Orderly destruction of the utility industry status quo
The North American utility industry is under extreme pressure to re-imagine how the industry will operate in the future.
The utility industry is;
- facing increasingly difficult carbon emission standards,
- besieged by competition from distributed energy systems such as wind & solar power that are slowly reaching grid parity pricing,
- watching revenues slowly disappear as consumers take to heart the energy conservation mantra, and;
- under financial duress as it contemplates the need to infuse the entire North American grid with more than $2 trillion of investment by 2030 just to maintain the status quo
The industry is facing a sea of change. This begs the question of industry feasibility using the “same-old-tried-and-true” utility formula and follows with questions on what the future will look like, and; how utilities can capitalize on these changes or even if the utility industry can remain relevant.
Much is being made of micro-grids, power storage devices and a host of alternatives meant to cure the ills of an industry in transition but while futurists are predicting a new enlightened and dispersed industry, the fact remains that at this point there is no one magic-off-the-shelf formula or technology that will answer the bell and solve the riddle.
There are though interim technologies and steps which can mitigate the coming upheaval and buy the industry what it needs the most of. Time!
Syncarb Energy (www.syncarb.com) has developed a business model that can afford the industry their most needed commodity while continuing to generate the strong revenues needed to help rebuild it in a manner more fitting to the new realities. The Syncarb business model is not only able to capitalize on the erratic and highly variable nature of electrical consumption in deregulated markets such as Alberta, Canada and Texas, USA, the basic premise is ready for a roll out to the more mundane yet highly lucrative regulated markets in most of the remaining jurisdictions in North America.
Successful implementation of the Syncarb merchant power model in Alberta can be propagated to all other areas of the North American grid and will become the catalyst for “an orderly destruction of the utility industry status quo”.
Profitability in this venture arises from a combination of maintaining close watch on capital costs and permitting times through the innovative and already approved use of asynchronous (induction) rather than synchronous generation in conjunction to a constant vigil on operating equipment via dedicated IP addresses and remote monitoring.
With the luxury of time on their side, the utility industry will be able to make a concerted stand as it continues to guide the North American economy to its next financial awakening just as it has successfully done in the past.
In 1859 Charles Darwin penned his famous publication “On The Origin of Species” which explained the concept of natural selection in a way that led to an increased understanding and wider acceptance of Darwinian evolution. The basic premise of his hypothesis being that natural selection would allow favourable variations to prevail as others perished.
As we view our modern day electrical generation and transmission/distribution system there is a striking similarity to the evolutionary changes in nature identified by Darwin more than 150 years ago. The growth and success of our electrical infrastructure network has been achieved through a series of “events and inventions. In other words; it has evolved. The result of this evolution has been an acceleration of personal wealth as well as an increase to our nation’s long term growth and prosperity.
We now stand on the threshold of a much less understood phenomenon, namely; the de-evolution of our electricity infrastructure network. We are migrating back in time to one where the generation and distribution of power is controlled at a regional or local level. The gold standard hub and spoke style infrastructure we are now accustomed to will inevitably and inexorably begin to adjust, morph, downsize and may eventually collapse.
In a note to clients, investment bank UBS recently stated that “Large-scale power generation, will be the dinosaur of the future energy system: Too big, too inflexible, not even relevant for backup power in the long run,” UBS goes on to write that “centralized fossil fuel generation will become “extinct” – and it will happen a lot sooner than most people realize”.
UBS goes on to predict that “most large scale centralized plants could be gone within a decade. “Not all of them will have disappeared by 2025, but we would be bold enough to say that most of those plants retiring in the future will not be replaced.” And; “The closer utilities are to the electricity user (both residential and commercial/industrial), the better they should fare in a decentralized electricity system,” the analysts write.
There are numerous reasons for this devolution;
- More stringent emissions standards
- Increasing emphasis on consumer energy efficiency
- Pressure from various new sources of energy generation such as solar and wind or from energy storage devices
- Increasingly expensive new plant capital costs
- Antiquated transmission & distribution systems requiring trillions of dollars for repairs and upgrades
Policy changes related to power plant emissions were recently announced to great fanfare in the US & Canada. These changes put increasing pressure on management teams and investors to make hard economic decisions on their ability to weather the financial burden of upgrades to those power plants (especially coal) that are nearing end of life and to make them compliant with these more stringent regulations.
This then begs the question. Should a new plant be built to replace the old and continue with the same tried and true utility industry business-as-usual practice? How do we meet continuing skyrocketing demand for electricity to power all the newest electronic gadgetry that modern civilization craves? How do we meld older and proven technologies and processes with the new versions of power generation and the newer economic realities they encompass? Is there a better way of transitioning?
As new plants replace these soon-to-be-shuttered emissions dinosaurs and as other newly built centralized plants come on line to feed the insatiable growth in electricity demand, the multi-billion dollar capital costs for these state-of-the-art plants are measured in 2015 dollars against a backdrop of emerging technologies nearing grid parity. No longer will power be generated with multi-MW plants first commissioned using the cheaper cost of 1960, 1970 or 1980 money. These generators will include the very best of the newest technologies to comply with all of the regulatory and emission standards enacted by government but with inflated dollars.
The 2011 report “Failure to ACT, The Economic Impact of Current Investment Trends in Electricity Infrastructure” published by The American Society of Civil Engineers states that costs to households and businesses associated with service interruptions will show a GDP drop of $496 billion by 2020 and will cost the US economy an average of 592,000 fewer jobs than it otherwise would have by 2020 if the necessary infrastructure investment does not occur.
The inevitable result will be an increase to the cost of electricity to pay for the real world cost of these plants. The consumer must pay!
But; constructing a whole new fleet of generators to meet consumer demand also means that we are continuing to pour electricity into a leaking, antiquated and creaking electricity infrastructure of wires, poles, transformers, circuit breakers and substations largely based on 1950’s era technologies that also require a massive infusion of capital simply to retain the status quo. Never mind the fact that the entire system needs a technology reset to future-proof the grid. As an example; the U.S. Department of Energy has estimated that 70% of distribution lines and transformers are older than 25 years and 60% of the circuit breakers are more than 30 years old.
A recent report by the U.S. FERC (Federal Energy Regulatory Commission) found that disabling just 9 substations out of the roughly 70,000 substations in the US would leave much of the country without power for weeks and perhaps months.
Once again, the inevitable result of this massive and costly infrastructure retrofit will mean that, “the consumer must pay”!
At what point will the consumer cast about for alternative sources of electricity and at what point will these alternatives become economically viable? What will be the tipping point?
Enter from stage left; solar, wind, fuel cell and electrical storage devices as well as a raft of energy efficient technologies requiring less electrical energy for homes and businesses than their predecessors. Showing all the colour and vibrancy of a real game changer; these technologies stand to disrupt the entire electricity utility industry as we know it.
But; the resulting movement away from centralized power production with grid tied distribution and transmission systems to one where independently owned and operated distributed energy generation located at or very near the consumer, operating either in sync with or independent of the larger grid cannot be easily achieved using the existing conventional utility formula.
Solar, wind & fuel cells may be disruptive technologies but an integrated transitioning technology which combines the best of conventional fossil fueled generation and that also has many of the same characteristics of the highly touted renewable energy sources will be needed to fill this gap. Without implementation of this bridge technology, the movement to truly distributed systems will simply add another layer of complexity to an already multi-layered network and with it a far more serious and potentially debilitating system collapse.
De-evolution of the utility industry is inevitable. The major questions though remain.
“Will this be an orderly destruction of the utility industry status quo, or; will the transition be one of mass chaos and confusion as regulatory authorities, three levels of government, investors, utilities, consumer advocates, lobbyists, equipment manufacturers, non-renewable energy providers and the myriad other groups now impacted by or benefitting from the conventional big-is-better utility industry weigh in on the process to create even more issues?”
The logical solution lies in use of a transitioning technology that supports the existing infrastructure while concurrently offering an alternative to the more sporadic and fickle renewable energy systems making their way into consumer hands!
What is the utility industry?
The electric utility industry is viewed by most consumers as a faceless monolithic entity that supplies electricity. I turn on the switch or motor and it works.
The U.S. electrical utility industry is presently comprised of 3,200 companies that sell $400 billion dollars’ of electricity/year over 4.4 million km’s of power lines. In Canada, 822 power plants generate $59 billion/year of electricity for Canadian consumption.
There is no Silver Bullet
A recent Edison Electric Institute (EEI) report came to the conclusion that the electric utility industry is facing many of the same factors that the communication industry faced with deregulation in the 70’s. Many of these carriers are no longer in business and those that remain were forced into a completely new direction. Other examples of this same directional change include airlines and the postal service. In all instances the forces of change were outside of their control and they had to adapt or suffer the consequences.
As electricity consumers tag onto the new sources of energy generation available to them and drain revenue away from the established utility players through reduced electricity purchases, the grid acts more and more like a back-up plan or perhaps a battery. Consumers are drawing from the grid when their own system is unable to generate power or they are exporting power when output exceeds requirements. The major utility is then tasked with trying to maintain and service their generators, wires, circuits and substations with the same diligence as previously when consumers were obligated to buy their power, but; are now forced to do so with reduced revenues.
Consider the difficulty in maintaining North America’s power infrastructure against the backdrop of antiquated systems now in place. Reduced revenues are occurring at the same point as significantly higher costs needed to upgrade the utility backbone of transmission and distribution systems.
The Brattle Group’s report “Transforming America’s Power Industry” pegs the infrastructure investment required to maintain the status quo in the U.S. as being $1.5 to $2 trillion by 2030.
In Canada; The Canadian Electrical Association estimates their investment at $347 billion by 2030.
A further squeeze on revenue generation for the utilities arises from increased electricity consumption on already congested transmission and distribution lines. This means greater power loss through lessened efficiencies. Harris Williams & Co., states that “transmission and distribution system losses increased from approximately 5% in 1970 to 9.5% in 2001 due to heavier utilization and congestion”. The increase in line losses is roughly equivalent to the electrical energy needed to power 13% of all households in the U.S.
The inevitable conclusion to all of these disparate pressures on existing utility infrastructure is that a paradigm shift to the process of powering up North American society is already underway.
Unfortunately; there is no silver bullet that will repair or reinvigorate our existing electrical energy business model. There is no one single technology, regulatory change or simple fix. De-evolution will occur. The primary question is “how can essential networks with an estimated asset value of more than $800 billion devolve to one where power has been democratised to a greater extent than ever before without cratering the entire system?”
The future utility industry will in all likelihood be comprised of not only those companies identified earlier but can potentially include all 130 million households and 5 million commercial buildings in North America with an ability to generate some or all of their own electricity.
Financial and regulatory decisions made today will impact the electricity grid for the next 40 years before another full reset can occur.
A Transitional Solution
There is a technology gulf that must be bridged. It lies between the present state of the industry and the anticipated distributed energy economy envisioned by futurists. Solar panels and other renewable type technologies, new carbon emissions standards, increasingly frequent instances of NIMBYism, an antiquated T & D (transmission & distribution) system requiring trillions of investment dollars, market uncertainty and investor risk mitigation as well as numerous other issues face the electricity industry. What the utility industry desperately needs is the luxury of time to “devolve” to reflect the newly changed market realities.
Distributed generation is that answer.
A simple Google search for distributed generation quickly reveals that more than 14 million pages can be viewed with this title. Upon closer inspection, the vast majority deal with power generation sizing of from 1 to 50 kW’s including solar, wind and small natural gas generators for “self” and in many cases “remote” generation.
Those pages that identify larger installations often concentrate on 25, 50 or greater MW units and in many cases speak to co-generation where excess thermal energy is consumed by buildings and industry for space conditioning or as a supplement to required process heat. Missing in the band of solutions are those purely merchant based generation systems from 2.5 to 10 MW in capacity that are grid-connected and designed to operate within and to support the existing grid structure while supplementing the ebb and flow of consumer demand from the grid.
What are the mechanics of the ideal grid-connected distributed generation units contributing to this orderly and controlled devolution?
v Units must be located on and be able to export power to distribution (not transmission) lines; while concurrently being located on or near natural gas lines with sufficient capacity for full operation. This is the first step in controlling full scale devolution.
- When called on, units must be able to spool up to full capacity within 3 – 5 minutes via remote management systems. This lends a level of sophistication and nuance not available to more conventional generation or larger facilities.
- In order that dispatched power is profitably exported, capital costs must be contained to a simple payback period of less than 7 years. Investment typically spent on massive support of transmission lines and generator improvements can be offset with an immediate return on investment through financing the support of this form of distributed generation
- Maintenance and equipment repair is flexible and fluid with an ability to access tradesmen from already existing and qualified industry veterans accustomed to working with heavy equipment.
- Distributed generation is installed to support a function. It is intended to support areas of high consumption and frequent brown-outs or to provide power factor reliability, or; as an alternative to rebuilding transmission/distribution systems.
- Unit interconnection issues are minimized by sizing generators appropriately. If the local distribution and substation system has never seen less than 10 MW capacity utilization, the generator or combined generators are sized to a maximum of 10 MW’s for that distribution line. This formula guarantees 100% optimization of capital and equipment.
- Recognizing that the <10 MW generator is not intended to act as a black start agent, these units are induction or asynchronous rather than synchronous as liability and permitting issues are less onerous and regulatory approval processes are less demanding. Incorporating black start generators with <10 MW sized units is of little value to restarting the grid in the event that there is a massive grid failure but can quickly respond and support near term issues induced from problems created by failure of the “grid” elsewhere.
The result of this formulated approach to grid devolution will be a more orderly yet eminently more profitable exercise.
Transitional <10 MW Distributed Power Benefits.
There are myriad benefits to this approach in supporting and transitioning the grid.
The difficulty in the transition of any technology array as diverse as the electrical grid is in finding a means of supporting “business as usual”, while also preparing for the inevitable milestones and mishaps during the switch. The computer software industry is practised in the art of change and one which the energy utility industry would be well advised to replicate.
Not unusually; there will be layer upon layer of updates and changes to the basic operation of the software programs that have already been on the market in widespread use for a number of years prior to another shift in direction with a new operating system. Nevertheless; through the many changes to the various programs, there is a common thread of support for and evolution to the software which will enable users of all levels to come together with a common update to the newest version should they choose to do so.
In this instance, the utility industry needs to represent their willingness to make these changes for the betterment of their consumers while concurrently supporting and transitioning their own utility industry to develop closer ties to what will inevitably be many, many smaller “utility” type companies owned by private homeowners and small business.
Benefits to this type of approach include;
- More rapid permitting, installation and commissioning of systems which can offset NIMBYism, engineering time lags, permitting and regulatory approvals than is the case for major new generation, transmission or distribution system components. These transitional systems can be operational in less than one year from the decision to proceed compared to the lengthier 4-10 years exhibited by most major generation projects.
- Capital costs are easily contained with as much as 80% of these costs arising from system installation directly related to the hard cost of the generator alone. Soft costs for permitting and development are variables well within the scope of most engineering firms and as such do not create undue capital budget pressures.
- Siting issues virtually disappear as these smaller units are located on easily discovered lands already zoned and approved for light industry.
- Environmental issues, noise and all the problems associated with conventional utility type smokestack industry become non-issues as standard off-the-shelf generators are a known commodity with a long track record of success in all regions of North America and Europe and are far less invasive than their larger utility cousins.
- Multiple <10 MW units sited throughout a regional distribution network provides a security of supply more in keeping with the desired devolutionary control than is the case with far fewer multi-MW plants. Losing production through mechanical failure from just 1, <10 MW plant out of an inventory of 20 generators is of less concern than losing 1 plant of just 2 regional plants through mechanical failure. The total loss of production in relative values is far less concerning and more easily managed in the truly distributed transitional generation program.
Transitional Risks & Operational Changes
As in any change to business practices, risks must be identified and assessed against potential benefits. In this case the greatest risk is quite simply; an ability for the transitional distributed generation sponsor to rethink and enact a new and less centralized management philosophy. The characteristics of managing the transitional solution are so radically different than the historical regime of managing a centralized utility that without a corresponding radically different management style, failure will inevitably follow.
The technology risk which this type of change would normally imply does not exist. The basic generator unit is relatively well known and hundreds, perhaps thousands have been in active use at various sites throughout the world for more than 50 years.
The supply chain for not only generators but for all the various componentry required to make this version of a distributed generation solution practicable are also available from numerous other major and credible suppliers worldwide.
Engineering, permitting and regulatory authorities are well versed in these smaller applications and in most instances have already had some limited experience in this field.
Infrastructure as identified earlier is not an issue for these <10 MW installations. Natural gas in quantities required by these smaller generators is readily available throughout most of North America; electrical distribution lines are prevalent everywhere and if the appropriate equipment specifications have been tendered; distribution and substation interconnections are a moot point.
The one overarching issue that can scuttle the transitional change is management’s philosophy and willingness to enact and manage these changes in a manner befitting the size of the plant and an understanding of the overall purpose of this direction.
The nature of constructing and managing centralized facilities requires formalized processes managed at the site by numerous levels of professionals including engineers, skilled electrical tradesmen and a host of other experienced, hands-on employees.
Transitional distributed generation units must be viewed from the spectrum of small business. The basic philosophy must include an understanding that capital costs are the first wedge to making this change successful.
These <10 MW units are assembly line manufactured and with that comes an ability to guarantee construction costs and commissioning processes. This construction philosophy is also easily “cloned”. In other words, the basic premise behind each installation is a replication of the one preceding it.
There is no need for engineering teams to spend months poring over technical details with each new installation. Design it once and clone each subsequent installation on the merits of the previous one. The inevitable result will be a lowering of capital costs and with that is an also inevitable reduction in simple payback which in turn increases the potential number of locations where these units can be profitably placed.
The nature of these distributed plants is that some may operate in a very narrow window with minimal hours of run time as they support short bursts of peak electrical consumption related to weather events or other anomalies while other units are prescribed to operate in a more conventional peak power 5 day/week rotation mode. In the new transitional distributed generation business model, management must rely on multiple externally contracted professionals with the skill set to maintain the network of generation plants based on the erratic needs of each installation.
These outsourced professionals and contractors are likely to mirror the philosophy of distributed generation in that they have a narrow skill set ideally suited to work performed on the generators and as small business, they do not carry the baggage of excessive overhead and wages.
Developing an internal team of professionals using the same basic philosophy as would be the case for a multi-MW utility scale generator will inevitably lead to significantly greater operating costs as teams of engineers from head office descend onto a generator site to determine the reason for failure prior to calling out their highly paid compatriots at head office to repair the unit. The result of this misguided management philosophy is sure to be additional operating costs not easily borne by a <10 MW generator with limited run time and capacity.