2021 Power and Utilities Industry Outlook 2021 Power and Utilities Industry Outlook

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2021 power and utilities industry outlook 2021 power and utilities industry outlook

Accelerating energy industry convergence

In 2020, the US power and utilities industry led the clean The broader energy industry could start to converge energy transition despite federal policy headwinds. in the coming year, as many players seek to serve a Pressure coming from stakeholders ranging from growing clean power market in an economy increasingly citizens to shareholders intensified in the past year, moving toward electrification. Within the energy hewing closely to the recommendations of the Paris industry, the oil majors’ diversification strategies will Climate Accord. Many utilities, their host cities and likely increase their investment across the power states, and their business customers announced plans sector’s value chain. Automakers’ increased shift to fully decarbonize over the next three decades—and toward electric vehicles (EVs) could also help enhance continued to do so in the aftermath of pandemic-driven the electric grid via charging infrastructure and battery shocks to the electricity load. In fact, as intermittent storage development. They might even seek to become renewables recorded record-high penetration and renewable and electric service providers, as Tesla is peak oil demand came into focus, COVID-19 helped to doing.1 Technology companies may do the same as crystallize the urgency of the energy transition and the they enable vehicles, homes, and businesses to both industry convergence it entails. be served by and serve as distributed energy resources (DER). The convergence of the electric, transportation, In 2021, a new administration could usher in an and building sectors may witness companies with acceleration of this energy transition and convergence. varying levels of regulatory, technological, and capital Biden’s campaign platform called for a national net- constraints and opportunities partnering and/or zero greenhouse gas emissions target by 2050 and a competing with power and utility companies. All these $2 trillion investment to help equitably achieve this companies are looking to establish a strategic foothold target. The power and utilities industry is expected to in a new energy landscape characterized by five trends: lead this transition, as the Biden plan envisions the consolidation, new economies, new battery business industry achieving an even more ambitious target of models, increased scale, and heightened disaster zero emissions by 2035. While a Republican-led Senate readiness. Our 2021 renewable energy outlook explores may narrow the scope and/or extend the timeline of variations on these same five trends. these plans, agreement on an infrastructural stimulus could serve as a vehicle to advance the energy transition, as could executive authority over emissions.

About the study: Deloitte postelection survey To understand the outlook and perspectives of organizations across the energy, resources, and industrials industries, Deloitte fielded a survey of more than 350 US executives and other senior leaders in November 2020 following the 2020 US presidential election. The survey captured insights from respondents in five specific industry groups: chemicals and specialty materials, engineering and construction, industrial products, oil and gas, and power and utilities. Consolidate: Regulatory1 landscape FERC enables competition through regulation

The Federal Energy Regulatory Commission (FERC) issued a landmark ruling in September 2020 that could help consolidate the competitive landscape for the energy industry’s convergence in 2021. By leveling the playing field for DER to participate in wholesale capacity, energy, and ancillary services markets, Order 22222 could help spur innovative technologies and aggregations of rooftop solar arrays, EVs, and smart building devices. The order is unlikely to be challenged given that, several months prior, the US Court of Appeals for the D.C. Circuit upheld a similar order applying to storage.3 As a result, regional transmission organizations (RTOs) and independent system operators (ISOs) could revise their tariffs over the next year to establish minimum DER aggregations no larger than 100 KW, in addition to technical and operational terms regarding location, metering, and bids.4 This ruling is significant given that, in a Deloitte postelection poll (see “About the study”), surveyed power and utility executives ranked regulatory hurdles as the single greatest obstacle to greater integration of DER into the grid.

In another move that may further consolidate the competitive landscape in favor of clean energy, FERC recently took a position of being open to carbon pricing. More specifically, FERC clarified its jurisdiction over and support for wholesale electric market rules on carbon pricing. This may encourage additional states in 2021 to join the 11 states that currently have carbon In 2021, the new administration may have an pricing.5 opportunity to choose two Democratic nominees to fill FERC’s current vacancies and to appoint a new chair. A key area to watch is whether FERC will dampen some of the momentum Flipping the agency to a Democratic majority could from these actions that enhance the competitiveness of clean energy yield FERC decisions that are more supportive of clean sources by handicapping their ability to clear capacity markets. In addition energy targets. to its order requiring the Pennsylvania New Jersey Maryland (PJM) Interconnection RTO to apply a minimum-offer price rule, FERC recently undercut a New York ISO (NYISO) pro–clean energy provision by upholding rules that artificially place a price floor on these resources’ market bids. As a result, storage and renewables are unlikely to be able to clear the capacity market, depriving DER of a key revenue stream.

Another challenge to the reach of Order 2222 is states’ ability to opt out if DER aggregations include third-party demand response programs. A demand response provider recently petitioned FERC to close this loophole and enable greater market competition.6

2021 power and utilities industry outlook 3 Create: New economies 2 Emerging DER aggregation platforms expand digital utility infrastructure

DER integration into the grid would require a new digital infrastructure to aggregate and manage these resources in grid-enhancing ways. The issue is pressing: Wood Mackenzie projects that cumulative US DER capacity may reach 387 GW by 2025, with DER installations between 2016 and 2025 accounting for more than a fifth of all generation and storage installations. Following a pandemic-related dip in DER capacity additions this year, growth is poised to recover in 2021, with a mix that is shifting from mostly nonresidential to mostly residential, solar, and EV load management.7

The big question is to what extent utilities, third parties, and customers can cost-effectively manage this DER digital infrastructure. Indeed, Deloitte’s postelection poll of various power and utility executives found that close to a quarter of respondents believe insufficient or low value streams are the single greatest obstacle to greater integration of DER into the grid. More than a fifth of respondents believe the greatest obstacle is the inability to include DER-related investments in the rate base. At one end of the spectrum, utilities could actively deploy DER in strategic locations as nonwire alternatives to distribution infrastructure upgrades and orchestrate them to help balance the grid. Alternatively, utilities could allow customers’ DER Southern California Edison (SCE) partnered with rooftop to operate autonomously. Another option is for a third party to manage the solar developer Sunrun to manage a network of 300 DER fleet, balancing utility and customer interests. Finally, customers could residential batteries as a virtual power plant. Customers respond to real-time wholesale price signals. This latter scenario raises pay for the batteries out of pocket, and Sunrun commits competitive issues for power and utility executives, 60% of whom, among to operating them to the customer’s financial benefit.9 Deloitte’s survey respondents, consider self-generating customers to be In other instances, Sunrun sells backup power to utilities’ greatest competitor in providing power to customers. customers. SCE is also piloting automated customer DER responses to real-time pricing in partnership with a Each of these configurations will be tested in 2021, and best practices may transactive energy company.10 emerge. For example, one utility that can own and rate-base customer-sited DER works with a software partner to manage a network of more than DER aggregation platforms can integrate both 2,000 residential batteries. The utility saves on payments to ISO-New stationary and vehicular battery storage to help England by discharging during peak demand and passes those savings integrate renewables. onto customers. Customers can choose a decade-long battery lease from the utility or bring their own devices and receive payments from the utility based on the capacity they allow the utility to use.8 Taking a different tack,

2021 power and utilities industry outlook 4 Reinvent: Battery business models 3 Mobile battery business models develop around EVs and charging infrastructure

The electrification of transportation and charging infrastructure is also poised to experience unprecedented growth in 2021, opening a significant opportunity for utilities to grow earnings. In terms of market developments, while US auto sales fell 9% between the third quarter of 2019 and the third quarter of 2020 amid the pandemic, Tesla sales increased 22%.11 In 2021, we may see the introduction of new, longer-range batteries in truck and SUV models from Tesla, other startups, and established automakers, which may further bump EV sales and accelerate their timeline to parity with gasoline-powered vehicles. New EV manufacturers such as Canoo and Polestar could also attract attention to the EV marketplace overall and provide expanded opportunities to potential customers.

Policy game-changers could also boost EV market prospects in 2021. At the federal level, a new administration could reinstate EV tax rebates and higher fuel efficiency standards and more than quintuple the number of charging stations. And in September, the governor of California (the country’s largest state automotive market) issued an executive order to end the sale of new gasoline cars in 2035.

can most rapidly and cost-effectively expand its network The governor’s announcement, in the context of California’s rolling blackouts, to assuage the range anxiety constraining suburban provided a stark reminder of the stakes of EV load growth management and EV adoption and to fill the charging deserts hampering highlighted the role of utilities in EV infrastructure development. Evening urban EV adoption. charge surges, fast charging, and EV clustering could all burden the grid and require significant infrastructural upgrades without time-of-use and other Regulators are increasingly coming around to the idea dedicated EV charging rates, customer engagement, and utility involvement of a leading utility role in EV charging infrastructure in charging infrastructure siting decisions. Conversely, grid interactive development, portending a wave of charging program EV charging could help support the grid and absorb excess renewables approvals in 2021 that could help grow utility revenue. production, complementing the similar role of utility and residential Regulators have already approved $2.6 billion in utility stationary battery storage. investment in transportation electrification, mostly in California, which recently approved a record $436 Here again, utility involvement ranges from siting, owning, and operating million charging program.13 Other players eyeing charging stations to providing EV charging tariffs and rebates. In Deloitte’s charging infrastructure investments include oil postelection poll, 98% of power and utility executives surveyed believe companies. that utilities should play a primary or secondary role in EV infrastructure development. In other cases, automakers are developing exclusive fast-charging networks (e.g., Tesla) or partnering to develop public charging networks (e.g,. GM/EVGo). And independent EV charging network operators are attracting private equity investment.12 The big question is which model

2021 power and utilities industry outlook 5 Scale up: New entrants and frontiers 4 Oil companies are investing in the power sector

The growth in renewables and clean technologies has engendered interest in the sector from new entrants, including some of the larger oil companies. Over the past several years, oil company investments in storage technologies, transport electrification, and renewable energy have increased noticeably.14 This trend is expected to continue in the longer term as oil companies move beyond the immediate impact of the oil price drop and COVID-19–related demand decline. In fact, the companies that had already invested substantially in new business models, such as renewable energy, found that even as oil price volatility increased in 2020, the comparatively stable returns on renewable investments were a welcome addition.15 As the US offshore wind industry takes off next year, US oil majors could be positioned to transpose their offshore drilling expertise to the nascent industry. They could similarly play a leading role in advancing a US green hydrogen economy. Consequently, the power and utilities industry may find itself increasingly partnering with, and in some cases competing with, oil companies in such areas.

2021 power and utilities industry outlook 6 Fortify: Disaster readiness 5 Digital strategies to help address wildfires, COVID-19, and cyberattacks

Several disasters buffeted the power and utilities industry in 2020, bringing disaster readiness to the forefront going into 2021. Utilities may increasingly deploy some digital tools to address the “twindemic” of COVID-19 and extreme weather events such as wildfires.

The first set of solutions revolves around a remote workforce. Utilities are using digital tools to enable remote work for safety purposes. To prevent exposure to the coronavirus, utilities are equipping workers with virtual reality in lieu of in-person training, with digital contract management tools to avoid physical meetings, cloud-based solutions to enable work outside of the office or any specific location, and digital customer engagement options to avoid the need for in-person interaction. Postpandemic, these tools may continue to provide a return on investment by offering additional flexibility, elevated customer experiences, and emergency contingencies.

The second set of digital solutions pertains to a remote workplace. The idea is to prevent unsafe conditions from occurring in the field. To protect equipment from succumbing to an extreme weather event, utilities are using artificial intelligence (AI) to model extreme weather events, identify where the infrastructure might be hit, and how to best mitigate the risk. Next, to Digital strategies for disaster readiness could take prevent equipment from sparking a disaster, utilities are deploying Internet center stage in the coming year, as COVID-19 is likely to of Things sensors to enable predictive maintenance, drones to identify faulty remain a risk for at least part of 2021, weather events equipment, computer vision to classify the resulting data, and machine continue to become more common and more extreme, learning to preliminarily analyze it.16 Again, these tools can provide a return and utilities conduct cyberattack postmortems. Chief on investment above and beyond fortifying disaster readiness. They can among these digital strategies is AI, which most power also help cut costs, facilitate remote work, and allow workers to focus on and utility executives surveyed (55%) in our postelection higher-value tasks. poll think is, by far, the most important digital technology for utilities right now. Alongside their investments in digital solutions, utilities can be expected to reassess and upgrade their cyber defenses after the US Department of Homeland Security warned of an increase in cyberattacks right before the elections from foreign groups specifically targeting the energy sector.

2021 power and utilities industry outlook 7 2021 power and utilities industry outlook

Decarbonization and digital strategies to drive industry convergence in 2021

In the coming year, the evolving energy landscape which this uptake can translate into market participation. is expected to be characterized by five trends: These trends in turn would expedite the process consolidation, new economies, new battery business of convergence we are seeing as new entrants and models, increased scale, and heightened disaster incumbents position to serve a growing clean power readiness. In this context, our postelection poll showed market in an economy gradually electrifying. The that most power and utility executives surveyed think recent uptick in antitrust activity around big technology that utilities should primarily focus on decarbonization companies may also alter the competitive landscape by strategy (33%) and digital strategy (29%) over the next limiting their penetration of the energy sector. Expanding year. Key areas to watch with a change of administration to the international market, carbon taxes could be a include the uptake of distributed energy resources, game-changer in both the energy and trade sectors. EVs, and hydrogen. Meanwhile, pending FERC decisions and new FERC appointments could shape the extent to Let’s talk

Jim Thomson Vice Chairman US Power, Utilities & Renewables Leader Deloitte LLP [email protected] +1 813 230 3714

Jim serves as the vice chairman, US Power, Utilities & Renewables leader, as well as a lead client service partner for Deloitte Consulting LLP. A consulting principal based in Tampa, Jim has more than 30 years of consulting experience working with global power and utility and renewable energy clients. He is focused on helping clients with complex and critical challenges within the power and utility industry and brings a strong passion for making a difference with some of our largest power and utility and renewable energy businesses and their customers.

2021 power and utilities industry outlook 9 Endnotes

1. 1 Ed Clowes and Olivia Rudgard, “Tesla applies for UK electricity provider 8. Green Mountain Power, “Tesla Powerwall,” https://greenmountainpower. license,” Telegraph, May 2, 2020, https://www.telegraph.co.uk/busi- com/rebates-programs/home-energy-storage/powerwall, accessed ness/2020/05/02/tesla-applies-uk-electricity-provider-licence, accessed October 2020. October 2020. 9. Sunrun, “SCE Bill Too High? Get Peace of Mind with Solar Panels and 2. Federal Energy Regulatory Commission (FERC), “FERC opens whole- Solar Battery Storage Today,” https://www.sunrun.com/utility/ca/sce, sale markets to distributed resources: landmark action breaks down accessed October 2020. barriers to emerging technologies, boosts competition,” https://www. ferc.gov/news-events/news/ferc-opens-wholesale-markets-distribut- 10. Opus One Solutions, “Opus One Solutions deploys first transactive ed-resources-landmark-action-breaks-down#:~:text=The%20Federal%20 energy management software at Southern California Edison for a DOE Energy%20Regulatory%20Commission,regional%20organized%20whole- demonstration project,” June 23, 2020, https://www.opusonesolutions. sale%20electric%20markets, accessed October 2020. com/news/opus-one-solutions-deploys-first-transactive-energy-management-software-at-southern-california-edison-for-a-doe-demonstra- 3. Note that Order 841 removed barriers to storage participation in tion-project, accessed October 2020. wholesale markets and their compensation for capacity, energy, and ancillary services across all ISOs, even if the storage is connected at the 11. Zachary Shahan, “US Tesla sales up 22% in 3rd quarter, US auto sales distribution level and providing services in retail markets. down 9%,” Cleantechnica, October 12, 2020, https://cleantechnica. com/2020/10/12/us-tesla-sales-up-22-in-3rd-quarter-us-auto-sales- Catherine Morehouse, “DC Circuit upholds landmark FERC storage or- down-9, accessed October 2020. der, rejecting claims it violates state authority,” Utility Dive, July 13, 2020, https://www.utilitydive.com/news/dc-circuit-upholds-landmark-ferc-stor- 12. Bethany Villarreal, “SemaConnect Secures Investment from Trilantic age-order-rejecting-claims-it-violate/581436, accessed October 2020. North America,” https://semaconnect.com/blog/semaconnect-secures-investment-from-trilantic-north-america, accessed October 2020. 4. FERC, “Staff presentation item E-1,”https://www.ferc.gov/staff-presenta - tion-item-e-1, accessed October 2020. 13. Rebecca Elliott, “Spread of electric cars sparks fights for control over charging,” Wall Street Journal, October 17, 2020, https://www.wsj. 5. “US FERC says it has jurisdiction over power market carbon market price com/articles/spread-of-electric-cars-sparks-fights-for-control-over- plans,” Reuters, October 15, 2020, https://www.reuters.com/article/us- charging-11602927000, accessed October 2020. usa-ferc-carbon-price-idUSKBN2702Q7, accessed October 2020. 14. Richard Stubbe, “Oil & gas majors pivoting to renewables in pandemic: 6. Earthjustice, Complaint of Voltus, Inc. requesting fast track process- Q&A,” Bloomberg New Energy Finance, August 4, 2020, https://about. ing, October 20, 2020, https://earthjustice.org/sites/default/files/ bnef.com/blog/oil-gas-majors-pivoting-to-renewables-in-pandemic-qa, files/2020-10-20_voltus_complaint.pdf, accessed October 2020. accessed November 2020.

7. Ben Kellison and Fei Wang, “What the coming wave of distributed energy 15. Nasdaq, “Oil price crash opens a window of opportunity for renewables,” resources means for the US grid,” Greentech Media, June 18, 2020, Oilprice.com, March 27, 2020, https://www.nasdaq.com/articles/oil- https://www.greentechmedia.com/articles/read/coming-wave-of-der- price-crash-opens-a-window-of-opportunity-for-renewables-2020-03-27, investments-in-us, accessed October 2020; Wood Mackenzie, “United accessed November 2020. States Distributed Energy Resources Outlook,” July 2020, accessed October 2020. 16. John McCormick, “California utilities hope drones, AI will lower risk of future wildfires,” September 11, 2020,Wall Street Journal, https://www. wsj.com/articles/california-utilities-hope-drones-ai-will-lower-risk-of-future-wildfires-11599816601, accessed October 2020.

2021 power and utilities industry outlook 10 About this publication This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

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