WHAT A UTILITY CAN BE

Report: Climate Change, Emerging RE Technologies Driving New Business Models
9 July 2010 (Renew Grid)
and
Climate Stabilization Targets: Emissions, Concentrations, and Impacts over Decades to Millenia
July 16, 2010 (The National Academy of Sciences)

THE POINT
Just as the Gulf oil spill has left little doubt that the way cars are powered must change, it is becoming more and more undeniable that the way electricity is generated and delivered must change.

If the Upper Big Branch coal mine cave-in that crushed 29 miners in early April has slipped from memory and the images of West Virginia mountain ranges ruined by surface mining are too difficult to think about, consider Climate Stabilization Targets: Emissions, Concentrations, and Impacts over Decades to Millenia, a new report from the National Academy of Sciences. It says a 1.8 degree Fahrenheit (1 degree Celsius) increase in temperature – to which the world average temperature is now about halfway – will (a) reduce rainfall 5%-to-10% in the already drought-burdened American Southwest, Mediterranean and southern Africa regions, (b) drop stream flow 5%-to-10% in river basins like the Arkansas and the Rio Grande, (c) reduce yields of U.S. and African corn, Indian wheat and comparable crops by 5%-to-15%, and (d) move dangerously close to warming that would double, or possibly quadruple, the size of wildfires in the American West.

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As explained in Ceres' new report, The 21st Century Electric Utility: Positioning for a Low-Carbon Future, generating the electricity that keeps the lights on and the air conditioning running also generates 40% of U.S. greenhouse gas emissions (GhGs). The greenhouse effect those GhGs create is driving the anthropomorphic (human-caused) global average temperature rise that accelerates the emergence of the anthropocene, a new geologic era in earth’s history (named by Nobel prize winning atmospheric chemist Paul Crutzen) in which human activity is determining the planet’s climate and its inhabitants’ fate.

The good news is that, according to The 21st Century Electric Utility, remedies are not only at hand, they are the most economically competitive choices for the people who run U.S. utilities and are charged with the awesome responsibilities of keeping the nation’s lights on and its a/c running. The report describes what is happening with utilities at present, the changes utilities need to make and the barriers to their transition to a New Energy economy.

4 key trends the report identifies are: (a) Increasing pressures to cut emissions 80% below 1990 levels by 2050, the scientifically-determined level needed internationally to interrupt worsening climate change; (b) increasing momentum in state, regional and federal policies and regulations that will make fossil fuel-generated electricity –especially coal-generated electricity – too costly to compete in the marketplace against emissions-free sources; (c) the increasing introduction of Energy Efficiency and Smart Grid technologies that are the cheapest way to cut emissions and reduce the demand for emissions-generating sources; and (d) progressively falling costs for New Energy sources.

The single specific addition to existing policies crucial to transitioning utilities to more New Energy and Energy Efficiency is the decoupling of utility profits from the volume of electricity sales. In states where such decoupling is rewarded, utilities increase efficiency 1%-to-2% per year on an ongoing basis and drive the maximum increases in both utility scale New Energy (wind installations, solar power plants) and distributed energy generation (rooftop PV, geothermal heat pump systems). Where there is no decoupling, utilities face losses in profits from such action and efficiency does not improve.

More broadly, the Ceres report concludes with a detailed list of recommendations that can reasonably be summarized as: (1) Do everything possible to increase Energy Efficiency, (2) use the savings to build New Energy, (3) don’t waste time or money on Old Energies that are dangerous and toxic and (4) NOW!

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THE DETAILS
Key factors driving the need for utilities to transition to the New Energy economy:
(1) Greenhouse gas (GHG) emissions must be cut 80% or more by 2050;
(2) More than half of U.S. states have standards requiring increased use of New Energy (NE) and Energy Efficiency (EE) and Congress will almost certainly institute federal requirements sooner or later and these policies will increase the cost of reliance on fossil fuel-generated electricity;
(3) The cost of New Energy-generated electricity is falling;
(4) A further array of policies and regulations already require utilities to institute EE, the lowest-priced emissions-free electricity, on an increasingly larger scale;
(5) Ever more widely-implemented Smart Grid technologies that give utilities tools to make EE happen;
(6) The advent of battery electric vehicles (BEVs) that will facilitate both NE and EE; and
(7) The increasing availability of domestic natural gas, a “cleaner” fossil fuel that compliments NE and EE and makes coal yet less necessary.

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The growing impact of global climate change awareness will likely impact the electricity generation sector most significantly because it generates 40% of U.S. GhGs. The immediate significance is that fossil fuel-generated electricity loses marketplace competitiveness.

NE is becoming increasingly available and the methods to introduce it on the grid without disrupting electricity delivery are becoming more widely understood.

EE cuts emissions without impacting electricity delivery reliability.

Potential challenges to deploying NE at scale:
(1) Most utilities lack support from regulators in making the changes required by NE;
(2) Distributed NE and EE cost utilities because they reduce electricity sales; and
(3) The present electricity delivery infrastructure (transmission system) could be compromised if asked to integrate too much NE too soon.

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5 recommended elements of a business model that will take utilities to the New Energy economy:
(1) Plan for a price on emissions.
(2) Institute Energy Efficiency and push for supportive rate structures.
(3) Integrate New Energy into sources of generation, including both (a) utility-scale NE such as wind installations and solar power plants and (b) distributed energy generation (DEG) such as rooftop solar and geothermal heat pump systems.
(4) Build Smart Grid technologies (demand management, smart metering, distribution automation and synchrophasor monitoring) into the full-scale implementation of pilot programs to better gain operational efficiencies and manage infrastructure and operating costs.
(5) Do transparent resource planning that considers risks, probabilities, benefits, impacts and applications of increased NE and EE to create wider stakeholder, and especially regulator, involvement and make the transition to a New Energy economy smoother, quicker and more successful.

Hundreds of billions of dollars of capital will be needed from the rate base. Raising this from ratepayers who have faced an average 50% increase in their utility bills over the past 10 years will be problematic. The recommended highly transparent and forward-thinking business model will be crucial to win over stakeholders and regulators but does not guarantee success.

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5 key regulatory policies needed from state governments and/or utility regulatory commissions (assuming a federally-imposed price on GhGs):
(1) NE policies that align NE growth within government with established goals.
(2) Enforceable Renewable Electricity Standards (RESs) with incentives, clear
market signals and rewards for utility participation.
(3) Decoupling to remove the utilities’ disincentive to implement DEG and EE.
(4) Net metering to reward builders of DEG.
(5) Rates that reward utilities for investments that drive the transition to NE and EE.

Both investor owned utilities (IOUs) and municipally owned utilities (MOUs) are public entities that have the responsibility to keep the power flowing while adhering to 2 key principles: (a) Minimize cost, risk, and environmental impact, and (b) maximize opportunity, options, and societal benefit. Going forward into the 21st century, only a wise and planned transition to NE and EE will observe those 2 principles.

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More detail on the report’s 5 key recommendations:
(1) Manage Carbon Across the Enterprise - (a) an overall corporate commitment emissions cuts; (b) a rigorous analysis of emissions costs; (c) plan for a price on emissions; (d) a GhG inventory; (e) set a GhG-cutting target in preparation or future regulation; and (f) disclose to stakeholders.

(2) Pursue All Cost-Effective Energy Efficiency – (a) recognize the value of EE; (b) seek lessons learned and best practices; (c) advocate for policies that support EE; (d) aim for 1% per year electricity savings; (e) include EE in resource planning; and (f) rigorous and transparent monitoring and verification.

(3) Integrate Cost-Effective Renewable Energy – (a) pursue NE at or beyond RES targets; (b) own PV; (c) study private competitors’ and other utilities’ business models that incorporate NE/DEG; and (d) create risk hedges, grid management mechanisms and other methods to deal with NE variability and load fluctuations.

(4) Incorporate Smart Grid Technologies for Consumer and Environmental Benefit – (a) simplify NE/DEG interconnection and integration; (b) use Smart Grid technology to increase EE to cut operational costs; (c) prioritize Smart Grid investments for NE and EE; (d) empower consumers with pricing programs; and (e) use a long-term capital plan to build the Smart Grid.

(5) Conduct Robust and Transparent Resource Planning – (a) be transparent; (b) analyze NE and EE fairly; (c) make key stakeholder input easy; and (d) educate the public and policy makers.

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QUOTES
- Mindy Lubber, President, Ceres: "The traditional paradigm of building large fossil-fuel power plants to sell ever-increasing amounts of electricity is fast becoming obsolete…New business models must include aggressive energy efficiency measures and delivery of cleaner, low-carbon energy through renewable and smart grid technologies. Realizing these changes, as a handful of utilities have begun to do, requires a fundamental rethinking of how we produce, transmit and use electricity in the U.S."

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- From the Ceres report: “The successful 21st century electric utility company will be very different from the utility of the 20th century. To remain competitive, today’s utility must respond to the risks and opportunities from climate change, carbon costs, volatile fuel prices, emerging clean technologies, expanding energy efficiency programs, increasing customer expectations and competing third party energy providers. Responding to these challenges will require new core competencies and revised business models for U.S. utilities.”

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- From the Ceres report: “A utility that deals effectively with these trends, and receives sufficient support from regulators and legislators, will be better positioned to succeed in the 21st century. All else equal, such a utility is also more likely to attract lower cost capital, enabling it to earn stronger returns for investors. On the other hand, a utility that fails to effectively manage risk, including higher carbon exposure, may suffer greater financial impacts if climate legislation takes hold and fossil generation costs rise.”