On February 4, the Energy Security Initiative (ESI) at Brookings hosted Brookings Trustee Jim Rogers and ESI Nonresident Senior Fellows Mike Chesser and Ron Binz to discuss the future of the electric utility industry, including regulatory challenges, implications for customers and impact on utility strategy. Senior Fellow Charles Ebinger, director of ESI, provided introductory remarks and then moderated a discussion.
Following are highlights of the panelists’ introductory remarks. Full audio and video are available on the event’s page.
Charles Ebinger: By 2050, nearly 70% of the current non-carbon emitting generation plants have to be replaced at a prodigious potential cost
It’s hard to believe that it was nearly … 36 years ago that we had the passage of the PURPA legislation, which of course for the first time assailed the historic role of monopoly utilities in the United States, by introducing the concept of independent power generation. And since then of course through a number of FERC orders and a variety of other pieces of legislation, we have seen of course the transmission sector also torn asunder with the development in some market at least of ISOs [Independent System Operator] and TSOs [Transmission System Operator], and now we are at the point where we see utility distribution—also the traditional modes of utility distribution—also coming under assault under the rubric of distributed generation [DG], with things such as roof-top solar and other forms of DG.
Clearly the utility industry is under great challenges. … By 2050, nearly 70% of the current non-carbon-emitting generation plants have to be replaced at a prodigious potential cost … They are going to be replaced very likely by new plants that will have a higher, albeit different, capital structure. So we have a number of questions before us today.
Ron Binz: Imagine the grid of the future where every device on the network—every refrigerator, every hot water heater, every generating plant, every steel mill—is communicating with every other thing, including some central orchestrator who make all of this work together
The subject we’re on today is huge. It’s very complicated. It’s even hard to define the terms around it. But when approaching the utility of the future, I’d like to ask each of us to think about what the grid of the future is going to look like. So let’s go out far enough that we can jump over today’s current controversies about $5 natural gas this week when it was only $3 six weeks ago …. Let’s just skip over that. What’s the grid going to look like 20 or 30 years from now?
There are certain characteristics which I think we will agree on. One is that it will be low carbon. I know there is religious debate in this country about the reality of the climate change, whether it’s anthropomorphic and so forth and so on. I’m asking you … to just move out 30 years from now and imagine a grid in which the electricity generated and consumed is zero, or near zero, carbon on average.
The second thing I am going to ask you to imagine is that it’s going to be a connected, webbed grid in much the same way as the Internet is today. I believe that the application of IP technology to the electric grid will transform electric consumption in a parallel but different way than the way the Internet has remade news gathering, entertainment, purchasing, banking, about anything we do. Just think how fundamentally those, the IP technology, has changed that. A similar transformation will happen in electricity. Although we can’t always decide what that will look like, it will happen.
So today you hear about the smart grid—you can set the thermometer in your house … while driving your car and talking to your wireless connection to your grid. That sounds kind of corny or hokey. And I agree that it is. You can’t justify an overhaul of the grid from your ability to be able to change your thermostat from your car. On the other hand if you imagine that every device on the network—every refrigerator, every hot water heater, every generating plant, every steel mill—is communicating with every other thing, including some central orchestrator who make all of this work together; if that’s the image you hold of the grid of the future, then you can start backing up from that and deciding what kind of changes are going to be required to get there.
Michael Chesser: Utility companies that succeed will be thinking about how to make the world better
I have to say having spent most of my career with four or five different utilities, I come down very optimistic about the potential of utilities to not only thrive but to also evolve into a more exciting kind of a company. …
The key will be, and this is a fundamental belief that I have, is companies that succeed over the long-term have a sense of a higher purpose. They’re not just looking at earnings next quarter or earnings next year but they’re thinking about how can we make the world better. That’s sort of been the legacy of utilities for over 125 years. Always looking for ways to improve the life of our customers, always looking for ways to improve the community, the economic development, the environment and even the low-income challenges that communities have.
So utilities that keep a focus on that as we go into this new world, then I think they are going to succeed. Obviously they are going to have to change the way they approach the market place. They have to recognize, focusing on the customer, that there are people out there that have better value propositions to offer than utilities do, with distributed generators, energy service companies and those types of services. But on the other hand, there are customers who really want to get their services from their local utility. They trust the brand, they trust the reliability. So it’s not really an either/or situation. Utilities have to be much more inclusive in how they approach the business.
The other thing that I think is interesting is, there are going to be lots of opportunities for utilities to provide services that maybe they uniquely are going to be able to provide. A classic example … is raising funds and capital in the public markets to fund energy efficiency in our buildings. There’s huge potential still, untapped potential, for improving the efficiency of our buildings. … Energy efficiency should really be our first fuel of choice and utilities are uniquely positioned to help advance that, raise capital, and earn a return on that capital.
Jim Rogers: What will the future electricity-generation mix be?
I’d ask you to think in a more macro way for a moment. If you look at demand for electricity in the United States today, it is essentially flat across the country. Some would say anemic growth. You can make a case there’s actually going to be a decline in the use of electricity, even though we are continuing to do electrification of more processes in the country. But when you look at the new technologies, there are huge productivity gains in the production, in the delivery, and in the use of electricity.
So I think one macro challenge that we all have to think about when we think about the future is a flat declining demand. There has been a decoupling of the growth and demand for electricity from growth in GDP for the first time in our history. … It’s going to have profound implications for the way forward.
The second thing … is that by 2050, virtually every power plant in this country with the exception of our hydroplants, and assuming that they will extend the license for nuclear from 60 years to 80 years, are going to be retired and replaced. It’s almost a virtual blank sheet of paper in terms of how do we design the generation mix going forward.
Now the significance of that is, if you believe that climate is a problem, and I do, is if we shut down the nuclear fleet of the United States, that represents 70% of the carbon-free electricity. And the question is, What are you going to replace it with? Are you going to replace it with nuclear? We have abundant of shale gas. Shale gas which has 50% of the carbon of coal? significantly more emissions than nuclear? So, one of the big challenges and question marks is, as we redesign the generation fleet in this country, what will the mix be? And how will we incent the building of the mix? Because the power sector is the most capital intensive industry in the United States. And as a consequence, we have to attract significant capital in order to replace this generation fleet.
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Mingwei Ma contributed to this post.