How Not-to-Succeed in the Next Decade of Energy Transition

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The 2020s promise to be a momentous time for the electricity industry, and I wanted to take some time to reflect on what businesses might need to succeed through the energy industry transition. I might have a privileged perspective on this, having worked with utilities, vendors and investors, first in the IT and telecom industries as they went through their transitions, and then mostly in the electricity industry for the last 20 years. This does not mean that I can’t be wrong (I know – I’ve been wrong many times), but perhaps my views will help others be right. 

I’ve structured this post as a series of “don’ts”, based in part on actual IT and telecom examples that I’ve lived through – I’ve put these examples in italic, but I left the names out to protect the innocents. I found that many businesses have short-term views that lead them down dead-end paths, and I might be more useful in showing known pitfalls than trying to predict the future. 

Don’t Fight a Declining Cost Curve

The IT, telecom and, now, electricity industries are all seeing declining cost curves. The best known one is Moore’s Law, the observation that the density of integrated circuits (and hence the cost of computing) halves every 2 years. Moore’s Law is nearly 60 years old and still strong. It gave us iPhones more powerful now than supercomputers of a generation ago, even though my iPhone ends up in my pocket most of the time, doing nothing. These days, the electricity industry sees the cost of wind and solar energy as well as that of electricity storage dropping at a rate of 10% to 20% per year, with no end in sight.[i]

In IT, telecom and, now, electricity, this also leads toward zero marginal cost, the situation where producing an additional unit (a Google search, a FaceTime call or a kWh) costs nothing (or almost nothing). 

During the IT and telecom transitions, many startups proposed solutions to optimize the use of (still) expensive information processing assets. Some sought to extend the life of previous generations of equipment (like a PBX) by adding some intelligence to it (a virtual attendant), while others were dependent on a price point (like dollars per minutes for overseas calls) that simply collapsed (calls are essentially free now). 

If your business case depends on the cost of energy or the cost of storage remaining where they are, ask yourself, what if the cost goes down 50%? That’s only 3 years of decline at 20%/year. After 10 years, costs will be only 10% of what they are now. Can you survive with near-zero marginal costs? If your solution aims to optimize capital costs, will it matter in a few years? Or, will people just do as they do now, with a do-nothing iPhone supercomputer in their pocket?

Don’t Think That Transition Will Go 2% a Year Over 50 Years

Phone companies were depreciating their copper wires and switches over decades. Phone utilities were highly regarded companies, imbued with a duty for public service and providing lifelong employment to their loyal employees. Service was considered inflexible, but everyone could afford a local line, which was cross subsidized by expensive long-distance calls and business lines. Things were simple and predictable.

In 1980, McKinsey & Company was commissioned by AT&T (whose Bell Labs had invented cellular telephony) to forecast cell phone penetration in the U.S. by 2000. The consultant predicted 900,000 cell phone subscribers in 2000 – the actual figure is 109,000,000. Based on this legendary mistake, AT&T decided there was not much future to these toys. A decade later, AT&T had to acquire McCaw Cellular for $12.6 Billion.[ii]

In 1998, I was operating the largest international IP telephony network in the world, although it was bleeding edge and tiny in comparison to AT&T and other large traditional carriers. Traditional carriers were waiting for IP telephony to fail, as the sound quality was poor, it was not efficiently using the available bandwidth, it was illegal in many countries, etc. The history did not play out as expected. In 2003, Skype was launched, the iPhone, in 2006. Today, you can’t make a phone call anymore that is not IP somewhere along its path. 

I’m seeing the same lack of vision in energy industry. For example, the International Energy Agency (IEA) is famous for being wrong, year after year, in lowballing the rise of solar and wind energy in its scenarios.[iii]

Another example is the rise of electric vehicles. There are about 77 million light-duty vehicles sold in the world, and this number is flat or slightly declining.[iv] Of these, about 2 million electric vehicles were sold in 2019, but the number of EVs sold in increasing 50% every year.[v] In other words, the number of internal combustion vehicles is clearly decreasing and the growth is only coming from EVs. Looking at their dashboards, car manufacturers are quickly reducing their investment in developing internal combustion vehicles, especially engines.[vi] Disinvestment in upstream activity means that internal combustion vehicles will fall behind newer EVs and become less and less appealing. It won’t take 50 years for most light-duty vehicles to be electric – a decade, perhaps.

Don’t Count on Regulatory Barriers for Protection

Telecom carriers fought deregulation and competition, teeth and nails. Back in the 1950s, AT&T went to the US supreme court to prevent customer from using a plastic attachment on the mouthpiece of telephones to increase call privacy – it was called Hush-A-Phone. AT&T owned the telephones and forbid customers from using Hush-A-Phone. However, AT&T lost the court battle, and Hush-A-Phone was sold legally from then on. This landmark decision is seen as the start of telecom deregulation in North America.

The IP telephony network that I mentioned earlier was indeed illegal in some of the countries we operated in. It didn’t matter. We had plenty of partners willing to bypass local monopolies, even if illegal in their countries, and customers willing to make cheaper international calls, even if the quality was not always so great. 

Regulatory barriers are only as strong as policy-makers make them. When constituents see an opportunity to save money or simply have choice, they pressure the policy-makers to change the rules – or elect new ones more attuned to moods of consumers. It’s just a matter of time. 

Don’t Take Customers Nor Suppliers for Granted

In 1997, at a time when cellular phones were still a luxury and the Internet was still a novelty, an Angus-Reid survey of the Canadian public put Bell Canada #2 among most admired corporations in Canada[vii], and it had been among the most trusted companies in Canada for decades. Yet, in 2017, Bell Canada ranked #291 in a University of Victoria brand trust survey[viii]. People love their Apple or Samsung phones, are addicted to Facebook to stay in touch with friends, naturally turn to Google for any question, and use Microsoft Skype to see remote family members, but they now mostly hate their phone company. 

Obviously, Bell is still around and making money, but one can only wonder how things could have been if Bell had played its hand differently. (In 1997, none of iPhones, Facebook, Google and Skype existed).

Suppliers to electric utilities should also listen to this lesson. Northern Telecom (Nortel), AT&T Bell Labs and Alcatel were among the large traditional equipment vendors to telephone utilities. However, a startup was founded in 1984, designing routing equipment for IT networks used in university networks. Over the years, it expanded into all sorts of datacom and telecom equipment – all telecom companies eventually standardized on this new vendor. Northern Telecom and the others went bankrupt or were merged and acquired to the point they could not be recognized. In the process, some telephone companies were left with unserviceable hardware. 

This startup company is called Cisco Systems and is now the largest telecom vendor in the world. 

The same pattern is playing out in electricity. On one hand, you have many utilities that do not understand that many customers want choice. On the other hand, you have vendors, like GE and ABB, that are in turmoil. 

Will you be the future Google or Cisco of electricity? Or the next Nortel?

Don’t Follow the Herd

Full disclosure: I’m a career business consultant. Caveat Emptor. 

The reason for this disclosure is that consultants are great at announcing bold trends that often do not pan out. There is a great herd mentality among consultants, and it carries over to their customers. 

Twenty years ago, one of my clients was one of the early Application Service Providers, a business concept where small businesses could access shared personal computer applications over the Internet. The idea was to reduce the cost of maintaining software installed in PCs and to reduce the hardware requirements of PCs. This client was unknowingly fighting the declining cost curve of computers. It went bankrupt (and my last invoices were not paid). 

The concept of application service providers was heavily promoted by consultancies like Gartner, who presented it as the future of business computing. I guess that Microsoft disagreed. 

I see similar fast-fashion concepts going through the electricity industry. Walking the floor at the Distributech Conference in 2018, it was all about microgrids. In 2019, it was distributed energy resources. We will see what will be fashionable in January 2020. 

My recommendation when you hear the same concept over and over again is asking yourself: is this a real trend or am I in an echo chamber? With many new consultants flocking to the electric utility industry – I call them tourists – , you can hear many concepts that are taken for truth but really too complex to be implemented or unlikely in the fragmented regulatory environment that we have. 

Closing Thoughts

In the end, keep cool: sound engineering, good economics and great customer service will always win.

Which leads me to offer you this quote:

If I’ve heard correctly, all of you can see ahead to what the future holds but your knowledge of the present is not clear.
—DANTE, Inferno, Canto X

All this being said, have a great Holiday season and see you soon in 2020!

[i]                 See this previous blog posts, https://benoit.marcoux.ca/blog/lower-and-lower-energy-prices-from-wind-and-solar-pv/, for an in-depth discussion of cost decline in wind and solar energy, accessed 20191220. 

[ii]                See https://skeptics.stackexchange.com/questions/38716/did-mckinsey-co-tell-att-there-was-no-market-for-mobile-phones, accessed 20191220. 

[iii]               See this previous blog post, https://benoit.marcoux.ca/blog/wind-and-solar-pv-defied-expectations/, for a chart of how wrong the IEA has been, accessed 20191220. 

[iv]                See https://www.statista.com/statistics/200002/international-car-sales-since-1990/, accessed 20191220. 

[v]                 See https://www.iea.org/reports/global-ev-outlook-2019 and http://www.ev-volumes.com/country/total-world-plug-in-vehicle-volumes/, accessed 20191220. 

[vi]                See https://www.linkedin.com/posts/bmarcoux_daimler-stops-developing-internal-combustion-activity-6580481304071065600-vRK8, accessed 20191220. 

[vii]               The Fourth Annual “Canada’s Most Respected Corporations” Survey, Angus Reid Group, Inc., 1998, page 5.

[viii]              The Gustavson Brand Trust Index, Peter B. Gustavson School of Business, University of Victoria, 2017. 

EV Charging: an Enabler for Utility Customer Engagement

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EV charging is a new type of load for electric utilities – probably the first new type of large electrical load since air conditioning over 50 years ago. A lot is being written about the perils that charging a large number of EV batteries could bring to the grid, but also how shifting EV charging off peak could offset decline in utility revenues. 

However, filling up a car with energy is not new for utility customers. In fact, they are already quite passionate about it. They’ll drive out of their ways to pay less, fueling up on days when price is lower, or driving some distance to get to a cheaper gas station. Multiple apps allow motorists to share tips. Gas station chains offer loyalty program and grocery coupons. Gas stations have become minimarts. Clearly, motorists are deeply engaged with those providers. 

Electric utilities are trying really hard to get their customers to be more engaged. They rightfully see customer engagement as the key to entice customers to participate in energy efficiency and demand management (or response) programs. The problem is that customers generally have no idea how much electricity they use for lighting, entertaining, cooling, heating, cooking, showering, cleaning dishes… This makes customers little responsive and unengaged, especially since these activities have very low emotional appeal for electricity (unless there is an outage during a hockey game). To tell you how bad the situation is, utilities regularly go to conferences presenting EE or DM/DR programs considered to be highly successful with only single-digit percentage of the customer base participating… 

With EV charging, utilities have the opportunity to reset customer engagement – especially as owning and driving a car has much more emotional appeal than, say, cleaning dishes. This is especially true since drivers are used to see how much fuel they use at the pump – there is a direct feedback every few days. We also know that drivers are responding strongly to fuel price signals. 

While much of the discussion on EV charging has revolved around grid-centric issues like peak management and electricity sales, EV charging is also a time-limited opportunity to get their customer more engaged. If electricity distributors are not seizing the opportunity, other players will, and they will fall back to being what they have traditionally been – utility service providers serving passive subscribers. 

I think that electricity distributors can be much, much more, especially in the context of the energy industry transition that we are going through.

Energy Is Cheap; Power Is Valuable

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For a while now, I have been saying that we are entering a world where energy (kWh) is cheap, thanks to dropping solar and wind costs, but power (kW) is expensive, needed as it is to balance renewables and peaking new uses, such as electric vehicle charging.[i]

There are not a lot of empirical evidence of this phenomenon, but Ontario offers one. 

In 2005, Ontario decided to move to a “hybrid” deregulated generation market, with a “Global Adjustment” (GA) charge on customer electricity bill that is used to cover the difference between the energy market price (¢/kWh) and rates paid to regulated and contracted generators for providing capacity (kW). The energy market price was intended to reflect the marginal cost of production, with contracts meant to compensate fixed capacity costs. Over time, as contract volumes increased, more and more of the costs of generation became charged through capacity contracting rather than through energy market revenues. In addition, a significant number of zero marginal cost bidders (essentially renewables) were built, further depressing market revenues. As the chart below indicates, a growing portion of generator payments shifted from the energy market onto capacity contracts, which were then charged to customers through the Global Adjustment.[ii]

This is for Ontario, with its peculiar market structure. However, with the advent of renewables and increasing electrification of the economy, we will see the same trend across the world: the capacity-driven cost of the grid will be exposed. The underlying trend is:

Energy, in kWh or MWh, will get very cheap.

Power, in kW or MW, will be very valuable.

For stakeholders in the industry, it means that economic value will be created with services and tools that help manage power, such as shifting peaks. If you own a generation source with non-zero marginal costs and cannot play on a capacity market, you’re in trouble. 

If you think that this is sort of crazy, think about what happened in the telecom market over the last couple of decades. It used to be that local phone connections were relatively cheap, but long-distance phone calls were extremely expensive (dollars per minute for some international calls). Nowadays, long-distance calls are effectively free, thanks to Skype and FaceTime, with video as a bonus. However, Internet access is expensive. 

How will this affect your business?

[i]  See my 2018 posts, https://benoit.marcoux.ca/blog/cea-tigers-den-workshop/and https://benoit.marcoux.ca/blog/a-perspective-on-canadas-electricity-industry-in-2030/.

[ii]  Data for this chart was extracted from http://www.ieso.ca/en/Corporate-IESO/Media/Year-End-Data. Contact me is you want the underlying numbers. 

Book Review: “Branchée: Hydro-Québec et le futur de l’électricité” (French version; in English : “Charging Ahead: Hydro-Québec and the Future of Electricity”)

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Jean-Benoit Nadeau and Julie Barlow have published this worthwhile book on Hydro-Québec. I have recently read the French version, and the English translationwill be available on October 15, 2019. I would highly recommend this book to people who need to understand what is driving Hydro-Québec. Electrical system vendors and other industry stakeholders will certainly appreciate the perspective that Branchée/Charging Aheadbrings. However, the authors largely (but not exclusively) rely on internal Hydro-Québec sources and sometimes come across as overly praising the company. Other, more critical, sources might be needed to grasp the complexities of the energy sector in Québec. 

Overall, Branchée/Charging Ahead is a very well-documented book on Hydro-Québec and current strategic directions. Fifty-three people were interviewed, including a large number of Hydro-Québec personnel, up to the CEO, Éric Martel. The book also draws on multiple third-party references and previous article published by the authors. 

Branchée/Charging Aheadstarts with a history of Hydro-Québec. The history of Hydro-Québec innovations is highlighted, with the 735 kV transmission lines being described as “Hydro-Québec’s great technical prowess”[i]. However, this technology dates back to the 1960s’. While there has been nothing remotely comparable since then, the book lists other examples of Hydro-Québec innovations, such as the LineRanger robot, Li-Ion batteries and TM4 electric motors. The book rightfully says that the “commercialization of inventions is an old fantasy of Hydro-Québec. For 30 years, all CEOs have talked about their amazing potential. But their promises have always disappointed.”[ii]TM4 is a good example given in the book: TM4 used up $500 million over 20 years, but Hydro-Québec sold 55% of it to Dana for only $260 million.[iii]

The book contains many noteworthy and hard-to-find current facts and numbers that industry professional might find valuable, such as:

  • As of early 2019, there are 716 prosumers (distributed generators) on Hydro-Québec’s network.[iv]
  • By controlling just 4 baseboard smart thermostats, Hydro-Québec can reduce the peak load of a typical household by 1 kW; Ten smart thermostats lead to a 2 kW saving.[v]
  • Hydro-Québec is running a smart home pilot project with 400 households, intending to launch a new smart home product through an unnamed subsidiary; Sowee, from Électricité de France, is given as a comparable.[vi]

The authors do not attempt to explain their paradox of innovation promises to have always failed Hydro-Québec and Hydro-Québec continuing to heavily invest in innovation. 

Toward the end, Branchée/Charging Ahead provides many insights into the thinking of Hydro-Québec senior managers, including where they see the industry going, how it is going to affect Hydro-Québec, what strategic imperatives ensue, and what Hydro-Québec needs to do. Undoubtedly, vendors could find in here material to enrich proposals and presentations. 

I found very few instances of questionable facts in the book. The Philadelphia Navy Yard microgrid is given as an example[vii], but this project has now been abandoned and is being reborn on a much smaller scale. Economically, I also disagree with the statement that Hydro-Québec is well positioned to develop hydrogen production[viii]– there is far more value in using dispatchable hydro to balance renewable resources than to produce hydrogen from electricity (which is a highly inefficient process). 

Furthermore, I believe that many customers, outside industry expert, vendors or other utilities might object to some praising characterization of Hydro-Québec, such as when the authors state that Hydro-Québec “is one of the best managed electricity grids on the continent and is admired by the largest companies in the industry”[ix]or that it has one of the most reliable grids on the continent[x]. The book would have been more balanced by giving a greater voice to those external stakeholders. Also, given the generally positive perspective that the authors are offering, Branchée/Charging Aheadwill certainly support Hydro-Québec when it tries to gather support for Bill 34[xi].  

All this being said, I greatly enjoyed reading the book and I highly recommend it to anyone wanting to better understand this fascinating company. However, I would caution against drawing conclusions or designing policies based solely on Branchée/Charging Aheadwithout balancing some of the ideas with more independent sources.   

[i]                Chapter 2. Quotes from the book are translated from the French edition. 

[ii]               Chapter 10.

[iii]              Chapter 10.

[iv]               In the introduction and later in chapters 4, 5 and 6.

[v]                Chapter 6.

[vi]               Chapter 6.

[vii]              Chapter 6.

[viii]             Chapter 6

[ix]               In the introduction.

[x]                Chapter 1.

[xi]               See https://benoit.marcoux.ca/blog/bill-34-selling-to-hydro-quebec/for my take on Bill 34. 

Customer Interviews: An Essential Step in Assessing Technology-Driven Companies

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Insight

Over time, I had to interview the customers of many energy, telecom and IT companies in the context of due diligence reviews. I got to appreciate the usefulness of this process to really understand the prospects of a company, especially in emerging business-to-business markets. The managers of these companies were often engineers or scientists that did not always listen well to their customers. Often, interviewing just a few customers pointed to a hidden gem or uncovered a fundamental weakness.

Why Should You Interview Customers?

As a venture capital partner, a senior manager of an acquiring company, or an M&A specialist, assessing a target company in the context of an industry transition is daunting. This is especially true right now in the electricity industry, with its complex regulatory frameworks, its worldwide supply chain, dropping energy generation costs, and changing customer expectations. In many ways, customers are the key to understand the transition: they buy electricity, are looking at distributed generation systems, and elect politicians who legislate new regulations. Then, what better way to assess a company than speaking to the company’s customers? These interviews also shed new light on the company’s sales forecast and help identify key areas of improvement.

In this article, I would like to share my experience and to offer some suggestions to help you get the most of customer interviews. I do not simply want to provide you with a checklist of questions. There is a certain art in contacting people, putting them at ease, getting them to speak, using active listening techniques, and having a structured analysis of the results.

Decide on What You Want to Assess

The first step of a successful customer interview program is to decide on what needs to be accomplished. Customer interviews may cover many topics:

  • Relationships between the customer and the company.
  • How the customer identified and selected the company and the product.
  • Who are the main competitors.
  • Responsiveness of the company’s staff facing the customer. 
  • Strengths and weaknesses of the product or the service.
  • Potential enhancements.
  • Reliability and availability of the offering.
  • Current and forecast sales volume with the company.
  • Pricing level and structure of the price list.

Depending on the needs of the company or the investor’s concerns, the interviews may focus on a few specific points. For example, it may be required to assess whether the features of a new energy product meets the needs and buying habits of customers, which also requires that the interviewer have some technical and market knowledge.

Select Interviewees

The company normally provides a list of customer contacts. This list must include the name of the company, the name and title of the contact person, a telephone number and an email address. Obviously, the company will tend to give the names of “friendly” customers. A good question to ask is how many customers have been excluded from the list and why. It could be necessary to examine service or returned merchandise records and to ask to contact some problem customers or even former customers. In order to avoid excessive screening by the company and accounting for unavailability of some customers, it is required to ask for a contact list twice as long as the expected number interviews. It may also be that the number of possible interviews is limited merely by the number of customers. This is especially common for companies using an indirect distribution channel or for early-stage companies. Even interviewing just a handful of customers can bring interesting information, but a greater number is required for a large product portfolio or if the distribution channel is complex or reaches many countries.

Another essential step is to get information on the customers being contacted. This information is obtained from internal sources and external sources. In a due diligence, it is common to verify material transaction records or contracts. If the interview program aims at validating these documents, it is necessary to have them in hand during the interviews. External sources, such as the company’s Internet site and the associated LinkedIn, Facebook and Twitter profiles should also be read prior to an interview. 

Many startup technology companies accelerate market entry through an indirect sale channel of distributors and OEM agreements. For example, in a recent case, the channel is comprised of national distributors, local dealers, customer companies and end users. Interviewing representatives at each layer of the distribution channel leads to better data than only interviewing one set of intermediaries. Similarly, it is ideal to contact people from various business functions (operations, marketing, upper management, etc.).

When approached professionally, people are usually genuinely interested in helping a supplier. However, many interviews may fail because of customer time constraints and last-minute emergencies. Also, pay attention to the order of the interviews. Some customers will be recognized as more important and should be interviewed at the end of the process in order to first practice with other customers. Similarly, in the case of a distribution channel, it is preferable to start with the end users in order to validate the selection of the distributors.

Get the Logistics Out of the Way

High-tech companies are often exporting a large share of their products. Interviews must then be done by telephone to minimize costs. Although convenient and inexpensive, telephones raise communication barriers that must be minimized. For international interviews, language can also become an issue.

The telephone is a somewhat impersonal communication system, and the use of videoconferencing is too complex. Even for a phone interview, it is preferable to make an appointment. Appointments are especially important if interviews have to be at unusual hours because the customer is overseas. To make the communication more personal, I take advantage of the email confirming the call to send a picture of myself. It is a simple gesture, but a good way to begin breaking the ice. 

It is important not to be disturbed during the interview. Also, keep a pencil in hand to scribble notes to remember to raise some points later during the interview. Finally, a headset frees the hands and permits more natural and relaxed posture and voice.

Have an Interview Guide

We are talking here about general guidelines, and not a rigid script. To get the most from an interview and to keep its natural character, it is necessary to deviate from the expected course and to take advantage of twists and turns of the discussion. The interviewee must not feel interrogated, but in confidence to talk about points that could be sensitive. 

Some base rules in preparing an interview guide include:

  • Agreeing with the interviewee on objectives and duration at the start of the interview.
  • Establishing an atmosphere of trust by offering anonymity.
  • Starting with mundane topics (ex.: confirming the contact’s title) and progressing toward more sensitive issues (ex.: prices).
  • Going from general to specific topics.
  • At the end, asking for global assessments of the company and its products.

Make the Interview Dynamic

Active listening is a good way to get someone to speak more and to ensure that what has been said is well understood. Using open questions (ex.: “How would you qualify the technical knowledge of the customer support staff?”) is preferable to closed questions that are answered by yes or no (ex.: “Is the customer support staff qualified?”).

Lighten the atmosphere by offering tidbits of information, for example by sharing experiences or by giving information previously obtained (“While speaking to other customers, I heard that… Would you agree?”). This transforms the call from a one-way questioning session into a two-way discussion. Obviously, an interviewer with some knowledge of the industry can better get into bilateral exchanges, especially for technology products.

It is important to keep a polite and respectful tone. Appreciate the fact that interviewees are without pay and may be very busy. Thanking people with a small gift after the interview is a mark of appreciation and can help strengthen the future relations with a customer, but first make sure not to breach company policies. 

Analyze the Results

The interview logbook that I use regroups in a table the highlights of the interviews. The table, which spreads over several pages, presents the salient pieces of information gleaned of the interviews organized in columns according to the structure of the original interview guide. At a glance, it is then possible to do cross references on the main topics. The interview logbook is a convenient analysis tool that supports results presentation while permitting to drill down quickly to specific points and to compare what customers have said. For example, it becomes easy to see if end-user perceptions are the same as those of distributors. It is just as revealing to make comparisons between what people from different functional groups have said. 

The analysis can point at possible corrective actions and opportunities. It may also support revised sales forecast. A customer’s marketing staff does not see the same benefits as the end users? There could be an opportunity to better communicate features and functions, or perhaps to review product packaging. Are the dealers waiting for the next version of the product before promoting of it? It could be worth to pay close attention to the product development schedule. Do distributors, fearing technical problems, only want to introduce a new product gradually? Maybe the sales forecast should be pushed back one quarter. Obviously, an investor may judge the situation too uncertain and decide against proceeding.

Plan Enough Time

For a typical half-hour phone interview, an experienced person will have to prepare by making an appointment and reading information. One or two hours are required to write down notes and fill in the interview logbook for each interview. You should plan for at least 3 hours of sustained work for each interview. 

To this, add the preliminary work for selecting interviewees and adapting the interview guide. This can evidently take longer if the interviewer cannot rely on prior work. Analysis and presentation of the results can be formatted in a slide show or a formal report. Analysis and presentation can also be integrated to a global due diligence report. Regardless of the format, count on a minimum of one day of preparation and 2 or 3 days of analysis and writing for a 10-interview program. For a complete and professional result by an experienced interviewer, budget about 8 days of sustained work for a 10-interview program. The work will have to take place over 2 or 3 weeks assuming normal delays for reaching interviewees. 

To this point, one can appreciate why interviews are often outsourced to a third party. Some customers could be unwilling to speak directly to a supplier’s investor. Besides, experience shows that close to half of people interviewed ask for some anonymity – they are more willing to speak to a seemingly neutral party. Furthermore, a report prepared by an external firm will have greater weight when presented to other investors involved in a transaction. 

Closing Words

Making good interviews is an art that takes some practice. To take advantage of the experience, stop a moment, think about what could have been done better, and update the interview guides. The interview skills will also improve over time.

How Bill 34 Will Affect Vendors Selling to Hydro-Québec

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The Government of Québec has tabled Bill 34[1]that simplify the rate-setting process for Hydro-Québec Distribution.[2]Essentially, most distribution rates are frozen for 2020, and then adjusted for inflation until 2025, when a rate review would occur. Additionally, the bill requires Hydro-Québec to reimburse to customers of some $500 million before 1 April 2020.[3]It should be noted that Hydro-Québec currently has the lowest residential rates in North America.[4]

This Bill is a significant change from the traditional rate base rate-of-return regulation that previously subjected Hydro-Québec to yearly rate filing. Based on my personal marketing experience in the electricity industry, this post outlines my views of how Bill 34 may change some of Hydro-Québec business drivers when dealing with its vendors, presumably leading Hydro-Québec to faster decision-making in purchasing, smarter assessment of costs, and a greater appetite for innovative solutions.

Before: Traditional Rate Base Rate-of-Return Regulation

The electricity distribution business is a natural monopoly. This means that it is in the interest of society to have just one distribution utility in a given territory. It is easy to understand the rationale: you would not want to have multiple sets of poles along roads; one set is more than enough. However, left to itself, a distribution utility with a monopoly could charge unreasonable rates for use of its bottleneck facility.[5]

In most of Canada and the United States, electric utilities are regulated using a traditional rate base rate-of-return regulation regime. Under this regime, the sum of all regulated costs – essentially operating expenses, depreciation on assets (resulting from past capital expenditures), interests on debt, taxes, as well as an allowed shareholder returns on investments (i.e. a reasonable profit) – are recovered from customers. This is called revenue requirement or required revenues. Required revenues are allocated across the customer base in a variety of ways, primarily on the basis of the energy distributed (cents per kilowatt-hour, ¢/kWh), as well as peak load (dollars per kilowatt, $/kW) for some commercial and industrial customers. In practice, different classes of customers get different rates, but revenues projected during a regulatory rate case have to be equal to revenue requirements. If there is a significant variance between the projected revenues and the actual revenues in a year, adjustments are normally made in subsequent years.[6]

Obviously, regulated utilities are not allowed to spend anyway they want: they have to prove to their provincial regulator – the Régie de l’énergie in Québec, the Alberta Energy Board, the Ontario Energy Board, etc. – that their costs (both operating expenses and capital expenditures) are necessary and prudent. These arguments are aired during public rate cases – yearly in the case of Hydro-Québec, up to now – during which various interveners, typically representing customer groups, submits reports and ask questions. The process can be slow, adversarial and excruciating as all details of operations are looked at and need to be justified – the regulator often does not trust the utility and even activities and investments that a utility may present as essential may not be approved. 

Rate-of-return regulation of utility monopolies has served relatively well as a market substitute for a century, but it has its drawbacks. I’ll retain three issues for discussion here: slow innovation, poor service quality, and uneconomic decisions.

Innovation tends to be among the casualties of rate-of-return regulations: the slow regulatory cycle, the public scrutiny and the second-guessing by interveners makes utilities extremely risk-averse and slow to integrate new technologies. For example, as part of rate cases, utilities sometimes specify models of power equipment, which become the standard products used in the network. Because another complex homologation process would get in the way, product selection may not be revised for many years, even decades, often until the vendor cease production. However, over time, utilities often end up customizing those products, based on experience or new needs, rather than seeking newer products. 

Rate-of-return regulation is an economic form of regulation that does not properly account for service quality. It is difficult to integrate service quality metrics in this regulatory framework and offering varying levels of service quality depending on willingness to pay is not practical. Not surprisingly, electric utilities tend to have negative Net Promoter Scores (NPS), a loyalty measure, with generally far more detractors than promoters among customers.[7]

Since their revenues are practically known in advance following rate setting, regulated utilities look at their business upside-down in comparison to companies operating in a competitive, free market:

  • Shareholders earn a return on all utility assets – the more, the better. New investments mean a larger asset base, on which the shareholders are allowed to claim a return, meaning that net income will also be higher. There is a strong incentive for utilities to buy more equipment or to gold-plate it, although interveners may oppose, and regulators may not agree. 
  • Regulated utilities effectively pass operating expenses to their customers. Indeed, lowering (or increasing) operating expenses simply lowers (or increases) required revenues, but net income remains unaffected. Yet, the regulatory process tends to compress controllable operating expenses (like customer service or maintenance) in expectation of raising efficiency by the utility. Utilities may actually go along, shareholders preferring to compress operating expenses than investments in assets. 

For vendors, traditional rate base rate-of-return regulations mean that making normal sales arguments often does not make sense in a utility world: 

What vendors may sayWhat utility people may think
“You would be the first in the industry to implement this new technology.”“…And go through hell trying to get it approved.”
“You’ll save on capital expenditures with this new equipment.”“Why would we do this? Shareholders want to justify more capital expenditures, not less.”
“You’ll be making more profit by adopting my cost-saving solution.”“No, we’ll have to pass on the savings to customers at the next rate case and not make more profit.”

Surprisingly, it seems that few vendors understand this traditional utility buying logic, although it is very much the normal case across Canada and the United States. However, Bill 34 is changing all this in Québec.

What Is Bill 34 Changing?

Bill 34 freezes most distribution rates for 2020, followed by yearly adjustments for inflation until 2025, when a rate review would occur. Therefore, Hydro-Québec would no longer have to file rate applications, with detailed costs justifications, every year. Under the Bill, Hydro-Québec is not required to obtain authorization for its infrastructure investment projects and changes to the electricity distribution network. Similarly, commercial programs do not need approval. In contrast to traditional regulation, Bill 34 effectively disconnects costs and revenues for 5 years and should introduce more common business decision-making. 

Bill 34 also stops the Régie efforts to move to a Performance-Based Regulation (PBR). PBR is increasingly popular to regulate utilities[8]. In Canada, Alberta has adopted PBR.[9]Another good example is Great Britain, with its RIIO (Revenue = Incentives + Innovation + Outputs) framework.[10]PBR generally aims to balance multiple variables, such as quality of service and costs, while freeing utilities to innovate. Without presuming of the rationale behind Bill 34, it may be that the very low costs of electricity in Québec in comparison to the jurisdictions where PBR was implemented, as well as Hydro-Québec’s renewable generation fleet, present a simpler approach toward the same objectives. 

After: Faster, Risk-Taking and Innovative?

Hydro-Québec remains a natural monopoly, without direct competitive pressure. However, with Bill 34, decision-making should become much closer to that of “ordinary” commercial business, with a new-found flexibility and a greater drive toward efficiency and business innovations. Hydro-Québec will be incentivized to reduce costs to increase net income, as revenues will be stable (after inflation). In particular, the new framework removes the bias toward capital expenditures and rewards a smarter control of operating expenses. For instance, with greater flexibility, Hydro-Québec might increase maintenance and extend life of some power equipment at the same time that it might replace other assets with advanced systems – all in the name of efficiency.

All this may change how Hydro-Québec will interact with equipment and service vendors, although any change to purchasing decision-making will undoubtedly depend on management decisions and may be slowed by the natural inertia of the company. 

Nevertheless, Hydro-Québec may become more open to acquire new products and services from new vendors, with a corresponding risk for established vendors. High-end or customized (and therefore more expensive) products from established vendors may be especially at risk of substitution by less expensive or industry-standard ones. In some cases, the number of vendors supplying a type of product dwindled to just one over the years; it now may be that Hydro-Québec will seek to split contracts with a competitor to try to bring down costs on commodity products. On the other end, like common in other industries, Hydro-Québec may also seek broad strategic partnerships for more complex products, with favorable contract terms for Hydro-Québec in exchange for a vendor exclusivity in some product categories. 

With the greater flexibility brought by Bill 34, Hydro-Québec may also become more inclined to try out innovative products or systems in its distribution network, and we could see faster decisions to deploy those innovations. This might come at an opportune time, as other utilities introduced new grid technologies in order to support distributed generation (especially solar) at a very large scale[11]; Hydro-Québec could learn from the vendors involved in these deployments.

Similarly, Bill 34 might enable Hydro-Québec to accelerate the launch of new products or services to its customers, possibly in collaboration with external vendors. Hydro-Québec has been innovative in researching new uses for electricity and energy efficiency system, going as far as building houses to test smart home technologies.[12]Hydro-Québec publicly expressed interest in how smart home, solar generation, energy storage and microgrids could impact its network.[13]Other utilities have already introduced services and products to their customers around these concepts, like BC Hydro (CaSA smart thermostats)[14], Green Mountain Power (Tesla batteries and FLO smart electric vehicle chargers)[15], Hydro Ottawa (Google smart assistant),[16]and many more; it would not be surprising to see Hydro-Québec following suit. 

What May Not Change

While Bill 34 will change many things, some important practices should remain. For example, Hydro-Québec is extremely serious about cybersecurity[17]; vendors should still expect to have to meet stringent cybersecurity requirements, for good reasons. As a Québec crown corporation, Hydro-Québec also remains subjected to normal government buying policies, like requiring bids beyond certain amounts and strict rules when dealing with vendors[18]– this too will remain. 

Contrary to performance-based regulatory regimes like RIIO in Great Britain (see above), Bill 34 does not provide explicit incentives to improve the reliability of the electricity service. While this is not a change from the current regulatory regime, it should be noted that the reliability of Hydro-Québec electricity services has been degrading over the last years.[19]However, repairing the network after an outage does cost money, and some vendors could highlight how their solution prevent outages or reduce the cost of repairs. Furthermore, Hydro-Québec management could conclude that maintaining sufficient reliability is essential to avoid a decision to return to traditional regulation in 2025. 

Also, Bill 34 specifically maintains Hydro-Québec’s obligation to file an annual report. Those reports include a wealth of information on the organization, the performance and the financial situation of Hydro-Québec.[20]

Finally, utilities, including Hydro-Québec, publish public performance indicators.[21]Usually, those indicators are also used in management incentive plans. Showing the impact of a solution on performance indicators will remain a sound sales tactics when selling to utilities. 

Closing Words

Once Québec’s national assembly adopts Bill 34, probably in the Fall, it will certainly become an experiment that will be carefully watched by Canadian regulators. Leveraging the low costs of renewable electricity in Québec, it may encourage greater efficiency and business performance by Hydro-Québec, without the complexity of a performance-based regulatory regimes. 

For vendors, the Bill may also fundamentally change how Hydro-Québec should be approached, with potentially a much greater attention to total costs and partnerships than before. 

Do not hesitate to contact me to discuss further. 

Benoit Marcoux, benoit@marcoux.ca, +1 514-953-7469.

[1]               See “An Act to simplify the process for establishing electricity distribution rates”,  http://www.assnat.qc.ca/en/travaux-parlementaires/assemblee-nationale/42-1/journal-debats/20190612so/projet-loi-presentes.html, accessed 20190614.

[2]               Bill 34 only affects the distribution division of Hydro-Québec. The transmission (TransÉnergie) and generation (Production) divisions are not affected. 

[3]               See http://news.hydroquebec.com/en/press-releases/1510/electricity-rates-adoption-of-a-simplified-approach-that-will-guarantee-low-rates/, accessed 20190620. 

[4]               See http://www.hydroquebec.com/residential/customer-space/rates/comparison-electricity-prices.html, accessed 20190615.

[5]               Note that the natural monopoly does not extend to energy retail and generation. In many jurisdictions, notably in most of Alberta, Texas and Europe, there are many energy retailers buying electricity from generators and offering various plans to customers. However, this energy is supplied through electricity distributors that have the poles and conductors up to customers’ homes. In Canada, provinces other than Alberta and Ontario have only vertically integrated distributors and retailers, i.e., the distributor is also the only retailer of electricity. 

[6]               To some extent, Bill 34 is the result of lack of adjustments from over-earning in previous years, as the provincial government, owners of Hydro-Québec, kept these surpluses. This resulted in a delicate political situation, as many people saw this as a disguised tax.

[7]               See CEA Opinion Research, 2014 National Public Attitudes for NPS of Canadian utilities, and https://en.m.wikipedia.org/wiki/Net_Promoter, accessed 20190615, for an overview of the concept. 

[8]               See http://go.woodmac.com/webmail/131501/471713673/8ec22b38df7f81ef4f8278af14095e1bb711214dffd0ee90dc9a250ab8bb5970, accessed 20290619, for an overview of PBR adoption in the United States.

[9]               See http://www.auc.ab.ca/pages/distribution-rates.aspx, accessed 20190615.

[10]             See https://www.ofgem.gov.uk/network-regulation-riio-model, accessed 20190615.

[11]             For example, there are 840,878 residential solar projects in California (https://www.californiadgstats.ca.gov/charts/, accessed 20190617) but only about 700 in Québec (see https://www.lapresse.ca/affaires/economie/energie-et-ressources/201903/22/01-5219334-mini-boom-de-production-denergie-solaire-au-quebec.php, in French, accessed 20190617). Integrating a large number of distributed generators in a distribution network is challenging, and utilities in some other jurisdictions had to innovate to make it work.

[12]             See https://ici.radio-canada.ca/nouvelle/1016006/hydro-quebec-maisons-futur-shawinigan-energie-solaire-thermostats(in French), accessed 20190617.

[13]             See http://plus.lapresse.ca/screens/f2ad982b-9fda-469f-a3f2-86116ab0a46a__7C___0.html(in French), accessed 20190617.

[14]             See https://www.bchydro.com/powersmart/energy-management-trials/casa-thermostat-trial.html, accessed 20190617. 

[15]             See https://greenmountainpower.com/products-all/, accessed 20190617.

[16]             See https://hydroottawa.com/save-energy/innovation/smart-audio, accessed 20190617. 

[17]             For example, Hydro-Québec is funding an industrial research chair in smart grid security at Concordia University – see  http://www.nserc-crsng.gc.ca/Chairholders-TitulairesDeChaire/Chairholder-Titulaire_eng.asp?pid=981, accessed 20190617.

[18]             See https://www.hydroquebec.com/suppliers/becoming-supplier/safe-ethical-and-responsible-procurement.html, accessed 20190618.

[19]             The average number of minutes of outages per Hydro-Québec customer, excluding major events like storms, has been steadily increasing, from 126 minutes in 2013 to 181 in 2018. See http://www.regie-energie.qc.ca/audiences/RappHQD2013/HQD-09-02-Indicateursdeperformance.pdfand http://publicsde.regie-energie.qc.ca/projets/501/DocPrj/R-9001-2018-B-0060-RapAnnuel-Piece-2019_04_18.pdf, respectively for 2013 and 2018, in French, accessed 20190617. 

[20]             See http://www.regie-energie.qc.ca/audiences/RapportsAnnuels_DistribTransp.html, accessed 20190615, for past annual reports in French.  

[21]             See http://publicsde.regie-energie.qc.ca/projets/501/DocPrj/R-9001-2018-B-0060-RapAnnuel-Piece-2019_04_18.pdffor Hydro-Québec’s 2018 performance indicators, in French, accessed 20190618. 

Digital Utility of the Future Conference

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Last month, I chaired the Digital Utility of the Future Conference in Toronto (http://ikonnect.world/DigitalUtilitiesoftheFuture2/). Based on feedback from many participants, the event was a clear success and I am looking forward to the 2020 edition. Having mostly been out of the country on business since then, I would now like to share some reflections on the event.

First, the multiple presentations highlighted the extent to which digital technologies now permeate the utility world. The energy transition adds tremendous sophistication to the electricity distribution network, relies on renewed engagement by customers, and brings many new regulatory and environmental constraints. As the transformation of other industries have shown, such complexity can only be dealt with through better management of corporate resources, especially information.

Second, adapting to the energy transition and leveraging information a big task. The rule book is still being written. Many innovations were presented. In a few years, we will look back at some of these ideas and admire the foresight of their promoters; other ideas will be dead ends. However, it is clear now that the future of the utility industry will depend on innovations to a much greater extent than was the case a few years ago.  

Third, participants were a mix of utility and vendor representatives, with many presentations being made by representative from both. I think that the best combination. Utilities know their business but may be insulated behind a regulatory wall. Vendors see multiple clients, inside and outside the energy industry, but may not understand all the subtilities of a regulated business. Having both can get sparks flying (in a good way). 

Finally, I would like to thank all participants, sponsors and presenters. I think that we all had a great time debating what the digital future of utilities may look like.

“The Shocking Business of Electricity”: A Short Lecture to McGill Business Students

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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.

Mcgill University 20190227

A Trojan Horse: Time-Varying Rates

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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.

A Perspective on Canada’s Electricity Industry in 2030

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I wrote this piece with my friend Denis Chartrand as a companion document for my CEA presentation back in February 2018 (See https://benoit.marcoux.ca/blog/cea-tigers-den-workshop/) but I now realize that I never published it. So, here it is!

Canada Electricity Industry 2030 20180221

Barbarians at the Gate (or: How to Stop Worrying and Love Your Customers)

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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!

SGC20180912 BMarcoux

Customers of Electric Utilities Are Redefining Quality

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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

Duration Residential Commercial Industrial Weighted Average
30 Minutes

 

 $3.02 $992 $3,641 $92.77
Momentary
(% vs. 30-Min.)		 $2.71 (90%) $757 (76%) $2,354(65%) $69.12(75%)
Customer mix 92.2% 7.3% 0.5% 100%

The table is interesting for two reasons:

  • On average, the costs to customers of a momentary interruption is 75% that of the cost of a 30-minute interruption, but up to 90% for residential customers. The very small difference in cost between a momentary outage and a 30-minute outage explains why outage frequency is a higher concern than length of outages for residential customers.[iii]Due to the prevalence of the fuse saving protection strategy on electrical distribution feeders in Canada,[iv]there are far more momentary service interruptions than sustained ones – momentary interruptions therefore become the primary concern of customers.
  • The bulk of the economic cost of service interruptions is borne by commercial and industrial customers. While residential customers are far more numerous, the cost per interruption is low. However, residential customers can be more vocal in their complaints in social and traditional media.

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.

Lower and Lower Energy Prices from Wind and Solar PV

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Reduction in installed costs and operation costs (per kW or MW – see https://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:

  • “[Without] incentives, early in the next decade wind is going to be a 2 to 2.5 cent per [kWh] product.”
  • “By early in the next decade, as further cost declines are realized, and module efficiencies continue to improve, we expect that without incentives solar pricing will be 3 to 4 cents per [kWh], below the variable costs required to operate an existing coal or nuclear generating facility of 3.5 to 5 cents per [kWh].”[iii]

This executive is saying that generating energy from wind and solar PV will cost less than just burning fuel in existing plants.

Even in Canada?

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
Phoenix, AZ 219,000 100%
Kansas City, MO 173,000 79%
New York, NY 153,000 70%
Lethbridge, AB 189,000 86%
Calgary, AB 182,000 83%
Montréal, QC 146,000 67%
Toronto, ON 144,000 66%
Halifax, NS 145,000 66%
Vancouver, BC 135,000 62%

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:

  • Geographically, the onshore wind resources are better at higher latitudes, while the solar resources are better in Southern Canada.[viii]
  • In Southern Canada, Alberta and Saskatchewan offer the best onshore wind and solar resources.
  • Offshore wind is available on the Pacific Coast (British Columbia), on the Atlantic Coast (Maritimes provinces and NF&L), on the Great Lakes (Ontario) and Lake Winnipeg (Manitoba).
  • Hydroelectric potential is greatest in Québec and Manitoba.
  • Across Canada, wind resources are, on average, better in the winter, while the solar resources are better in the summer. There is also some hourly complementarity between wind and solar potential.[ix]

References:

[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.

[iii]     http://www.investor.nexteraenergypartners.com/phoenix.zhtml?c=253465&p=earningsRelease, accessed 20180130.

[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.

[vi]      http://pvwatts.nrel.gov/index.php, accessed 20180129, and author’s calculations.

[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.

[viii]    See the The Atlas of Canada – Clean Energy Resources and Projects (CERP), http://atlas.gc.ca/cerp-rpep/en/, accessed 20180129, for the wind and solar energy resource potential in Canada.

[ix]      Energy Watch Group, Global Energy System Based on 100% Renewable Energy – Power Sector: Canada, Lappeenranta University of Technology, 2017, p. 5.

The Costs of Wind and Solar PV Systems Are Down – Way Down

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Summary:

Insight  1
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.

Insight  2
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.

Insight  3
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.

Insight  4
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

Performance improvements

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]

  • Half of them since 2010.
  • 55% were for solar energy and 20% for wind energy. Hydropower, a mainstay of Canadian Utilities, accounted for just 6% of patents.
  • Greater China (including Hong Kong and Taipei) accounted for almost a third of patents, well ahead of second-place United States at 18%. Canada has less than 1.5% of those patents.

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]

Supply chain efficiency gains

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]

Business innovations

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.

[i]        http://www.forbes.com/sites/williampentland/2017/01/18/wyoming-considers-de-facto-prohibition-on-solar-and-wind-energy/, accessed 20180118.

[ii]       https://www.bloomberg.com/news/articles/2018-01-08/perry-plan-to-help-coal-nuclear-plants-rejected-by-regulators, accessed 20180118.

[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.

[ix]       http://www.mhivestasoffshore.com/worlds-most-powerful-available-wind-turbine-gets-major-power-boost/, accessed 20180121.

[x]        https://www.reuters.com/article/us-ge-windpower-france/ge-to-develop-worlds-largest-wind-turbine-in-france-idUSKCN1GD5GW, accessed 20180310.

[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.

[xvii]    http://www.investor.nexteraenergypartners.com/phoenix.zhtml?c=253465&p=earningsRelease, accessed 20180130.

[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.

[xxii]    http://news.energysage.com/best-solar-panel-manufacturers-usa/, accessed ???.

[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.

[xxviii] https://www.bloomberg.com/news/articles/2018-01-12/buffett-s-squeezing-more-power-out-of-wind-with-this-software, accessed 20180120.

Wind and Solar PV Are Becoming a Chinese Story

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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.

[vi]       https://www.reuters.com/article/us-china-power-shenhua-guodian-factbox/factbox-shenhua-and-guodian-chinas-latest-state-marriage-idUSKCN1B918I, accessed 20180118.

[vii]      https://about.bnef.com/blog/vestas-reclaims-top-spot-annual-ranking-wind-turbine-makers/, accessed 20180118.

CEA Tigers’ Den Workshop

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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.

Coal, Crude Oil and Natural Gas Are Really Forms of Sun Energy

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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.

 

Wind and Solar PV Defied Expectations

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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:

  • In the USA, the solar industry met the 2020 utility-scale solar cost target set by the Energy Department’s SunShot Initiative – in 2017.[vi]
  • The French Environment and Energy Management Agency estimated in 2015 that the cost of utility-scale solar would reach €6c per kWh only in 2050.[vii] Solar PV costs are already well below this.
  • Canada’s National Energy Board published a report entitled “Canada’s Energy Future 2017”. This report has a figure showing historical solar, wind and biomass renewable capacity and NEB’s own forecasts. Actual growth up to 2016 is exponential, while the projection to 2040 is linear at a sharply lower initial rate, with a distinct kink in the trend.[viii] Somehow, I am doubtful that this NEB forecast will ever happen.

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.

Utilities Should Really Show Customers What They Do

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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]

Insight:
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]

  • Multiple robocalls to ~3.4 million customers in advance of the storm.
  • Embedded reporters provided with open access to restoration effort.
  • Multiple press conferences (daily) at the FPL command center, in the field and at county EOC’s leveraged new satellite technology.
  • Use of Twitter, geo-targeted paid social media and Facebook Live highlighted challenges in hardest-hit areas reaching millions of customers.
  • Print, radio, TV and billboard advertising prior to, during and after the storm.
  • Daily email updates to employees.
  • Customer service kiosks in hardest hit areas.
  • Thank you letters to stakeholders after the storm.

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.

[ii]        See https://patch.com/florida/bradenton/fpl-announces-new-storm-hardening-plan-including-major-investments-enhance-electric-system-serving, retrieved 20171230.

[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.

Virtuous Cycle of Sun and Wind Power

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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.