Taxes, Toys and other Converging Forces of Energy Change

Turning Energy Strategy Upside Down, Part 2

Traditional utility business models are being challenged by a convergence of forces that threaten to turn most energy strategies upside down.  These forces of change include:

  1. Renewable Energy Boom & Bust. Production tax credit-supported growth in renewable energy in the competitive wholesale segment is being driven by state renewable portfolio standards requiring utilities to buy more now intensified by a federal push to do the same.  What is the right balance of  renewable energy in our portfolio? Are we are building too much renewable energy too fast?  Can the grid integrate it?  Is there transmission to support it?  Are we trading off energy reliability for cleaner technology?  And how much will it cost ratepayers?  How much will ratepayers tolerate before they revolt?
  2. Emissions Reduction or Energy Tax Revenue Play? The quest for emissions reduction and use of that aspiration as a basis for carbon taxes or cap and trade regulations by the government is bearing down fiercely on utilities with a coal fired generation portfolio.  It likely will also provoke accelerated consolidation in the coal industry and may increase US coal exports to markets more coal-friendly.  I am not a “deny-er” on this topic, but I admit skepticism about whether the path our politicians seem to want to take up on this quest will produce beneficial results that are worth what they seem ready to force me to pay for them.  I’d rather refill the hole in my own 401k before I help Al Gore make his next $100 million selling emissions credit indulgences.
  3. Smart Grid, Energy Cleantech and Real-time Pricing.  The search for the ‘next big thing’ in IT and the lusting by private equity for investment opportunities in cleantech to capture it is causing a feeding frenzy among cleantech startups seeking a place at the stimulus banquet table—the question is will we have interoperability and scalability for these smart grid solutions in time to avoid wasting a lot of capital experimenting with alternative technologies before the ‘blu-ray” of smart grid technologies finally wins out to set the standard? And remember, none of this really pays off without real-time pricing of energy to provide consumers the incentive to use all this stuff.  Remember when your Ma Bell land line cost $12 per month and now your cell phone cost $100 per month?
  4. Energy Efficiency, Demand Response and Digital Toys.  The concept of less is more is returning to center stage.  This time it is moving well beyond the ‘negawatt’ concept of the past to a more sophisticated proactive decision to use technology to control load, cycle equipment on and off using sensors and software.  We are entering the great ‘gaming of energy’ phase where our daily use of electrons is being turned into an iPhone, Wii, Blackberry, Pre or Comcast-enabled app.  Kill Ready Kilowatt!!  It’s fun—and you can save a few pennies—if you fork over the big bucks for IT gear and digital toys!
  5. Energy Security or Showbiz.  Meanwhile, the Federal Government is pushing hard for improvements in energy security out of fear of the lone wolf terrorist attack on a power plant or transmission line or a cyber attack on the grid.  No doubt these threats are worrisome but energy security should focus on more than homeland security insurgency to address supply diversity, reduced imports of fuel stocks; transmission congestion and choke points; and reduced exposures to uncontrollable geopolitical events.  Putting a band-aid on utility security with new reporting regulations while ignoring the underlying risk factors is more politics than security. But maybe we can buy nuclear energy from Iran and North Korea and turn these foes into our providers of last resort and give them a reason to like us.  We can import LNG from Russia to discourage new Russian adventures.  And don’t forget, we’ll get all those wind turbines from China and pay a little extra by adding an emissions credit payment to the price as penance for our wasteful ways.

This sarcastic but fun to write posting is designed to get your creative juices flowing about the force of change you see bearing down on the North American energy industry particularly the electric power industry.  No doubt there are more factors than these—what would you add to my list of things to keep the utility CEO up at night?