2020 power and utilities industry outlook Power and utilities industry seeks growth by leading clean energy transition
In 2019, the multiyear pattern of record-breaking utility electrification, especially in the transportation sector as capital expenditures amid stagnant load growth continued electric vehicle (EV) adoption rises. in the power industry. And it shows few signs of changing as the need to upgrade aging infrastructure, digitize, and In our 2019 outlook, we explored how the US power and secure the grid against natural and manmade disasters utilities industry is continuing on its path to transformation such as cyberattacks continues. But while this generally and experimenting with new technologies and business creates upward pressure on prices, once again in 2019 models, while the traditional utility regulatory structure retail electricity customers saw only modest increases. struggles to catch up. As we move into a new decade, many This is due in part to low natural gas prices and declining power and utility companies are not only boosting their costs of wind and solar power continuing to dampen own decarbonization commitments and efforts, but they’re wholesale electricity prices. also taking on the mantle of leadership in the economy- wide clean energy transition. In 2020, we expect to see Natural gas continued to dominate the US power these efforts intensify and bring new opportunities for generation mix, at more than 44 percent of generation customer engagement and growth. capacity.1 Wind and solar capacity also continued its rise, to nearly 12 percent of capacity, driven largely by growing In the recent Deloitte survey about the transition to 100 corporate commitment to renewables, declining prices, percent renewables,4 responding organizations across supportive policies such as renewable portfolio standards the private and public sectors identified “coordination (RPS), and improved performance. Renewables as a whole, with our electric utility” as the top external enabler for including hydroelectric, reached nearly 22 percent of US their progress in moving to cleaner energy sources. This capacity, surpassing coal-fired plants’ share for the first underscores the electric power sector’s unique role as a time.2 And the rush to deploy battery storage at grid-scale leader in the clean energy transition. And many are ready and behind-the-meter surged as battery costs fell sharply. to embrace that role.
Other significant trends in 2019 were the federal While some may have hesitated a decade ago, today most government’s continuing efforts to roll back environmental power companies see rapidly expanding opportunities rules such as the Clean Power Plan,3 while many state to address their customers’ increasing interest in clean and local governments reinforced their support for clean energy and new ways to manage and control their energy energy with steps such as increased renewable portfolio use and costs. From building grid-scale wind and solar standards. Natural disasters such as hurricanes and plants to providing distributed solar, storage, and EV wildfires hit particularly hard in 2019, continuing a pattern charging infrastructure—2020 will likely bring increasing that may signal the need for increased utility planning and opportunities for power companies to create value as even more investment in transmission and distribution a catalyst in the clean energy transition. We’ll start by systems. At the same time, cyberattacks on the electric discussing power companies’ increasing commitments grid have increased and become more targeted in recent to decarbonization and follow with key trends and years, requiring power companies to continue fortifying opportunities for them to help customers transition to their defenses. Bright spots were increasing flexibility cleaner energy while creating value and managing risk for and resilience achieved through grid modernization themselves and their customers. and opportunities to boost long-term revenue through
2020Oil, powergas and and chemicals utilities outlookindustry for outlook 2020 | 2 Sustainability1 Power and utility companies likely to raise the bar on climate change goals in 2020
In December 2018, Xcel Energy became the first US utility to commit to going 100 percent carbon-free by 2050, and 80 percent by 2030.5 Similar power company announcements became a regular occurrence throughout 2019, with nearly 50 companies committing to significant carbon reduction goals by November.6 And it’s likely to continue in 2020. Why? Largely due to technological improvements, customer demand for cleaner energy sources, and a commitment to keep customer bills low. Some are also driven by climate science.
But that’s not all. Capital markets are organizing around climate change issues, and we’ll be watching to see if a growing number of companies across the electric power and other industries assess evolving risks and take further action in 2020. Consider:
•• Investors are increasingly asking companies to analyze the impact on their business of policies consistent with limiting the global average temperature rise to no more than 2 degrees Celsius.7
•• Investors increasingly view companies’ response to climate change as important in deciding which shares to buy.8 “Climate change/carbon” was reportedly “the top ESG [environmental, social, and governance] criterion for money managers representing $3 trillion in assets and the third-biggest issue for institutional investors with a collective $2.24 trillion in assets.”9
•• Credit rating agencies are signaling that they may increasingly incorporate climate risk into credit assessments.10
•• Climate-related shareholder resolutions are more frequently leading to deals with company management, as they increasingly agree to steps like cutting emissions or buying clean power.11
•• A US insurer will no longer underwrite construction of coal-fired power plants and is phasing out existing coverage for companies that generate more than 30 percent of their revenue from coal mining or production.12
To promote more transparency on ESG issues such as climate change, Edison Electric Institute (EEI), an industry trade association, provides an ESG/ sustainability reporting template for its investor-owned electric and gas utility members. The association is also advocating for policies to boost research and development into technologies needed to achieve the industry’s clean energy goals. These include energy efficiency; energy storage; renewable energy; next- generation nuclear technology; and carbon capture, utilization, and storage.13
2020 power and utilities industry outlook | 3 Portfolio modernization2 The new year brings new opportunities to create value from distributed energy resource (DER) strategies
Surveys tell us electricity customers across residential, commercial, and industrial segments increasingly seek to save money, use cleaner energy sources, ensure resiliency, and gain more control over their energy use.14 And utilities, especially those facing rising state renewable portfolio standards (RPS) and corporate carbon reduction goals, seek more flexible resources to help balance the growing supply of variable resources such as wind and solar. They also seek to shave peak demand, avoid costs of building new generation and transmission, and further engage customers.
DER strategies address many of these issues. Hawaiian Electric plans to meet Hawaii’s 100 percent RPS mandate by 2045 (and its own carbon neutrality goal) in part by relying on customers to provide a portion of the renewable energy through distributed resources.15 Utility planners across the sector are planning how best to use DER. Most are exploring questions such as:
•• How to manage DER while maintaining system reliability?
•• Who will own them?
•• How can they use them in emergencies?
•• How can they aggregate them and value them across time and location so DER owners can be compensated for the grid services they provide?
•• How can they be secured?
In one survey, two-thirds of utilities said they wanted to be able to own and rate-base DERs.16 We’ll be watching whether state regulators pave the way for regulated utilities to do so in 2020. Regardless of who owns them, advanced analytics, automation, and other smart technologies can help utilities value and optimize these assets. Since DER can provide so many benefits for utilities, customers, and the grid, utilities should support them, proactively plan for them, and educate customers about them. They should also consider selling, installing, and maintaining DER as a potential revenue source. At the same time, since DER growth can increase vulnerability to cyberattacks, utilities should build robust cyber risk management into their DER strategies.
2020 power and utilities industry outlook | 4 Business model3 transformation Power companies are exploring growth through new business models
New technologies, evolving customer preferences, and the changing competitive landscape are leading many power companies to explore new business models. Some models may help utilities further enable the clean energy transition, and some may also provide new revenue sources.
For example, Sacramento Municipal Utility District (SMUD) is offering program design and implementation for Community Choice Aggregation (CCA) programs. CCAs allow communities to choose their electricity and natural gas sources and aggregate procurement. By late 2019, eight states had approved CCA programs and several more were considering them.17 Many CCAs focus on reducing greenhouse gas emissions, boosting renewable energy, and/ or creating local jobs—and most also aim to cut electricity costs for their customers.18 The SMUD services include design research, data, energy acquisition and transportation, customer service, billing, and assistance with contracting. The utility views this offering as a way to help its customers save money and reduce carbon emissions.19
Some utilities are exploring transactive energy models using technologies such as blockchain to enable customers to create value through rooftop solar, storage, managed EV charging, and eventually vehicle-to-grid transactions. Many see such markets as key to the industry’s future as they can incentivize customer participation and boost grid flexibility. But they typically require further development of regulatory and market structures. One model that may provide lessons for the future is being developed on Isle au Haut, off the coast of Maine. Developers are building a microgrid that includes solar panels, supercapacitors for long-term battery storage, smart inverters, and a transactive energy system that allows neighbors to sell power peer-to-peer and participate in a demand response program that can help automatically balance the grid.20 The question in 2020 and beyond is whether evolving market and regulatory structures can enable replication and scaling of pilots like these. Can New York, California, Hawaii, or another state that’s been exploring these options make it happen?
2020 power and utilities industry outlook | 5 Core growth4 Utilities are seizing opportunities to help build cleaner, smarter cities
Most large US cities, and more than 35 percent of midsize cities surveyed, are implementing smart city projects.21 Many utilities are already deeply involved in these projects and learning that they can increasingly create value by becoming the center of smart city initiatives. In 2020, we would not be surprised to see utilities boost their involvement in smart cities for the following reasons:
•• Utilities are a foundational player with connections to every home and business; their equipment and devices can be harnessed for other purposes, such as detecting water leaks, hosting air quality sensors or security cameras, or powering smart streetlight systems.
•• Utilities have vast databases of energy customer data, and they understand the potential costs and benefits of many smart city decisions.
•• Utilities can help cities incorporate their clean energy goals into smart city plans.
•• Utilities can also help cities boost resiliency to natural and manmade disasters through digitization and automation (with effective cyber risk protection), deploying backup power sources, battery storage, microgrids, and more.
•• Cities may not be able to achieve their goals without collaborating with their utilities and, conversely, if utilities are not involved, they could lose opportunities to nontraditional suppliers.
Not all utilities are actively involved in smart city initiatives, which means opportunities may be left on the table. According to one survey, nearly 33 percent of utilities are playing only support roles in smart city initiatives, and more than 23 percent have no role.22 Utilities in many cities have already installed smart grid infrastructure such as connected and automated devices and technologies for meter reading, system monitoring, and predictive and preventive maintenance. The logical next step is to use their expertise, experience, and technology investments to advance their community’s smart city initiatives. Whether it’s smart, connected EV charging stations, solar parking canopies, smart street lighting, or sophisticated security monitoring— utilities can seize opportunities to create value for their customers, communities, and shareholders by participating in smart city programs.
2020 power and utilities industry outlook | 6 Strategic planning5 Utilities are preparing for EV growth and opportunities
Power companies are helping customers cut carbon emissions not just by greening their energy supply, but by electrifying additional end uses and powering them with clean energy. Heating and cooling and industrial processes are key segments for conversion, and the spotlight is recently trained on the transportation sector, as EVs become increasingly attractive to car buyers and fleet operators. The power industry sees significant potential in the transportation sector, as it accounted for 28 percent of US energy use in 2018, while it was less than 3 percent electrified.23 The 1.1 million electric vehicles on US roads today is expected to rise to 20 million by 2030,24 and 63 percent of organizations recently surveyed by Deloitte have transportation fleet electrification plans.25
And it’s not just cars. Orders for electric delivery trucks, transit buses, and school buses are growing fast too. Amazon recently ordered 100,000 electric delivery vans to ship between 2021 and 2024.26 And one report predicts 40,000 electric heavy-duty vehicles will be on the roads in the United States and Europe by 2025.27 Some utilities are actively supporting e-bus purchases, such as by offering to develop charging infrastructure and pay the cost difference between diesel and electric buses for diesel bus replacements in their service territories.28
These growing fleets of trucks and buses promise both load growth and additional flexible resources to provide demand response and grid services. Utilities are exploring new ways to support charging depots for fleets and coordinating with fleet operators to manage charging to benefit the grid. They see opportunities for growth in building, maintaining, and operating charging depots with distributed generation and on-site storage to provide resiliency— which could require billions of dollars of investment throughout the 2020s.29
In 2020, look for many utilities to continue to invest in charging infrastructure and to accelerate plans to manage EV load in areas of high adoption. Some posit that utilities could build out EV infrastructure on major US highways within a year given the right policies and incentives.30 But while some state regulators already allow utilities to recover costs for charging infrastructure investment, others are still considering it. As for managing growing EV load, utilities are increasingly developing strategies, and several state regulatory commissions have ordered such plans. The imperative is to shift EV charging away from peak electricity demand periods to avoid adding costly new capacity. Utilities are using or planning to use communications and control technologies combined with real-time pricing to incentivize charging during off-peak demand hours and/or periods of peak solar and wind output. 2020 power and utilities industry outlook | 7 2020: Clean energy transition brings opportunities in the new year
The new year brings significant opportunities for the power and utilities industry to grow into its role as leader of the clean energy transition. Many power and utility companies are raising the bar by setting their own clean energy goals as they seize opportunities to help customers transition. Some of the industry’s most significant challenges follow them into the new decade: managing growing cyber risk, justifying new investments to regulators (up 10 points to 55 percent in a 2019 industry survey),31 and preparing for or responding to natural disasters. Improving the customer experience is also a key priority. Doing all of the above while keeping costs low may seem like a high-wire act in more ways than one. But strategic planning, risk management, and ongoing digital transformation can help the industry maintain its balance and grow in the coming year.
2020Oil, powergas and and chemicals utilities outlookindustry for outlook 2020 | 8 Endnotes
1. Federal Energy Regulatory Commission, Office of Energy Projects Energy 16. Gavin Bade, State of the Electric Utility survey 2019, Utility Dive, February Infrastructure Update for July 2019, “Total available installed generating 26, 2019, pp. 49, 51, https://www.utilitydive.com/news/seu-2019-survey- capacity,” September 18, 2019, p. 4, https://www.ferc.gov/legal/staff- uncertainty-mounts-in-the-clean-energy-transition/549214/. reports/2019/july-energy-infrastructure.pdf. 17. Lean Energy US, “CCA by State,” https://leanenergyus.org/cca-by-state/, 2. Ibid. accessed October 2019; Eric O’Shaughnessy, Jenny Heeter, Julien Gattaciecca, 3. Nadja Popovich, Livia Albeck-Ripka, and Kendra Pierre-Louis, “85 Jenny Sauer, Kelly Trumbull, and Emily Chen, Community choice aggregation: Environmental Rules Being Rolled Back under Trump,” New York Times, Challenges, opportunities, and impacts on renewable energy markets, National September 12, 2019, https://www.nytimes.com/interactive/2019/climate/ Renewable Energy Laboratory (NREL), February 2019, pp. iv–v, https://www. trump-environment-rollbacks.html. nrel.gov/docs/fy19osti/72195.pdf. 4. Marlene Motyka, Kristen B. Sullivan, Suzanna Sanborn, and Jaya Nagdeo, 18. Rob Nikolewski, “Why SDG&E wants to get out of the business of buying Moving organizational energy use toward 100 percent renewables—aspiration or electricity,” San Diego Union-Tribune, January 13, 2019, https://www. destination? Insights from the Deloitte 100 Percent Renewable Transition Survey, sandiegouniontribune.com/business/energy-green/sd-fi-sdge-wants-out-of- Deloitte Insights, October 2019, p. 21, https://www2.deloitte.com/content/ buying-power-procurement-20190113-story.html. dam/insights/us/articles/6387_100-Percent-Renewables/DI_100-Percent- 19. SMUD, “SMUD expands services to Silicon Valley Clean Energy,” June 25, 2019, Renewables.pdf. press release, https://www.smud.org/en/Corporate/About-us/News-and- 5. David Roberts, “A major US utility is moving toward 100% clean energy faster Media/2019/2019/SMUD-expands-services-to-Silicon-Valley-Clean-Energy. than expected,” Vox, updated May 29, 2019, https://www.vox.com/energy-and- 20. Robert Walton, “Dynamic Grid Systems will rebuild a small Maine utility from environment/2018/12/5/18126920/xcel-energy-100-percent-clean-carbon- the ground up,” Utility Dive, June 27, 2018, https://www.utilitydive.com/news/ free. dynamic-grid-systems-will-rebuild-a-small-maine-utility-from-the-ground- 6. Smart Electric Power Alliance (SEPA), “Utility carbon reduction tracker,” https:// up/526693/. sepapower.org/utility-carbon-reduction-tracker/, accessed October 2019. 21. Noman Akhtar, US smart cities – 2018, US Conference of Mayors and IHS Markit, 7. Amy Myers Jaffe,A framework for 2 degrees scenario analysis: A guide for oil and June 2018, p. 9, http://www.usmayors.org/wp-content/uploads/2018/06/2018- gas companies and investors for navigating the energy transition, Ceres, 2016, Smart-Cities-Report.pdf. p. 3, https://www.ceres.org/sites/default/files/reports/2017-03/Framework_ 22. Black & Veatch, 2019 Black & Veatch Strategic Directions: Smart utilities report, Jan%2010%2017.pdf. 2019, p. 35, https://pages.bv.com/SDR-SmartUtilities-Download.html. 8. Transition Pathway Initiative, “Overview of the TPI,” www.lse.ac.uk/ 23. US Energy Information Administration (EIA), “Share of total US energy used GranthamInstitute/tpi/about/. for transportation, 2018” pie chart, from “Use of energy explained: Energy use 9. Hazel Bradford, “Climate change moves to top of investors’ list of ESG issues,” for transportation” web page, https://www.eia.gov/energyexplained/index. Pensions & Investments, September 16, 2019, https://www.pionline.com/esg/ php?page=us_energy_transportation, last updated May 10, 2019. climate-change-moves-top-investors-list-esg-issues. 24. Herman K. Trabish, “The rise of EVs could overwhelm the grid, but PG&E has a 10. Kristoffer Tigue, “Climate change becomes an issue for ratings agencies,” better plan,” Utility Dive, June 13, 2019, https://www.utilitydive.com/news/the- InsideClimate News, August 5, 2019, https://insideclimatenews.org/ rise-of-evs-could-overwhelm-the-grid-but-pge-has-a-better-plan/555984/. news/04082019/climate-change-ratings-agencies-financial-risk-cities- 25. Marlene Motyka, Kristen B. Sullivan, Suzanna Sanborn, and Jaya Nagdeo, companies. Moving organizational energy use toward 100 percent renewables—aspiration or 11. Ross Kerber, “Climate activists find warmer reception at shareholder destination?, p. 15. meetings,” Reuters, July 11, 2019, https://www.reuters.com/article/us-usa- 26. Ben Kellison, “4 Takeaways from Amazon’s huge electric delivery van order,” climate-investors/climate-activists-find-warmer-reception-at-shareholder- Greentech Media, September 26, 2019, https://www.greentechmedia.com/ meetings-idUSKCN1U62FY. articles/read/4-takeaways-from-amazons-huge-electric-delivery-van-order- 12. Chris D’Angelo, “First major US insurance company moves away from coal,” with-rivian#gs.96jtgj. Grist, July 7, 2019, https://grist.org/article/first-major-u-s-insurance-company- 27. Timotej Gavrilovic, “Global electric bus adoption to triple by 2025,” Greentech moves-away-from-coal/. Media, September 16, 2019, https://www.greentechmedia.com/articles/read/ 13. Edison Electric Institute, “Delivering America’s Energy Future,” prepared global-electric-bus-adoption-is-set-to-triple-by-2025#gs.91ysyo. remarks from EEI President Thomas R. Kuhn at the EEI Wall St. Briefing in New 28. Ibid. York City, February 6, 2019, p. 2, https://www.eei.org/issuesandpolicy/finance/ 29. Ben Kellison, “4 Takeaways from Amazon’s huge electric delivery van order,” wsb/Pages/default.aspx. Greentech Media. 14. Marlene Motyka, Stanley E. Porter, Suzanna Sanborn, Andrew Slaughter, 30. Mark Webb, Dominion Energy, speaking at SEPA Grid Evolution Summit, and Scott Smith, Deloitte Resources 2019 Study, Energy management: Balancing Washington, DC, July 31, 2019. climate, cost, and choice, Deloitte Insights, June 2019, pp. 2–3, https://www2. deloitte.com/content/dam/insights/us/articles/5065_Global-resources-study/ 31. Gavin Bade, State of the Electric Utility survey 2019, Utility Dive, February 26, DI_Global-resources-study.pdf. 2019, p. 30. 15. Marc Asano, Hawaiian Electric Companies, speaking at 2019 SEPA Grid Evolution Summit, July 31, 2019, and The Hawaiian Electric Companies’ 2016 Power Supply Improvement Plan (PSIP) Update report – Executive Summary, Hawaiian Electric, December 2016, p. ES-1, https://www.hawaiianelectric. com/documents/clean_energy_hawaii/grid_modernization/psip_executive_ summary_20161223.pdf.
2020 power and utilities industry outlook | 9 Let’s talk
Scott Smith Vice Chairman US Power & Utilities Leader Deloitte LLP [email protected] +1 619 237 6989
Scott serves as the vice chairman, US Power & Utilities leader for Deloitte LLP, as well as the Audit Industries leader for Deloitte & Touche LLP. He is an Audit partner with more than 29 years of public accounting experience working with power and utility clients throughout the United States, South America, and Europe. Scott serves on the Global Power leadership team, and he also serves as lead client service partner, advisory partner, and concurring review partner on several of our largest power and utility clients.
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