City||Annual generation in MWh for a 100-MW system||% vs. Phoenix|
|Kansas City, MO||173,000||79%|
|New York, NY||153,000||70%|
Based on this table, utility-scale tracking solar PV system in Southern Canada generates approximately 62% to 86% of the electricity generated by a similar system in Phoenix, AZ. Southern Alberta has the best solar resources in Canada, above the U.S. average (represented here by Kansas City, MO).[vii]Given that cost of electricity from utility-scale solar PV sees an average reduction of 20% per year, the large Canadian cities are just 1 to 2 years behind Phoenix.
The annual generation stated in Table 1does not reflect diurnal and seasonal variations in output. After all, the sun does not always shine, nor does the wind always blow. A combination of dispatchable generation, transmission networks, demand management programs and energy storage is required to balance the grid, including the variability of wind and solar generation. However, it is interesting to note that the wind and solar resources in Canada are quite complimentary:
[i] Renewable Power Generation Costs in 2017, International Renewable Energy Agency, 2018, Figure 2.12, p. 50.
[ii] Renewable Power Generation Costs in 2017, International Renewable Energy Agency, 2018, p. 19-20.
[iv] https://www.aeso.ca/market/renewable-electricity-program/rep-round-1-results, accessed 20180128.
[v] U.S. Solar Photovoltaic System Cost Benchmark: Q1 2017, National Renewable energy laboratory, Figure ES-3.
[vii] Calgary is the sunniest of Canada’s largest cities and Edmonton is the third-sunniest. Perhaps surprisingly, Alberta enjoys a much better solar resource than Germany, an early leader in solar PV.
[ix] Energy Watch Group, Global Energy System Based on 100% Renewable Energy – Power Sector: Canada, Lappeenranta University of Technology, 2017, p. 5.
Utility-scale solar PV costs are dropping ~20% a year (including solar panels, inverters, balance-of-system, installation, and operations) while panel efficiency is improving. Solar is the renewable sector with the most patents, promising further improvements.
Onshore wind costs are dropping ~6% a year, and onshore wind is currently the least expensive new generation source. Wind turbine technology continues to improve through a combination of taller towers and wider rotor diameters.
Prices are below 2¢/kWh (unsubsidized) for projects auctioned to be delivered in 2019 and 2020. Continuing cost drivers include: larger-scale manufacturing in low-cost locations, tighter integration, higher performance, larger farms with better economy of scale, repowering of old sites with good wind or solar resources, and automation of operations.
The cost reduction curve of commercial solar PV over time is about two years behind the cost curve of utility-scale solar farms. Residential is two years behind commercial. Southern Alberta and Saskatchewan have the best solar resource in Canada, one year behind Southern United States. The rest of Southern Canada is just another year behind.
The rate of cost reduction in wind and solar PV systems has been wholly impressive. Solar PV modules are 20% of the cost they were in 2010. Wind turbine prices have fallen by around half over a similar period, depending on the market. Costs are dropping so quickly that some governments feel compelled to protect fossil generators. For example, in 2017, there was a bill in front of the Wyoming State Legislature to tax renewables in order to favor local coal producers. The bill went nowhere, but you know that you are onto something when it is being taxed.[i] Similarly, the U.S. Department of Energy attempted to protect coal and nuclear producers in the name of keeping power grids dependable, but this was eventually rejected by the Federal Energy Regulatory Commission in early 2018.[ii]
Spurred by a global competitive race sponsored by states and large corporations, a confluence of performance improvements, supply chain efficiencies and business innovations is driving cost reduction trends for renewables, with effects that will only grow in magnitude in 2018 and beyond.
Figure 1 A confluence of performance improvements, supply chain efficiencies and business innovations is driving cost reduction trends for renewables
The last decade has seen a string of innovations and inventions for renewable energy technology. The large number of patents issued is a measure of the level of innovation, and, perhaps surprisingly, China has become the leading innovator by this measure. From 2000 to 2016, over 575,000 patents were filed for renewable energy:[iii]
Technology improvements primarily aim at raising the capacity factor, generating more energy from available resources, and reducing installations, operating and maintenance costs.
For example, in the last decade, the efficiency of solar PV panel went from about 12% to a range of 18.8-23.5%. By 2424, industry expectations place the range at 19.8-25%.[iv] Increased use of sun tracking for utility-scale plants and improvements in inverter losses are also contributing to the improvement of the capacity factor of solar PV systems, with utility-scale PV systems increasing from an average of 13.7% to 17.6% (see Figure 2).[v]
For wind power, higher hub heights allow turbines to access higher wind speeds[vi], with each additional meter of hub height added to a wind turbine increasing the annual energy yield by 0.5 to 1 percent[vii]. Average rotor diameter and nameplate capacity (in MW) have also significantly increased since 2010[viii]. Offshore installations allow even larger turbines, with the 9.5 MW Vestas V164 currently holding the world record[ix] and General Electric developing an even larger Haliade-X 12 MW model[x]. As the market for wind turbines expands, manufacturers are also offering a broader range of models to allow developers to choose the best models for the site constraints they are facing (e.g., strong winds, light winds, wind variability, setting issues, etc.).[xi] All this contributes to better wind capacity factor: average capacity factor for onshore wind plants increased from around 20% in 1983 to around 29% in 2017, with average capacity factor for newly commissioned offshore plants routinely reaching 40% (see Figure 2)[xii], with a new offshore floating wind farm, Hywind Scotland, achieving a 65% capacity factor from November 2017 through January 2018.[xiii]
Figure 2 Capacity factors of newly commissioned systems have increased since 2010.[xiv]
As the market for renewable power generation systems expands, the industry sees increasing economies of scale in manufacturing, better vertical integration of manufacturers and consolidation among manufacturers, all fueled by a more competitive global supply chain. Again, China stands as a model, for example creating the largest power company by combining Shenhua Group and China Guodian. Groups such as this are active as foreign investment agents of China, using Chinese wind turbines and solar panels, along with Chinese engineering expertise, to develop renewable wind and solar plants across the world.
With larger scale operations, manufacturers are introducing process improvements that reduce material and labor needs, while reducing overhead. The supply chain gets more and more optimized with product better adapted to local markets and resource conditions.
As a result of these efficiencies and a robust international competitive environment for developers, the installed costs of utility-scale solar PV projects fell by 68% between 2010 and 2017. Installed costs for onshore wind projects fell by 20%. For offshore wind, the total installed costs fell by 2%.
Figure 3 Installed costs have come down since 2010, on average 20%/year for solar PV.[xv]
It is striking that wind and solar PV costs went down so much while efficiency went up at the same time.
For wind electricity generation, installed cost reductions have been driven by declines in turbine prices which, which fell from a range U.S.$1,600-2,000/kW in 2008 to U.S.$800-1,100/kW for recent turbine orders.[xvi] In 2017, one developer saw a 30% reduction in turbine costs and foresees another 10% decline per year through 2020.[xvii] Even as price went down, the profitability of turbine manufacturers has generally rebounded since 2012,[xviii] with the price declines explained by turbine scale, offshoring of key components by European manufacturers and the rise of Chinese manufacturers[xix]. As a result of cost decline and the greater efficiency of new turbines, repowering old wind farms with new turbines is gaining traction.[xx]
Figure 4 compares the reduction in solar PV installed costs for utility scale (100 MW), commercial (200 kW) and residential solar PV (5.7 kW) in the U.S. market, from 2010 to 2017. Overall, the costs of utility scale have declined 20% per year on average since 2010, while the costs of residential and commercial U.S. systems have declined about 14% per year on average. As of 2017, residential installed costs are 2.5 times higher than utility-scale solar PV; commercial installed costs are in the middle, at 1.8 times. However, in order to appreciate the scale of the reduction, note that the installed costs of residential systems in 2017 are at about the same level as utility scale in 2012 or 2013 – a 4-year lag. Commercial costs are less than 2 years behind utility-scale costs. It only took a couple of years for the cost structure of residential and commercial systems to catch up with utility-scale systems that are orders of magnitude larger! With the efficiency due to the economy of scale up the supply chain, the economy of scale of the PV systems themselves is quickly collapsing. This opens the door for smaller, distributed solar PV systems to have a positive business case.
Installed cost reductions happened in all components of systems, including solar panels, inverters, structural and electrical components, install labor, and even customer acquisition or marketing. However, the cost reductions of solar panels were the largest ones. This was driven by Chinese solar manufacturers, who accounted for about 60% of global solar cell production in 2016.[xxi] China’s dominance in solar manufacturing does not come at the expense of quality, with seven of the top ten largest high-quality manufacturers supplying the U.S. residential market being Chinese.[xxii] Manufacturing capacity expansion increased in 2017, with China accounting for 70% of the expansion.[xxiii]
Figure 4 Installed costs of solar PV came down across all market segments in the U.S., with commercial and residential costs only 2 to 4 years behind utility scale.[xxiv]
The installed cost reduction of solar PV systems in the U.S. was partly driven by the reduction in solar PV module prices since 2010. Balance of system costs have also fallen, but not to the same extent (see Figure 5). Commercial systems are still relatively custom designs, with relatively high engineering, construction and developer overhead. Residential systems are a retail market, with higher supply chain, marketing, overhead and profit margins than the business-to-business markets. Furthermore, the cost of residential and commercial solar PV system in the U.S. is higher than many other countries. As an example, the installed costs of residential solar PV in Germany were around 37% of those in California in 2016[xxv] and the analysis suggests that there are significant opportunities to reduce the gap, if the right policies are put in place. Another study blames very high overhead in the U.S. for the high cost of residential systems.[xxvi] As the electrical code is adapted and permitting streamlined, this study suggests that residential costs will come down in the U.S.
Figure 5 Installed costs of solar PV came down across all market segments in the U.S., but soft costs remain high in the residential and commercial markets.[xxvii]
On the backdrop of improving performance and supply chain efficiencies, business models, commercial and operating innovation are perhaps the most significant cost reduction factors for developers and operators.
First, experienced international project developers, especially from Europe and China, have developed standardized approaches to project evaluation and construction, minimizing project development risks. These firms are now looking for international opportunities as that some of their home markets are slowing. These firms are generally subsidiaries of large groups, like EDF and Shenhua (the world’s largest wind power developer), with access to low cost of capital. Chinese solar module manufacturers continue to feature strongly in overseas solar generation projects. In 2017, Chinese companies took part in projects across Asia, Latin America, Australia, and Africa. No doubt that operating in cost-sensitive and low-skill developing countries in forcing Chinese developers to innovate even more, probably with the idea to bring those innovations in developed countries later.
Second, competitive procurement get a large number of experienced medium- and large-scale developers competing to develop projects, worldwide. The relatively low barriers to entry also put smaller local players into play. The resulting purchase agreements set the price of energy for typically 20 years, adding predictability to developers’ business case, and driving costs further down than the favorable feed-in tariffs initially used in many jurisdictions (like Ontario).
Thirdly, optimized operational practices and the use of real-time and big data analytics at an increasingly granular level enable predictive maintenance to reduce ongoing costs and generation loss from downtime.[xxviii] For example, new PV panels have built-in diagnostic tools accessible remotely via monitoring software. New wind and solar farms are being designed with serviceability in mind to minimize ongoing operation and maintenance costs. Benchmarking performance and digital twins with advance analytics allow operators to identify areas of improvement. Drones do aerial thermography to identify hotspots while robots clean panels and mow grass. All these tools clearly reflect the increasing maturity of renewable power generation technologies.
[iii] International Renewable Energy Agency (IRENA), INSPIRE database, http://inspire.irena.org/Pages/patents/Patents-Search.aspx, accessed 20180121.
[iv] Renewable Power Generation Costs in 2017, International Renewable Energy Agency, 2018, pp. 59-61.
[v] Renewable Power Generation Costs in 2017, International Renewable Energy Agency, 2018, p. 66.
[vi] Wind power in an open-air stream is proportional to the third power of the wind speed. Thus, a wind speed 10% higher means 33% more available power, all other things being equal.
[vii] http://www.mbrenewables.com/en/world-record-for-energy-transition/, accessed 20180121.
[viii] Renewable Power Generation Costs in 2017, International Renewable Energy Agency, 2018, p. 91.
[xi] General Electric, Siemens and Vestas have all roughly doubled the number of offerings in their portfolio since 2010, with each now offering over 20 models. See Renewable Power Generation Costs in 2017, International Renewable Energy Agency, 2018, p. 90.
[xii] Renewable Power Generation Costs in 2017, International Renewable Energy Agency, 2018, pp. 102-103.
[xiii] https://www.statoil.com/en/news/15feb2018-world-class-performance.html, accessed 20180310.
[xiv] Renewable Power Generation Costs in 2017, International Renewable Energy Agency, 2018, pp. 42-47.
[xv] Renewable Power Generation Costs in 2017, International Renewable Energy Agency, 2018, pp. 42-47.
[xvi] 2016 Wind Technologies Market Report: Summary, Lawrence Berkley National Laboratory, U.S. Department of Energy, p. 43.
[xviii] 2016 Wind Technologies Market Report: Summary, Lawrence Berkley National Laboratory, U.S. Department of Energy, p. 18.
[xix] Globally, Vestas, GE, and Goldwind were the top suppliers in 2016, with Chinese suppliers however occupying 4 of the top 10 spots in the global ranking, based almost entirely on sales within their domestic market.
[xx] https://www.eia.gov/todayinenergy/detail.php?id=33632, accessed 20180202.
[xxi] IEA Renewables 2017: Analysis and Forecasts to 2022.
[xxiii] China 2017 Review, Institute for Energy Economics and Financial Analysis (IFEEA), p. 3.
[xxiv] U.S. Solar Photovoltaic System Cost Benchmark: Q1 2017, National Renewable Energy Laboratory, Figures ES-1.
[xxv] The Power to Change: Solar and Wind Cost Reduction Potential to 2025, International Renewable Energy Agency, 2016, p. 11.
[xxvi] https://www.greentechmedia.com/articles/read/how-to-halve-the-cost-of-residential-solar-in-the-us?utm_source=Solar&utm_medium=email&utm_campaign=GTMSolar#gs.UscExbA, accessed 20180131. This study shows that the cost per watt in US$3.25 in the US and US$1.34 in Australia.
[xxvii] U.S. Solar Photovoltaic System Cost Benchmark: Q1 2017, National Renewable Energy Laboratory, Figures ES-1.
In 2015, China became world’s largest producer of photovoltaic power, and this is clearly a policy enshrined in the 13th five-year plan (2016-2020).[i] This plan calls to increase installed wind power capacity to 210 GW and solar PV capacity to 105 GW by 2020 – about a third more than in 2016, although developers’ enthusiasm means that the solar PV 2020 objective will be achieved in 2018, given 34 GW added in 2016 and 54 GW in 2017 – more than the rest of the world combined. To put this 54 GW in context, it is a third more that the nameplate capacity of the electricity producers in the province of Québec.[ii] However, contrary to what happened in Europe, China’s policy followed the initial price reduction in wind and solar power. If Europe lit the renewable fire some time ago, China now fuels it.
Figure 1 The growth of wind and solar PV capacity saw Europe leading in early years, but China is now the main source of growth.[iii]
China now dominates new installed capacity for wind and solar PV, and this keen interest is enshrined in its 5-year plans – China will continue to have the largest share for years to come.
You may have noticed how small wind and solar PV capacities are in Canada in comparison to the rest of the world – just 12 GW for wind and 3 GW for solar PV, and barely visible in Figure 3. Canada is a small player for wind and solar PV. The rest of the world adds as much wind and solar PV capacity per year as the entire electricity generation capacity currently installed in Canada, all sources combined.
While new generation capacity from wind and solar is being installed at an increasing rate, investments have been essentially flat since 2011, compressed by dropping unit costs:[iv]
Figure 2 While new generation capacity from wind and solar is being installed at an increasing rate, investments have been essentially flat since 2011.
With lower unit costs per MW, developers can install more capacity for a given investment. This phenomenon can be expected if wind and solar technologies follow a pattern like Moore’s Law – we are not paying more for a computer than we did years ago, we are just getting more for the same price (or even lower price).
This flat 2011-2017 trend also masks major difference across the world: China’s new wind and solar investments went from $42B in 2011 to $123B in 2017 – almost half of global investments. Conversely, European investments went down in the same period, while North America was relatively flat. Canada’s investments in 2017 were a modest $3B.
The domination of Chinese investments is even greater when one considers China foreign investments in clean energy. China being already the largest market for renewable energy, it is developing the renewable sector internationally, aiming to be a leader along the entire value chain. China’s Belt and Road Initiative (BRI) is driving Chinese energy investments overseas. The initiative already has driven solar equipment exports of U.S.$8 billion.[v] China is not content to be a manufacturer and it is also looking for opportunities to develop Engineering, Procurement and Construction (EPC) standards that it can apply internationally, plus operating credentials. China is building corporate giants to fulfill those ambitions, such as Shenhua Group, now the largest wind developer in the world, with 33 GW of capacity.[vi] In 2016, Xinjiang Goldwind ranked 3rd for onshore and also 3rd for offshore wind turbine manufacturing[vii]. China has become the number one exporter of environmental goods and services, overtaking the U.S. and Germany.
[i] See https://www.iea.org/policiesandmeasures/pams/china/name-161254-en.php and https://translate.google.com/translate?hl=en&sl=auto&tl=en&u=http%3A%2F%2Fwww.nea.gov.cn%2F2016-12%2F19%2Fc_135916140.htm, accessed on 20180116.
[ii] Statistics Canada. Table 127-0009 – Installed generating capacity, by class of electricity producer, annual (kilowatts), http://www5.statcan.gc.ca/cansim/a47, accessed 20180131. In 2015, public electricity producers in Québec had an installed generating capacity of 37 GW, while privates ones has 3 GW.
[iii] IRENA (2017), Renewable Energy Statistics 2017, The International Renewable Energy Agency, Abu Dhabi, with estimates based on Bloomberg New Energy Finance for 2017.
[iv] Clean Energy Investment Trends, Abraham Louw, Bloomberg New energy Finance, January 16, 2018.
[v] China 2017 Review, Institute for Energy Economics and Financial Analysis (IFEEA), p. 2.
On February 21, 2018, I presented at the annual T&D Corporate Sponsors meeting of the Canadian Electricity Association. This year, the formula what similar to the “dragons” TV program, with presenters facing “tigers” from utilities. They asked me to go first, so I didn’t know what to expect, but it went well. Or, at least, the tigers didn’t eat me alive.
The theme was a continuation of my 2017 presentation, this time focusing on what changes utilities need to effect at a time of low-cost renewable energy.
I’ve attached the presentation, which was again largely hand-drawn: CEA 20180221 BMarcoux.
It may sound strange, but coal, crude oil and natural gas are really forms of sun energy. Millions of years old sun energy trapped in chemical bonds by plant photosynthesis and animals that eat them…
Coal originates from dense forests in low-lying wetland areas, mostly from the Carboniferous Period, around 300 million years ago. Some of the vegetation got trapped underneath soil due to natural events such as flooding. As more and more soil deposited over the remains of the forests, they were compressed, with temperature rising naturally. Under high pressure and high temperature, dead vegetation was slowly converted to coal.
Oil is usually younger, from the Mesozoic Era, about a hundred to 2 hundred million years ago. The formation of oil begins in warm, shallow oceans that were then present on Earth. In these oceans, small animals called zooplankton and plants called phytoplankton died and felt to the floor of the ocean. As they got buried by sediments, they were transformed into shale. As pressure and temperature increase, the shale transformed into oil and, if the temperature was high enough, into natural gas.
I used to tell by children that petroleum is really “dinosaur oil.” This is not technically exact, but a nice metaphor.
Today’s solar energy obviously also comes from the sun. But it’s brand new energy, not hundreds of millions of years old stuff. Essentially, we are now building a society that bypass hundreds of millions of years of dead history long buried in the ground. Somehow, I find this refreshing.
Insight from this post:
Our reliance on historical concepts and dated utility business models has masked the shift in the primary driving force for renewable generation, from policy obligations to least-cost generation. As a result, past forecasts have systematically underestimated the penetration of low-cost wind and solar PV. Yet, 2016 was the first year in which solar and wind net additions worldwide exceeded coal and gas.
Solar power was once so costly it only made economic sense on a spaceship. As costs went down, volumes went up, attracting innovation and driving costs further down, which drove volume further up, which caused more innovation and drove costs further down… and so on. The spaceship has come down and has now landed on Earth — no wonder that this new reality seems alien to many. Close to earth, installed capacity of wind turbine farms is even larger than solar and follows a similar virtuous cyclone, albeit at a more moderate pace, and the latest purchase agreements show that it is still the cost leader (but barely).
Worldwide photovoltaic solar generation (in terawatt-hours) has increased tenfold since 2010, following an exponential growth curve (see Figure 1). Wind increased even more in absolute numbers, almost quadrupling since 2010.
Figure 1 Exponential progression of worldwide electricity generation from wind and solar photovoltaic.
While this growth in renewable capacity is impressive, it masks that renewables are still relatively small. Half of electricity generation worldwide is from coal, oil and natural gas, and another 10% is from nuclear[i]. The share of the electricity generation was in 2017 only about 4.4% for wind and 1.5% for solar. From a small base, those percentages are, however, increasing quite rapidly: 2016 was the first year in which the net capacity additions of solar and wind net exceeded coal and gas.[ii]
While residential solar PV has attracted a lot of attention, utility-scale solar generation is far larger. In the United States, utility-scale solar PV represented 60% of the installed capacity and 69% of the electricity generation in 2017.[iii] In Ontario, 80% of the solar PV capacity resides in MW-scale systems, while residential capacity (from MicroFIT contracts) is only 8% and commercial capacity (from FIT contracts) is another 12%.[iv]
The existence of a virtuous cycle driven by innovation and industry investments rather than government policies has not always been recognized, but it is becoming clearer. For example, the International Energy Agency (IEA) publishes a yearly World Energy Outlook (WEO), forecasting, among other things, electricity generation for the next 20 or 30 years. The Outlooks implicitly assume that government policies are the main drivers of the evolving generation mix in the Outlooks. For example, WEO2010 states that the “future of renewables hinges critically on strong government” and that “the scale of government support [for renewables] is set to expand as their contribution to the global energy mix increases.”[v] Policies certainly have had a major influence in the European Union and in other areas, like Ontario, that subsidized renewables with instruments such as favorable feed-in tariffs. However, the IEA assumption that policies are the driving force may have contributed to a lag in recognizing the rise of technology and business innovation and the resulting cost reductions as the new driving forces, like what we are seeing now in renewables. As a result, past IEA generation Outlooks broadly diverged from actual wind and solar PV generation (see Figure 2). Until 2010, IEA wind Outlooks and actual generation diverged steeply. Starting with WEO2010, as wind generation reached 300-400 TWh, IEA Outlooks got less inaccurate. As for solar PV, WEO2017 still shows some divergence. However, solar generation is now at the same level as wind was in 2010 – perhaps this is a sign that the current solar PV outlook is getting more realistic.
Figure 2 IEA World Energy Outlooks consistently underestimated the future energy generation from wind and Solar PV.
The IEA is not alone in having poorly forecast the rise of wind and solar generation:
Traditional wisdom is a poor guide in forecasting during a technology shift, as the case now with wind and solar power. Forecasters relying on historical policies and industry practices remain oblivious to the confluence of performance improvements, supply chain efficiencies and business innovations that arise during a technology shift. They assume that the latest deviation from past trends is just an exception and they are surprised when costs fall quickly and volume increase faster than expected.
It is not to say that policies are not important. In fact, policies have been the driving force behind the renewable growth in pioneering European countries (see Figure 3) at a time when wind and solar PV were considerably more expensive than coal and nuclear generation (more on costs of wind and solar PV later). However, the USA also saw significant growth without consistent policies at the federal level.
Government policies may also dictate the types of renewable plants being built. For instance, public tenders will tend to favor large corporations and cement the market power of oligopolies, while feed-in tariffs favor private investors, energy cooperatives and small businesses.[ix] However, while public tenders may be justified on the basis that utility-scale plants are currently more cost-effective than distributed systems, such a policy could decrease public support and ultimately slow down adoption of renewable generation in the long run.
Furthermore, some governments have policies, including direct and indirect subsidies, regarding generation from fossil sources, and those policies are delaying the tipping point when renewables become cost effective in those jurisdictions.
[i] International Energy Agency, World energy Outlook 2017, New Policies Scenario, p.650.
[ii] International Energy Agency, World energy Outlook 2017, Figure 6.1, p.231.
[iii] U.S. Energy Information Administration, Short Term Energy Outlook, table 8b, U.S. Renewable Electricity Generation and Capacity.
[iv] IESO Contracts and Contract Capacity, Progress Report on Contracted Electricity Supply: Q3-2017, Table 6.
[v] International Energy Agency, World energy Outlook 2010, p.51.
[vi] U.S. Solar Photovoltaic System Cost Benchmark: Q1 2017, National Renewable Energy Laboratory, p. viii.
[vii] Vers un mix électrique 100% renouvelable en 2050, Agence de l’Environnement et de la Maîtrise de l’Énergie, Figure 7 p. 16.
[viii] Canada’s Energy Future 2017, Energy supply and Demand Projections to 2040, National Energy Board, 2017, page 49.
[ix] Hans-Josef Fell, “The shift from feed-in-tariffs to tenders is hindering the transformation of the global energy supply to renewable energies“, Policy paper for IRENA, July 2017.
The electricity business is highly technical and customers do not understand what their utility is doing for them. This deserves more attention in plain words, and customer communications should not be limited to storms, grid problems and feel-good messages. Plain communication is especially important since the correlations of customer satisfaction with verifiable objective measures of service delivery (such as SAIDI and SAIFI) are very low! There is, however, very strong relationship between the customers’ overall assessment of reliability and their feelings about how the company manages to minimize the number and length of outages and provides accurate estimates of when power will be restored.[i]
There is a strong relationship between customer satisfaction and
feelings about what the utility does to reduce outages and provide repair estimates, but
low correlation with actual measures of reliability.
Obviously, this implies that the utility must show what it does to manage outages.
Florida Power & Light (FPL) is a great example of this approach. FPL turns installing smart new devices to its network into local media events – adding an automated recloser to a line becomes newsworthy! The following 3 news clips illustrate FPL’s strategy:
During hurricane Matthew in September 2016, FPL initiated proactive and frequent communications to keep customers and key stakeholders informed, with unity of messages across all channels:[iii]
Not surprisingly, FPL won the ReliabilityOne National Reliability Excellence Award in 2015 and 2016, and the Southeast Region award in 2017 (despite hurricane Irma in September 2017).[iv]
[i] Assessing Residential Customer Satisfaction for Large Electric Utilities, Lea Kosnik et al., Department of Economics, University of Missouri—St. Louis, May 2014.
[iii] Grid Hardening & Hurricane Matthew, Ed DeVarona, Senior Director, Emergency Preparedness, Florida Power & Light, https://www.midwestreliability.org/MRODocuments/Hurricane%20Matthew%20Performance%20Presentation%20by%20Ed%20DeVarona%20to%20MRO%20BOD%2003162017.pdf, retrieved 20171230. .
[iv] See http://www.paconsulting.com/newsroom/releases/we-energies-wins-national-reliabilityone-excellence-award-at-pa-consulting-groups-17th-annual-reliabilityone-awards-ceremony/, retrieved 20171230, for the 2017 awards.
Solar power was once so costly it only made economic sense on a spaceship. As costs went down, volumes went up, driving costs further down, which drove volume further up, which drove costs further down… and so on. The spaceship has come down and has now landed on Earth — no wonder that this new reality seems alien to many. Close to earth, wind power is even larger than solar and follows a similar virtuous cyclone, albeit at a more moderate pace, and the latest purchase agreements show that it is still the cost leader (but barely).
Worldwide photovoltaic solar generation (in terawatt-hours) has increased tenfold since 2010, following an exponential growth curve (see the figure). Wind increased even more in absolute numbers, almost quadrupling since 2010.
While this growth in renewable capacity is impressive, it masks that renewables are still relatively small. Half of electricity generation worldwide is from coal, oil and natural gas, and another 10% is from nuclear[i]. The share of the electricity generation was in 2017 only about 4.4% for wind and 1.5% for solar. From a small base, those percentages are, however, increasing quite rapidly: in 2017, wind and solar gained almost 1% of the global share of electricity generation. With renewable now competitive with traditional utility-scale generation, growth will undoubtedly continue. But the important insight is this:
Solar and wind power are relatively small but already competitive with traditional generation, which will continue to fuel the virtuous cycle of higher volumes and lower costs for years to come, crowding traditional generation out of the market.
We haven’t yet seen the end of this story.
[i] International Energy Agency, World energy Outlook 2017, New Policies Scenario, p.650.
I have worked in the telecom industry as head of marketing, in customer care and as a business consultant — I saw what happened there. More recently, I have also seen some of the best and the worst of stakeholder communications at electric utilities — including while I directed a large smart meter deployment, a very challenging activity for customer relationships. Beyond the obvious like using social media, online self-support, and efficient call center operations, There is one thing that electric utilities should do to improve their chances to maintain healthy customer relationships as the industry is transforming: lead the change.
“Someone’s going to cannibalize our business — it may as well be us. Someone’s going to eat our lunch. They’re lining up to do it.”
That was Alectra Utilities CEO, Brian Bentz, speaking at the Energy Storage North America in 2017.[i]
Utilities have a choice: lead change or have change done to them. The latter might hurt customer satisfaction more than the former.
Like telephone companies of the past, electric utilities could try to forestall the coming change, or even to reverse it, hoping to get back to the good old days. In fact, this is rather easy, as there is a lot of inertia built in a utility, often for good reasons: public and worker safety, lifelong employment culture, good-paying unionized jobs, prudency of the regulated investment process, long-lasting assets, highly customized equipment and systems, public procurement process, dividends to maintain for shareholders, etc. For utility executives, effecting change is never easy.
In the end, however, resisting change is futile. Customers are able to start bypassing utilities by installing solar panels and storage behind meters, keeping the utility connection as a last resort. It is just a matter of time before the economics become good enough for many industrial, commercial and residential customers, with or without net metering. Customers will do it, grudgingly, but they’ll do it. This will also leave fewer customers to pay for the grid, sending costs up and stranding assets, therefore increasing rates for customer unable to soften the blow by having their own generation, further antagonizing the public… A death spiral of customer satisfaction.
So, what should utilities do? Here are three examples of utilities that have embraced change and made it easy for their customers to adopt change:
[i] As reported by UtilityDIVE, https://www.utilitydive.com/news/alectra-utilities-ceo-someones-going-to-cannibalize-our-business-it-ma/504934/, accessed 20180102.
[iii] See https://www.tesla.com/blog/next-step-in-energy-storage-aggregation, retrieved 20171230.
[v] Performance Based Regulation, A Review of Design Options as Background for the Review of PBR for Hydro-Québec Distribution and Transmission Divisions, Elenchus Research Associates, Inc., January 2015, page A-25.
[vi] See http://www.energystoragenetworks.com/pge-selects-edf-behind-meter-energy-storage-contract/, retrieved 20171230.
With low-cost renewables, many customers become power producers, and it will transform the relationship of utilities with them.
You saw that in media and telecom. My grandchildren loves to watch amateur baby video on YouTube. This one has been viewed 178 million times.
Every time, there is an ad and the daddy or mommy who produced the video gets a bit of money. Overall, videos that people put on YouTube generate $15 billion a year in advertising revenue.
In the electric utility industry, low cost solar means that many customers will generate power, with or without incentives or net metering. It will just make sense. They may just take the free electrons when they can, and wasting them if they can’t neither use nor sell them.
And by the way, we have cut down on our cable TV subscription. Customer-owned generation will have a similar effect on utilities. Many will have solar panels and they will buy less from utilities.
In essence, for the first time, utilities will see competition from their own customers.
In 1977, I worked as an electric meter reader, before going to university to earn my Electrical Engineering degrees at Polytechnique Montréal. In 2012, I was directing the largest smart meter deployment in Canada, replacing some of the same meters that I had read three and a half decades earlier. In between, I worked for 20 years in telecoms, living the Internet and wireless revolutions, and then mostly with electric utilities for the last 15 years.
As this year gets to a close, I would like to reflect on the changes that technology has brought – or could bring – to utilities and what it may mean for the future.
In 1987, telephone and electric utilities were both in the wire business – perhaps 20 AWG for telephone and 4/0 for electric, but mostly copper hanging on wood poles and serviced by a fleet of bucket trucks. Telecom companies were then telephone companies, just experimenting with wireless (the first cellular call in Canada had occurred just 2 years earlier) and the Internet was still primarily a military research technology (commercial service only started in 1989). Phone and electric utilities were highly regarded companies, imbued with a duty for public service and providing lifelong employment to their loyal employees.
By 1997, I owned a cell phone and I was running what was then the largest Internet telephony network (but tiny in comparison to today), competing with international telephone carriers. However, phone companies were in denial on the Internet, seeing us as a temporary nuisance, and trying to control user experience on cellular phones, like they had been doing for a century with rotary phones on landlines.
In 2007 the iPhone was launched. Not only did it merged the Internet and wireless phone, but it profoundly changed the business of the telecom companies. Before the iPhone, the wireless carriers were subsidizing cheap handsets to get customers to lock in for 3-year contracts and using the carrier’s proprietary and closed services. But the iPhone upsets that balance of power. Apple kept control on the user interface, given choice to consumers to buy the best apps from developers. However, by fostering more innovation, the carriers’ networks got more (not less) valuable through this change. People spent – or wasted – more time on their smart phones, generating more revenue for carriers and hardware manufacturers as network capacity expanded through successive generations of technology.
In the meantime, not that much has changed in the electricity business – my father, who worked as a dispatcher at Hydro-Québec until the 1970s, would probably recognize the network today, although he would certainly envy dispatchers using electronic maps rather than the paper ones he used.
However, 2017 has seen the rise of inexpensive solar energy and energy storage. Could 2018 have an “iPhone moment” for electric utilities? After all, the Internet brought us on-demand access to information, like energy storage is bringing us on-demand power. Wireless phones allowed us to cut the cord, and so may be distributed solar energy, at least to some extent. The parallel is striking.
Now who will be the next Steve Jobs? Elon Musk, perhaps?
All my best wishes for 2018!
Low-cost renewable energy and energy storage are reshaping the Canadian electricity industry (see http://benoit.marcoux.ca/blog/canadas-electricity-industry-in-2030/). Along the way, new regulatory frameworks, energy choice, and competition from new energy service providers will transform the relationships between utilities and their customers. If what happened in other industries that went through similar transformations is any indication, such as airlines and telecoms, those relationships could be strained. Utilities should learn and apply lessons from those industries, hopefully not making the same mistakes again.
Twenty years ago, an Angus-Reid survey put Bell Canada #2 among most admired corporations in Canada. In 2017, Bell Canada ranked #291 in a University of Victoria brand trust survey. People love their Apple or Samsung phones, are addicted to Facebook to stay in touch with friends, and use Microsoft Skype to see remote family members, but they mostly hate their phone company.
The transformation of the telephone industry in Canada really started in the 1980s with businesses being able to lease high-capacity dedicated lines from other providers, such as CNCP Communications. Businesses were clamoring for more, and the Canadian regulator, the CRTC, allowed resale of telephone companies services, first dedicated lines and then local phone services. Canadian long-distance market developed slowly until 1992, when Canada unbundled local and long-distance telephone services and allowing competitor entry into long-distance services. When cellular service became more popular around the year 2000, it also offered an alternative to local services. However, if competition in residential long-distance services is seen as a milestone, the fact is that it all started with businesses leasing high-capacity lines from competitive providers — businesses were already resenting being coerced by phone companies. Later, when residential customers got choice, they too got dissatisfied.
It is still early, but we may be seeing the same unfortunate trend with electric utilities. When listening to renewable energy developers or commercial businesses, you already hear an undercurrent of dissatisfaction, although the reality is that there is not much they can do. With low-cost renewable energy, energy storage and microgrids, businesses will start to see alternatives. Eventually, the same will happen with residential customers. Unbundling of the wire business from energy retail will bring more choices. You can readily see a parallel with telecoms .
This is a very real risk for utilities: in 2030, there will be many more potential friction points between utilities and customers than there are now. In addition to traditional transactions such as new connects, outage reporting, energy efficiency and bill payment, there will be multiple demand response schemes, EV charging and energy sales, bringing new expectations along. Even if customer satisfaction surveys are good now, they may not stay that way.
I have worked in the telecom industry as head of marketing, in customer care and as a business consultant — I have seen what happened there. I have also seen some of the best and the worst of stakeholder communications at electric utilities — including while I directed a large smart meter deployment, a very challenging activity for customer relationships. Beyond the obvious like using social media, online self-support, and efficient call center operations, here is what I have to offer to electric utilities in improving their chances to maintain healthy customer relationships as the industry is transforming:
Even with all the talk from consultants about customers wanting more participation, the fact is that electricity will never have the emotional content of communicating with friends and family, would it be telephone or Facebook. This only makes it harder to ensure that electric utilities can maintain healthy customer relationship. Still, it can be done.
Are you up to the challenge?
The NEB published its 2017 assessment on Canada’s energy future a few weeks ago. The NEB, purposely an independent national energy regulator, published this report, part of the Energy Futures series, to be used, among other things, as an input for sound policy making. However, I find it lacking coherent vision.
Curiously, the assessment starts with an admission of failure, with its first “key finding” that the 2017 Energy Futures report is the first where fossil fuel consumption peaks within the projection period. Indeed, each subsequent update since the first Energy Futures in 2007 shows lower and lower fuel use projections:
The chart can be interpreted in two ways: the NEB had it wrong in the past, and now they have it right, or, the NEB must again be getting it wrong. Looking at the assumptions shows that it is the later. While the NEB projects a peak in consumption, it also projects higher oil prices (from $50 to $65–80 per barrel of Brent, depending on scenarios), which is rather surprising, especially since it also projects a constant increase in supply for oil sands, up 59% by 2040 in comparison to 2016.
While the report includes projected price for fuel and gas, it, strangely, does not include projection for the price of electricity. There are, however, a number of projections on the change in generation mix and underlying cost and demand trends.
All scenarios show a (modest) increase in the share of electricity in the national energy mix. The “Technology Case” scenario, the most optimistic one toward clean energy, shows a shift toward more electricity and reduced overall demand in the end-use sector, and more renewable generation in the electricity sector—but the changes are rather small. This modesty is justified by a number of assumptions.
The report projects an increase in new electric passenger vehicles—but growth flattening after 2025, justified by the phase out of incentive programs. Essentially, the NEB assumes that EVs will never be truly competitive with internal combustion cars.
On renewables, the NEB an increase in generation and a decrease in costs under all scenarios. However, the projections are nevertheless surprising. The report acknowledges that solar costs have been coming down 20% a year since 2010:
Then, the report projects that future costs will continue to drop at … 3% to 5% per year:
There is no explanation on what might have happened in 2016 or 2017 to explain this surprising shift.
As a consequence, the projection for non-hydro renewable is rather modest, with much slower growth in the future:
I cannot condone these NEB projections, as they run contrary to what I see in the market.
I just hope that no one uses them to justify how to spend my tax dollars.
The cost of solar and wind energy and energy storage have been coming down at double-digit rate per year for many years. Every year. Double-digit percentages. Again. It continues. Tirelessly. No end in sight. Capitalism and innovation at their best. No government regulation nor corporate ego will stop it. And it will reshape – no, it is reshaping – the power industry in Canada.
By 2030, renewables will be so inexpensive that they will have upended the traditional economics of the industry. But we can see this transformation to its logical conclusions, based on how the power industry is evolving elsewhere in the world and how other industries went through similar transformations.
If ever lower-cost renewables and energy storage triggered the reshaping of the electricity industry, other factors tint how industry stakeholders: the impacts of climate change, our increased dependence on reliable electricity, and the higher cybersecurity threats. Each of these factors helps define how utilities, customers, regulators, policy makers and product and service vendors react to or take advantage of the situation, sometimes trying to accelerate change, sometimes attempting to slow down. However, if broad conclusions can be drawn, we need to be mindful that local specificities in resource availability, cost structure and ownership will mean that the end game will not exactly be the same everywhere.
Wind, solar and storage are not only becoming increasingly cost effective, but doing so at a much smaller size than traditional generation. By 2030, customers will be installing solar panels on their side of the electricity meter, on rooftops and backyard, even in absence of incentives or net metering, taking whatever “free electrons” they can and wasting what they will not be able to use or sell. If wasting electricity seems heresy, think about the iPhone in your pocket: it has more computing power than a supercomputer of a generation ago, and yet it is idling most of the time, its vast computing power wasted. Yet, the iPhone has transformed our daily relationship to computing. Similarly, inexpensive renewables and storage will transform our relationship to electricity.
Even with this abundance of distributed generation, grid defection will be the exception, as customers keep the utility connection as a last resort and because space constraints and the low energy intensity of solar and energy storage make it impractical to generate all the energy needed in urban areas. Nevertheless, abundance will cause energy (kWh) price to plummet, especially since electricity consumption has plateaued in Canada, taking traditional utility revenue along.
Commercial and industrial customers, as well as some residential customers, will take this a step further by having energy storage as well. By adding storage, customers can arbitrage time-of-day rates or peak demand charges, shifting consumption at other times to reduce costs. Having local generation and storage also turns a customer site into a microgrid able to maintain power during grid disturbance or outage, maintaining production for businesses and food stuff cold for consumers. Some smart communities and campuses will also become microgrids regrouping multiple customers and utility-scale resources for better resiliency and efficiency.
Given how low-cost renewables and storage are advancing, by 2030, if not before, the traditional, centralized grid will have been transformed into a digital grid of microgrids integrated to distributed renewable energy resources. This will have repercussions across the industry, transforming competition, energy markets, regulation, grid architecture and utility operations.
Retail Unbundling and Competition
Having so much customer-owned distributed generation will put pressure on policy makers and regulators to allow retail competition, so that distributed generators may sell surpluses on open markets. With retail competition, customers have more choices in what energy they use, what energy they sell, and how they use it, including sophisticated demand response programs to support energy balancing on the grid.
The retail arm of utilities and the wire business will be unbundled (as it is already the case in Alberta), allowing energy service providers to compete in energy retail, perhaps along with utilities’ unregulated subsidiaries. This will also expose the capacity-driven cost of the distribution grid, now charged separately. This is similar to long-distance telephone service unbundling in the 1990s. With competition forcing energy market players to keep price low, energy price regulation will be lightened, just like telephone regulations are much lighter now than they were 25 years ago.
Renewed Energy Markets
Today’s energy markets were not designed for the large number of players distributed across the grid with varying capabilities that we will have in 2030. Energy markets will evolve to improve the way electricity is priced, scheduled and procured in order to ensure reliability, transparency, efficiency and at the lowest cost. Through the energy market, distributed energy storage systems will accumulate electricity when the sun is shining or the wind blowing, releasing it at time of use. Demand management will shape the load curve to better match availability of inexpensive renewable resources. Electric vehicles will be charged during the day, and give power back to the grid if needed.
New transactional technologies, such as blockchain, may be required to deal with the sheer volume of automated transactions. Market intermediaries to act on behalf of distributed asset owners, simplifying the process and offering financing.
In the traditional Canadian rate-of-return regulatory framework, electric utilities earn a return on investments based on the depreciated cost of past capital expenditures approved by the regulator. This model will no longer be suitable in 2030 to regulate the wire business of utilities because of its “capital bias”, its insensitivity toward grid reliability, its inhibition of innovation, and its short-termism. The regulatory regime will evolve to incentivize lower total costs (including incentives to use non-wire alternatives such as third-party energy storage) and better reliability (to avoid momentary service interruptions that trip distributed generators offline), with utilities freed to implement innovative solutions without regulators and interveners second-guessing investment in technology. Multi-year incentive plans will allow utilities to plan ahead better. Similar approaches already exist, as in Great Britain, where the regulator developed its RIIO (Revenue = Incentives + Innovation + Outputs) 8-year model.
High-Availability Distribution Grid?
By 2030, we will obviously not have replaced all poles, conduits and wires that make up the legacy grid – nor should we try to. Utilities, however, will have transformed this critical infrastructure to make it resilient (especially against the impacts of climate change) and reliable (to keep now-essential distributed energy resources online).
We will more storm-proofing of critical feeders, including undergrounding of mainlines, with intelligent protection devices on laterals, near customers and distributed energy resources to minimize disturbance while faults are being cleared on overhead lines. Protection devices, switches and sensors will be automated to the best extent possible and remotely operated, from a control room or from a truck, freeing operators and crew to better manage and repair outages. Remote control will allow protection settings to be more sensitive to limit the risk of forest fires caused by the electrical grid.
New Operating Model in Distribution
In a technology-intensive environment in constant innovation and with ever-increasing cybersecurity threats, utilities will develop new skills and will learn to leverage partnerships with vendors. This is very different than traditional distribution grid operation, still largely relying on physical work and manual switching.
In their new high-tech and fast-changing environment, utilities will implement new business process and organizational structures to take advantage of the latest technology innovations. At the same, new skills technology skills are required, including cybersecurity. Rather than doing things internally, as they are often used to, utilities will partner with technology vendors that have the scale and the expertise to provide better products and professional services at a lower cost. Essentially, utilities will follow the path already taken by telecom network operators.
New business models in the industry
New businesses will cater to energy customers, distributed generators and microgrid owners, removing complexity and turning energy into services.
Energy customers, distributed generators, and microgrid owners will be supported by an ecosystem of third-party vendors and unregulated utility subsidiaries. Vendors will support customers with low-cost financing and technology to optimize the use of distributed assets on energy markets, lowering costs. For utilities, this is a clear growth opportunity, not limited to traditional territories. With transportation electrification, the electric industry will essentially replace the petroleum industry, with new businesses supporting public charging of electric vehicles – a welcome development as it could prevent further reduction in electricity consumption.
This new, distributed and digital-enabled electrical grid will be more resilient and sustainable. Its resiliency is based on multiple and alternate energy local sources and paths, with reduced reliance on large infrastructure. This new resilience is welcomed given the growing importance of electricity in energy use, as residential and industrial customers are dependent on electricity to power our modern life in smart communities and with the advent of electrical transportation. The new grid will also be more sustainable, reducing the environmental impact of communities and improving quality of life – while being financially affordable.
Preparing for the future is essential for Canadian electric utilities and new players. In an industry traditionally defined by centralized generation and rigid geographic boundaries between utilities, new linkages need to occur: utilities and customers, vendors and entrepreneurs, cities and businesses, ensuring that all see the opportunities that didn’t exist before and have the support they need to get their ideas to market quickly. The structure of the industry will emerge transformed, with Canadian-owned service providers offering novel energy solutions in Canada, backed by a web of hardware, software, and professional service vendors. Realizing this vision will increase opportunities for Canadians to export their energy, their expertise, and the fruit of their labor.
Today, I moderated a panel on microgrids at a smart grid conference hosted by the electric industry association of Québec (AIEQ). I think that it went quite well. Chad Abbey (Smarter Grid Solutions), Michel Carreau (Hatch), Teddy Chettiar (S&C) and Ronald Denom (Ossiaco) were on the panel. Chad presented 3 microgrid cases, including one on the Shetlands Isles off Great Britain – an obviously remote community. Michel continued by presenting the challenges of microgrids (and the recent progress) in the Canadian North. Further South, Teddy both in-front and behind-the-meter examples, including one in North Bay. Ron focused on behind-the-meter applications, with the “nano grid” concept.
Other panels focused on the smart grid proper, with Greg Farthing (ABB) moderating Gary Rackliffe (ABB), Jayant Kumar (GE) and Mark Feasel (Schneider), and on cybersecurity, with Oral Gürel (Schneider), moderating and Dominique Gagnon (CGI) , Robert Nastas (PM SCADA), Bruno Lafeytaud (Accenture) and Pierre Taillefer (Vizimax) presenting.
The panels were followed by a dynamic luncheon presentation by Eric Filion, VP Customer Service at Hydro-Québec Distribution. Éric highlighted the goal of Hydro-Québec to become more of a lifestyle service provider and increase customer loyalty (going well beyond customer satisfaction). Éric presented 5 innovation trends (see picture) which, I think, are worth sharing.
Thanks to all panelists and to the AIEQ for organizing this very successful event.