With decreases in retail electricity sales in five of the past eight years, many utilities are actively seeking new ways to support load growth and increase earnings. Utilities are introducing a wide array of products and services, including solar, distributed generation, service warranties, energy services, storage, electric vehicles, home automation, HVAC contracting, and many others.
However, some utilities are chastened by experiences of the 1990—2000s when the vast majority of utility forays into non-traditional services performed poorly. These disappointments resulted from undifferentiated offerings, unrealistic financial projections, underestimated competition, unrealized synergies with the parent company, lack of skilled business management, inflexible legal and financing arrangements, and cultural conflict. In general, these ventures failed to generate enough margin to warrant the risks and attention of a utility holding company.
Despite disappointments, today’s utility must consider new businesses due to shrinking opportunities to invest capital in new generation, a movement toward a two-way grid populated with customers who both produce and consume electricity, and a shifting regulatory compact. Fortunately, perhaps due to recognition of past missteps, some of the early entrants into these new businesses are performing remarkably well.
What then, is the prudent utility to do? I recommend a “no-regrets” strategy that builds organizational capability to prosper in a shifting regulatory and economic environment and provides the flexibility to evolve and scale over time. New businesses supporting this strategy will:
· Provide meaningful net revenues commensurate with investment and risk levels.
· Develop a platform to support new transactions, purchases, and financing.
· Establish a framework on which to layer additional products and services, test new regulatory structures and tariffs, and sustain deeper customer relationships.
Beneficial electrification is one of the most promising no-regrets businesses. Supporting the replacement of fossil-fuel powered technologies (such as forklifts, pumps, cranes, airport ground support equipment, and industrial heating) with electric powered alternatives can decrease emissions, reduce customer operating cost, improve the working environment, and enhance the utility system load factor. Such programs have proven capable of increasing utility system sales by as much as 0.5 percent per year, with rates of return in excess of 120 percent. At the same time, these programs have reduced net site emissions by as much as 95 percent–a feat which has been especially important in ozone non-attainment areas.
Furthermore, while some utilities finance these businesses with shareholder funds, others are gaining support from their regulators for rate base recovery of program costs. Using much the same justification applied to economic development activities, utilities have been able to demonstrate that beneficial electrification programs lower average rates, support local job creation, and improve the environment.
Buoyed by recent improvements in electric technology applicability, greatly enhanced battery and charging options, and an increasingly efficient and low-carbon generating fleet, beneficial electrification programs are on an upswing. At last count, more than 15 North American utilities are actively promoting beneficial electrification. With states and tribes poised to receive $2.7 billion under the VW Settlement NOx Mitigation Trust for programs that could (if the recipients elect) include electrification of a wide range of transportation technologies, utilities with “spade ready” programs may be able to leverage these funds.
One such utility is JEA (Jacksonville, FL) which offers cash incentives for a broad range of material handling and airport ground support equipment as well as golf carts, cranes, and shore power. JEA also provides custom incentives for specialized applications. In less than 18 months, the program has more than doubled JEA’s historic rate of system load growth and significantly increased its system efficiency, with approximately 70% of incremental sales being made off-peak.
CenterPoint Energy in Houston has promoted technologies ranging from forklifts to natural gas pipeline compressors to port electrification. CenterPoint has increased its market share of covered electric technologies by almost 50 percent and has done so without funding customer incentives. Instead, CenterPoint relies on a combination of technical support and marketing, along with facilitation of customer incentives available through the State of Texas Emissions Reduction Program.
Similarly, Entergy supports conversion of diesel-powered agricultural pumps to electric pumps with a combination of marketing, technical support, trade ally coordination, technical and financial analysis, and line extension facilitation. Like CenterPoint, Entergy does not pay any direct customer incentives.
Each of these businesses supports a no-regrets strategy, providing the utility with a strong lever to influence environmental emissions, meaningful net revenues, a flexible model to scale (much of the work associated with these businesses is outsourced to third parties on a pay-for-performance basis), and a platform on which to layer additional products and services.
While the results of the current utility surge toward non-traditional businesses will become known over the next few years, early entrants–especially those focusing on beneficial electrification–are doing well.
About the author: David Pickles joined ICF in 2004. He has more than 28 years of experience in utility resource planning, energy efficiency and demand-side management, non-traditional product and service development, and operations of unregulated utility subsidiaries. Mr. Pickles previously held leadership roles at Navigant Consulting (Director of Market Strategy), PHI Consulting/Honeywell (CTO of the energy information business), CSW (now AEP, Vice President of Marketing, Development, and Operations of the energy services business), and Synergic Resources Corporation (Director of Pricing and Product Development). Pickles has a master’s degree in public utility economics, and a bachelor’s degree in economics, both from the University of Wyoming.