Part I of II: Benefits of cross-sector collaborations with utilities
Owners of refineries and other large industrial assets, along with owners of large commercial and institutional facilities, are developing new partnerships and gaining great bottom-line benefits by working with leading US utilities who have been Evolving Utility Business Models.
New utility business models are turning energy transition challenges into business opportunities that create shared value.
That the achievement of energy transition goals remains a very big challenge is made clear by a review of this month’s US Energy Information Administration’s Short Term Energy Outlook (STEO).
The STEO shows rising usage and rising prices for natural gas and for electricity in 2022—with noteworthy increases in the price of electricity at both the residential customer level (up 7.5%) and in some major regions, dramatically higher wholesale prices (up 25% in the Southeastern US vs. 2021, and up 96% in ISO New England and 124% in ISO New York).
While electricity generation from renewable energy sources (mostly wind and solar) is forecasted to be 20% higher in 2022 vs. 2021, the EIA also projects that there will be an increase for 2022’s level of coal production, and for energy-related CO2 emissions in the US.
Leading utilities are providing a wide range of new services to improve energy usage and achieve decarbonization. These utility service offerings include:
- Energy advisory services
- Cost-saving energy efficiency rebate programs
- Peak demand reduction programs
- Microgrid- and other Distributed Energy Resource based reliability improvements
- Primary energy use case improvements (e.g. replacing inefficient electrical equipment and/or electrifying processes which still rely on direct burning of fossil fuels);
- Facility and building management programs
- Installation of rooftop solar and large utility scale renewable energy projects
- Transportation network improvements and/or Electric Vehicle enablement
These activities are being carried out not only via the local regulated utility but also through non-regulated utility subsidiaries which many large US investor-owned utilities have spun off from their regulated holding companies. While no company is immune to market volatility, it is of value to look at the prevalence of relatively strong financial performance for leading utilities who have robust non-regulated subsidiaries with large business units that are providing these services nationwide, in comparison to utilities that have stuck with the traditional asset owner model.
Part II of II: Examples of utilities helping Commercial and Industrial customers meet major ESG challenges
Fundamentally, utilities play a crucial role in helping their commercial and industrial customers, as well as the municipalities and states where they operate, meet emissions reduction and other sustainability and ESG-related goals, while also supporting local economies and ensuring cost-effective continuity of reliable and safe infrastructure operation.
Some major utilities, e.g. National Grid (1) and Southern California Edison (2) have committed not only to achieving net zero Scope 3 emissions, but have also committed, as part of their stated mission, to take a leading role enabling the entire utility industry, and the entire country, to achieve net zero e.g. NextEra (3).
While these goals may seem too lofty to some, so did the goal of replacing the old-fashioned ice box, (where a driver delivered blocks of ice to individual homes) with the new-fangled electric refrigerator. In this regard, when it comes to utilities engaging more deeply with those they serve, the phrase “everything old is new again” applies very well, per the following quick look back in time:
Before the 1920’s, as electric streetlights replaced gas lights, the local “Light & Power” utility initially provided lighting service. Then, for their residential and commercial customers, these utilities had service contracts for replacement of bulbs on site. In subsequent decades, as installations of lighting service increased and the utility industry evolved, utilities expanded their market by playing a key role in greater electrification beyond lighting for residential customers. In 1922 in the US, the utility industry and railroads together represented the economy’s largest portion of capital investments. Back then, the majority of washing machines and refrigerators sold in the US were not sold by department stores, but instead were sold by specially dedicated sales departments within most major cities’ electric utility companies. Utilities drove innovation back then, and along with their retail Sales Departments, they also interacted closely with those they served. Often, the meter reader was an interface with the end-user, and encouraged customers to buy their first washing machine or refrigerator on a lay-away plan, as part of their monthly bill. Utility company engineers and technicians at refrigerator and washing machine Service Departments at gathered data and reported to manufacturers specific details about what needed to be improved so as to make electric appliances more economical and desirable for end users.
Even though, in 2022 vs. 1922, fewer people view utilities as being “high tech,” utilities are again innovating, both by way of internal resources, and also through new relationships with “high tech” partners in other industries.
- See page 5, “It is not common for companies to include Scope 3 emissions in their greenhouse gas reduction efforts, or in their net zero targets; however, as a utility our Scope 3 emissions cannot be ignored and we look forward to helping reduce these emissions.” National Grid USA, 2021 Net Zero Plan Update. November 4, 2021. https://www.nationalgridus.com/media/pdfs/our-company/net-zero/cm8610-net-zero-sm.pdf
- Southern California Edison: “Achieve net-zero GHG emissions across Scopes 1, 2 and 3 by 2045, in alignment with economy-wide climate actions planned by the State of California. This covers the power SCE delivers to customers and Edison International’s enterprise-wide operations, including supply chain.” Edison International Sustainability Report, 2021, page 8
- NextEra: "Real Zero means our power generation would come from 100% carbon emissions-free energy sources at no incremental cost to our customers relative to alternatives...Real Zero means zero scope 1 direct emissions from owned assets and zero scope 2 indirect emissions from owned or leased assets, by no later than 2045" (Page 10). "Third, we would help lead the decarbonization of the U.S. economy – by working to become the preferred partner for customers to help them reduce or eliminate carbon emissions in their own operations." (Page 12)
The most recent developments associated with these and related issues will be analyzed in more detail from a strategic perspective in the upcoming ARC Advisory Group Insight, “Utilities and New Business Models for Industrial Sustainability and Energy Transition,” by Peter Manos.