Utility death spiral or utility renewal

Michael Brown, Delta-ee

Many energy companies around the world are developing strategies to enable them to become major future players in distributed energy deployment.  Some will succeed.

Many, including ourselves at Delta-ee, expect global markets for distributed energy systems to continue to expand.  For example in July, we released our latest country report for <20 MWe gas engine deployment, covering the USA, anticipating a 10-12% annualised growth rate in installed capacity to 2020, with much of this deployment in high efficiency CHP applications.

For us the big questions are not so much whether the markets for distributed energy (including cogeneration, trigeneration, BEMS and other on-site energy efficiency systems that are deployed in buildings) will grow on a global basis. The 3 big questions we seek to answer are:

·         Which markets will see the highest growth rates? 

·         Which DE systems will be deployed fastest, and where?  In some countries, conventional gas-fired CHP will succeed.  In others it might be commercial building-scale heat pumps. Elsewhere it might be on-site PV or bio-energy systems.

·         Which are the most lucrative parts of the DE deployment value chains and who will succeed in capturing them?  Is it gas sales, installation, servicing, something else?

The third question is most relevant to the question in my title.  It is one which offers the opportunity for energy utilities to quell the growing – but still unconvincing - hype about utility death spirals, and to refocus their activity on reshaping their customer offerings towards expanding markets and higher margin services.

Why unconvincing?

First, probably the most independent view of the prospects of energy utilities comes from the stock markets.  And they don’t seem to be in the least bit concerned about their prospects.  The S&P Global Utility Index (on 8 August 2014) has seen growth of 4.4% over the past 3 years and almost 7% over the past year.  A sector in a death spiral would be losing value, not gaining.

Second, I agree 100% with the US ACEEE view which urges US electric and gas utilities to avoid fighting over diminishing commodity sales of electricity and instead “recommends that utilities offer optional energy-related services to their customers, including energy efficiency and technical help and financing for larger customers installing and operating high-efficiency combined heat and power systems.”

Third, most cogeneration, trigeneration and hybrid heat pump systems all consume gas and represent opportunities for growing utility gas sales.

In short: DE is an opportunity for utility strategy renewal at a time when their multi-decade business model of ‘generate, transmit, distribute & supply’ is clearly not viable in the future.

Many of these companies are already moving in this direction:

·         Europe is probably furthest ahead, with E.ON and GDF Suez among several who are actively exploring how to build successful DE / CHP oriented businesses.

·         In the US, several utilities, especially in the North East, are being proactive.  Even the Edison Electric Institute now sees DE increasingly as an opportunity.

·         In Japan, the gas companies have been supplying gas-fired DE systems for years.  The electricity companies have been pushing heat pumps.  With energy sector reform now imminent, multi-utilities will emerge in a more competitive environment.  Delta-ee sees much in these reforms that will accelerate DE deployment, perhaps substantially.

So we are seeing several frantic strategic moves by utilities to exploit DE opportunities.  To be frank, while some will certainly succeed in time, early signs are not wholly positive.  Most utilities are not yet nimble enough, commercial enough or have enough understanding of DE value chains to win early successes.

For example, many of the most successful non-utility players in international DE markets, Clarke Energy is a good example, put high emphasis on post sale revenues; they represent steady, guaranteed and multi-year revenue streams.  It’s hard to imagine many energy utilities making a successful play in DE without building their business around that specific part of the value chain.

But some will.

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