The power system is changing and electricity suppliers need to adapt or get left behind. Experts weigh in on what leaders should be focusing on and how these items will affect utilities in the future.
The power industry has experienced a whirlwind of activity in recent years. In fact, some insiders might argue that there’s never been more change in the power system since the grid’s inception than what we’ve seen over the past 10 to 15 years. The transformation goes beyond just the forms of generation being deployed; it also extends to technology utilized to operate and monitor the system, customer and employee expectations, and what it means to be sustainable. Looking ahead, artificial intelligence and machine learning could result in even greater changes in the not-to-distant future.
“Many utilities have been investing time and capital into becoming more than just providers of reliable service. Customers expect predictable and affordable electric service, but the level of service, bill transparency, triage and restoration from outages, as well as menu of additional and complementary services, continues to expand and evolve,” Jeremy Klingel, senior partner for West Monroe’s Energy and Utilities practice, told POWER. “This isn’t to take away from the commitment and complexity of remaining a provider of last resort, but an emerging requirement to further serve and collaborate with all customer classes (large, small, disadvantaged, etc.) to enable additional resiliency, support ESG [environmental, social, and governance] goals, and chart a practical path to cost-effective beneficial electrification.”
Challenges Exist, Leading to Opportunities
To get a better understanding of how the landscape is changing, and what challenges and opportunities exist, POWER engaged with a handful of industry experts to get their perspectives (see sidebar “Power Sector Mergers and Acquisitions”). Among items they said electric utilities needed to watch were supply chain issues, decarbonization trends, workforce capabilities, and reliability and resiliency requirements.
Power Sector Mergers and Acquisitions
After a record-setting year for power and renewables mergers and acquisitions (M&A) in 2021, there was a marked reduction in deals last year. “2022 activity was down slightly but in line with what we expected given rising interest rates and the deteriorating macro environment in the back half of the year,” Ryan Luther, senior vice president of Enverus Intelligence Research, told POWER. “M&A multiples for generation pipelines have to stay competitive with the cost of new builds, so we expect M&A prices to fall this year as the Inflation Reduction Act pushes down the cost of new renewable builds. Energy storage startups have been growing rapidly and earning outsized returns, but it’s a capital-intensive business and we’re expecting a record level of storage deployments in 2023 and a pick-up in grid storage deals to meet those capital needs.”
Jeremy Klingel, senior partner for West Monroe’s Energy and Utilities practice, said his group continues to see private equity firms showing interest in clean technology, renewable energy, and critical infrastructure. “While large-scale renewable energy assets/portfolios make many of the headlines due to their size, the volume and market interest in battery energy storage, energy-as-a-service providers, advanced demand response platforms/aggregators, carbon accounting, and behind-the-meter clean back-up generation technologies are experiencing a bit of a renaissance,” Klingel said. “It’s also important to note the growth and market interest in the service providers that design, engineer, build, and maintain both emerging and traditional grid infrastructure. Those firms will be the architects of the backbone for the clean energy transition.”
GlobalData, a data and analysis solutions provider, issued a report on Feb. 3 that showed the value of power sector M&A deals completed by the industry’s top 10 financial advisors last year was less than half the value of those completed by the top 10 advisors in 2021 ($204.221 billion versus $467.338 billion). Yet, while the value of deals was down more than 56% in the survey, the number of deals facilitated by the top 10 advisors based on volume was only down 19%.
Meanwhile, Klingel noted that a trend has developed in which utilities are spinning off businesses in competitive markets. “There are a number of regulated utilities doubling down on their core business as investor-owned utilities are considering the divestiture of their non-regulated businesses, particularly large-scale renewable portfolios,” he said.
“The supply chain is all sorts of messed up,” said Sarp Ozkan, vice president of Commercial Product at Enverus. “From the general supply chain issues globally, to the Auxin anti-dumping/anti-circumvention inquiry, to Biden’s temporary freeze on tariffs from select countries, to the general increase in the minerals intensity we are going to need to realize a more than 14x increase in carbon-neutral technologies, these all impact the energy evolution in meaningfully negative ways.”
Yet, there are a number of ways power companies can improve prospects for success in the near- to mid-term. Scott Tinkler, a managing director and global utilities lead at Accenture, said, “Acquiring the talent for the energy transition is paramount, starting with identifying all the skills needed, and then training and reskilling workers to do these jobs.”
Tinkler continued: “Becoming more resilient to energy shocks is also critical, which will require more effective management of cost structures to combat inflation and high interest rates while reimagining supply chain operations to balance global disruptions. Looking a bit further forward, some important areas include grid modernization to support the rapid development of low-carbon infrastructure, and accelerating the shift to clean energy technologies and integrating more renewables into their generation portfolios. Lastly, reevaluating strategies and approaches to regulatory affairs, including rate case development, permitting, and consenting will be vital.”
Tony Carrino, director of Power and Utilities with Solomon Associates, suggested utility leaders should take a good look at their assets and develop plans to adjust resources to better fit the future. “The potential exists for a significant revaluation of generation assets by technology in the coming years. It will affect changes in book value of installed generation assets,” he said. “While some asset types will more quickly lose favor, others will be deemed more necessary, resulting in a repricing of assets in purchases and sales. This repricing will likely occur for two reasons: the relative environmental impacts of each generation technology and the realization of what becomes the ‘optimum mix’ of generation technologies to recover and sustain electric grid reliability.”
Added West Monroe’s Klingel, “Decarbonization gets a significant amount of airtime and tends to center on utilities’ own generation fleets many times. While that transition to cleaner fuel should continue, the move to a more sustainable energy economy will be greatly fueled by the commercial and industrial (C&I) sector. We are approaching a bit of an inflection point where utilities can become a partner to the C&I market and help guide that journey to cleaner, more efficient energy operations. However, it will require an enhanced tool kit of distributed resources to complement and, at times, supplement traditional T&D [transmission and distribution] infrastructure.”
Klingel suggested investments in resiliency are important (Figure 1). “Resiliency cannot be undervalued, yet it is difficult to value in the traditional (utility) capital investment sense,” he said. “Climatic events, wildfires, hurricanes, or polar vortex are year-round and not just an occasional black swan. The balance between physical infrastructure investment and virtual infrastructure to balance and bolster the grid is going to be critical.”
1. Underground power lines are more reliable than overhead lines, particularly during hurricanes and severe weather. Florida Power and Light says it has been installing underground service for decades and has about 45% of its distribution system underground today. The work shown here was done in Port Charlotte, Florida, after Hurricane Ian. Source: POWER
How the IRA Is Influencing the Industry
Heading into 2023, one of the most impactful drivers influencing U.S. power markets (see sidebar “2022 Record Year for Corporate PPAs”) has been the significant incentives contained in the historic Inflation Reduction Act (IRA) passed in August last year. “These incentives can supercharge investment in solar, wind, and energy storage—along with tax credits that will buoy market prices for carbon-free nuclear power,” said Tinkler. “There will also be significant opportunities for power and utility companies to drive growth from clean hydrogen to put it at par with conventional hydrogen, with the ability to pair credits with renewable energy projects. Headwinds impacting this clean energy surge include continued supply chain-related challenges, and managing persistent inflation and its impact on costs and customer affordability.”
2022 Record Year for Corporate PPAs
The American Clean Power Association (ACP) released a report on Jan. 18 showing corporations had set a new record for energy purchases last year. The ACP said commercial and industrial (C&I) companies are driving demand for renewable power and accelerating the clean energy transition through purchases of electricity directly from wind, solar, and energy storage plants.
“Even as power purchase agreement (PPA) prices increased, corporations purchased nearly 20 gigawatts (GW) of clean energy in 2022, more than 4 GW higher than any previous year. By the end of the year, over 300 corporations had contracted more than 77 GW of clean energy,” the ACP said.
“Economic and environmental benefits, as well as growing pressure on corporations to meet sustainability targets, have led to a 100-times increase in corporate clean power procurement over the past decade. During that same period, solar and wind costs have decreased 71% and 47% respectively, making both more attractive to corporate energy buyers,” JC Sandberg, interim CEO and Chief Strategy Officer at the ACP, said in a statement announcing findings from the report.
The ACP said 326 companies had PPAs in place for at least some of their power at the end of the year, led by Amazon (Figure 2), Meta, and Google. Technology companies have contracted more clean energy than any other industry, according to the ACP.
“The increasing tax credits that are going to be created by the IRA will need to be monetized,” said Ozkan. “With transferability (the ability to sell tax credits for cash), tax credits will be sold for less than 100 cents on the dollar. Tax equity structures will be more adept at utilizing tax credits more efficiently, but continue to be useful to only those who can get it. So, how well the tax credits can be monetized via transferability will eventually become an issue for how well capitalized these projects will be.”
But Carrino suggested more needs to be done to enhance the power grid itself. “In the Inflation Reduction Act of 2022, the proportion of spending allocated to new wind and solar project development is far greater than what is allocated to high-voltage transmission systems. In fact, the transmission grid continues to lose ground to new renewable projects, causing increasing curtailments of renewables because the transmission system has not kept up in several U.S. markets,” Carrino said. “The UK electric market is a great example of the high consumer prices that result when payments are made to curtail over-generation from renewables while other generation still must run due to system imbalances,” he added.
Noting similar worries, Klingel said, “We cannot underestimate the importance of underlying infrastructure, particularly in the transmission and distribution space. The system upgrades required to support things like building electrification, new electric vehicle [EV] load, and economic development will be critical and many times costly. The timing of those investments must be balanced and thoughtful, and I don’t think anyone has completely cracked the code, or that there’s a ready-made blueprint,” he said.
Enverus is likewise concerned. Said Ozkan, “We are particularly concerned about transmission. The IRA was great for renewables and carbon-neutral technology investments in general, but what was markedly missing was any incentives for the grid buildout necessary to handle the changes. The lack of investment in the grid has been disillusioning for those who have been looking at the big picture of the energy evolution and its needs.”
Ozkan noted developers and end-consumers are showing frustration as more projects become contingent on high interconnection costs and reliability continues to be an issue on extreme-weather days. “Currently, it all lives and dies with the IRA,” he said. “Understanding well the opportunities to take advantage of the adders that take the tax credits even higher will be important.”
Power Market Wild Cards
The evolution of decarbonization strategies is sure to transform the power system further. Accenture is focused on three potentially important market drivers. “Among the exciting trends we’re watching is how fast EV demand can be met and charging infrastructure can be rolled out to meet this demand. Another is how clean hydrogen can be integrated into power markets. A third is how the drive for net-zero emissions is requiring power companies and all stakeholders to think beyond electricity to envision how the power market will integrate with economic sectors such as natural gas, transportation, water, and waste,” Tinkler said.
Referencing a recent study, Tinkler explained how a UK vehicle-to-grid charging infrastructure project (Figure 3) had enabled more than three million “free” miles for customers, who had made money by exporting electricity stored in their EVs back to the grid at peak times. “Opportunities like this are extremely exciting,” he said.
3. Vehicle-to-grid (V2G) charging can benefit both electric vehicle (EV) owners and the power grid. V2G technology works by using EV batteries to charge when demand is low and to supply energy to the grid when demand is high. To do so, the EV needs to have smart charge technology and the grid needs to have dynamic load management capability. Source: Envato Elements
“We are at the dawn of a next-generation power market, one where utilities will play a prominent role, but requires an unprecedented level of collaboration and investment from federal and state governments, commercial entities, the financial community, and all of us as customers,” concluded Klingel.
—Aaron Larson is POWER’s executive editor.