by Surajit Kar and Andrew McKenna, PRTM Management Consultants Inc.
Buzzwords or industry trends? Energy efficiency (EE). Decoupling. Clean technology. Renewable portfolio standards (RPS). President Barack Obama and Vice President Joe Biden frequently mentioned these four topics on the campaign trail.
The topics are also integral to the new administration’s energy plan, which aims to invest $150 billion in clean energy and EE over 10 years. Utility executives and regulators in many states have a choice: Act aggressively now or wait for greater federal clarity. This article provides an approach based on an analytical model to help navigate through the buzzwords and uncertainty and lay out a plan tailored to specific state conditions and utility service territories. With this model, state regulators and utility executives have a framework to understand their current positions (a static snapshot) and respond to changes in Washington, D.C. (dynamic levers).
The Analytics of Demand and Supply
While each utility’s service territory and state regulatory environment is unique, every utility sits in the middle of a common demand-supply equation. On one side is customer demand for retail electricity and gas; on the other is energy supply generated from internal assets or procured externally. On the demand side, regulatory decoupling removes the financial incentives for utilities to promote higher energy consumption. Meanwhile, states are spending more on programs that drive customers toward greater EE, regarded as the lowest-cost resource in a utility’s energy portfolio. On the supply side, 33 states have implemented mandatory RPS or have set voluntary renewable targets, committing their utilities to derive a significant fraction of power from renewable sources such as solar, wind, hydro and biomass.
In our analytical model, we computed a numerical score for Demand-Side Activity on the horizontal axis (as a function of decoupling and per capita EE spending), and a separate numerical score for Supply-Side Commitment on the vertical axis (based on the aggressiveness of state RPS mandates or goals). The resulting map (see Figure 1) explains what many utility experts suspect, but also contains some surprises.
Five State Clusters
As Figure 1 illustrates, states may be grouped into five clusters that share similar demand-supply characteristics:
-Push the Envelope States. Five states in the top right have implemented some form of decoupling, spend on average $24 per capita on EE (the highest of all clusters) and have aggressive RPS mandates or goals. Most are democratic -blue states located on either coast, and most have deregulated or explored deregulation.
-Balanced Approach States. Nineteen states in the upper middle are close behind. While most have not yet decoupled, they spend on average $14 per capita on EE (based on data for 18 states) and all have RPS mandates. Eleven of them are democratic -blue states, and 12 states have either deregulated or explored deregulation.
-Supply Pull States. Nine states in the upper left are primarily pulling for renewables through aggressive RPS mandates (Delaware’s RPS mandate is the most aggressive in the cluster: 20 percent by 2019) but have little or no demand-side efforts. Many of these states have large wind and solar photovoltaic (PV) potential.
-Demand Push States. Three states along the bottom (Iowa, Indiana and Idaho) are active on the demand side and spend on average $17 per capita on EE. While none have RPS mandates, each has some renewable potential: solar PV, wind potential and biomass, biofuels or both.
-Wait and See States. Fifteen states in the bottom left corner have no decoupling, invest minimally in EE (the six states for which EE funding data is available spend only $2 per capita on average) and have no RPS mandates. All 15 are republican -red states and all but one has avoided deregulation. Many of these states fall in the southern U.S. with heavy dependence on coal and natural gas fuel sources, but they also have renewable potential in biomass, biofuels or both and solar PV.
Scenarios, Strategies and Options
Using this model as a guide, state regulators and utility executives operating in each cluster must assess their options by evaluating the likelihood and timing of federal-level standards on both the demand and supply sides. Figure 2 provides a partial list of strategic levers and possible options.
From Strategy to Action
As state regulators and utility executives from progressive states will attest, there is no single answer to optimize the demand-supply equation and achieve leadership.
Leaders continue to experiment and refine their goals, strategies and tactics with the benefit of hindsight and the wisdom of real experience. Regulators and utility executives in each state should use this inflection point to ask themselves:
- Where does the environment fit into our list of priorities and those of our customers, employees and stakeholders?
- Should we push demand-side levers, pull supply-side levers or both?
- Shall we be proactive or reactive to federal policy and mandates?
- What is our tolerance for uncertainty, ambiguity and risk?
- What are our available options today and in the future?
- What scenarios could play out and how will we respond?
- How will we quickly move from strategy and vision to operational models, execution strategies and customer-facing programs?
- Which technology and business model innovations are critical to success?
- Are we prepared and resourced for both?
- Where there are obvious gaps in our knowledge, from whom will we learn?
The next 12 months are sure to be dynamic—even exciting—for U.S. utilities. Understanding the dynamics of the demand-supply equation and exploring your options today is a pragmatic way to lean into the future.
Surajit Kar is a partner at PRTM Management Consultants and a leader in its global utilities practice. E-mail him at firstname.lastname@example.org.
Andrew McKenna is a principal at PRTM Management Consultants with more than 20 years of experience. E-mail him at email@example.com.
The authors gratefully acknowledge the contribution of Loren Taylor, a manager at PRTM Management Consultants.