Turning Energy Strategy Upside Down, Part 1

A Quick History of the Energy Biz and Why It Matters

Energy market volatility is a wonderful thing for consultants, traders, and investors. Customers, of course, hate volatility.  Utilities and their suppliers are often caught in the middle—and often being in the middle was a sweet spot—that is changing.

In the beginning. . .

There were regulated, fully integrated, investor owned utilities serving much of America’s electric, gas, and telecommunications needs with help from public power, electric and telephone cooperatives often serving rural areas.  As part of the “stimulus” efforts from the Great Depression, the Federal Government embarked on hydropower dam building, rural electrification and creating TVA, Bonneville and other Federal Power Marketing Agencies.

World War II pulled America out of the depression and as the troops came home there was an explosion of home building, job creation, and enterprise to meet the needs of the explosive growth of new families created.  The baby boom started the greatest period of economic expansion the nation had ever seen.  As the boomers filled their three bedroom subdivision homes with kids and incomes rose demand increased.  From WWII until the late 1970’s each new power plant built by an investor owned utility had the effect to lowering the average cost of service for customers and raising the return on equity for utilities. Life was good.

Inflation in the 1970’s and 1980’s savaged capital construction costs and wiped out nuclear power plant construction as costs spiraled up, anger at rising rates hit the fan, and regulators being good politicians put on the brakes.  By then America had a very large installed base of coal fired generation and a new but very expensive fleet of nuclear power plants.

What to do?  Whatever to do!  Let’s try competition.

In 1978 the Public Utility Regulatory Policy Act (PURPA) began the staged introduction of wholesale competition into the power generation segment. By 1992 open transmission access and wholesale power market competition was in full swing with merchant generators supplanting utilities as suppliers of marginal increments of power supply.  By the end of the decade the forces of competition were bearing down on the industry and many investor owned utilities were forced to “unbundle” and sold off their power generation, sequestered their transmission and were forced to decide “ what do you want to be when you grow up?”

California Electric Market Melts Down and Enron Collapses

Then the California Energy Crisis and the meltdown of the experimentation with retail energy access and trading soured customers and regulators but taught valuable lessons about the market behavior in times of volatility.  The collapse of Enron, retrenchment to more traditional commodity regulated energy supply for retail customers stabilized the industry and allowed time to ‘wound all the heels’ that created the mess.

Fast forward to today’s concerns . . .

Concerns about climate change and greenhouse gas emissions grow as does enthusiasm for renewable energy as cleaner, greener.  In Silicon Valley and throughout the high tech sector the post-dot.com bust search for new growth opportunities focuses on cleantech and the tax incentives and regulatory drivers set the stage for a private equity to focus on the energy industry.  Production tax credits for renewables stimulated fits and spurts of expansion for wind generation and other renewables and growing acceptance led to entry by big players to consolidate the renewable segment.  State renewable portfolio standards (RPS) greased the procurement path for utilities to buy more of it.  Smart grid tech is an IT dream come true and Obama Federal stimulus money sweetens the pot.

Why does all this matter?

For the last thirty years since PURPA, the electric power industry has been buffeted and transformed by volatility.  The introduction of competition first at the wholesale level for natural gas and power generation were the essential seed corn for everything that has followed.  Competition in the energy sector has utterly changed the face of America and when combined with regulatory mandates for open access transmission, renewable energy portfolio standards and integrated resource planning, and now the quest to reduce emissions we have set the stage for what’s to come.

We are reinventing the energy marketplace as we speak

Smart grid, the digitizing of the energy transmission and delivery system leveraging high tech software, sensors and applications to capture, package, interpret and feedback back to us information about energy consumption and efficiency will utterly transform the way we think about energy.

Beyond the crude experiments with retail competition of the 1990’s, this time the commodity sale of energy will likely be turned on its head replaced by “energy applications” available on your iPhone or managed on your cable TV’s energy channel to assess, package, manage and shop for bundles of products and services.

Smart grid and other high tech solutions are an IT play that requires scale, broad access to markets, interoperable equipment standards, and fast, convenient access to customers.  Energy commodity is the mere lubricant which will grease the future access to energy-driven services and the achievement of national, state and regulatory policy goals now being defined.

Are you ready?

In the next series of posts I want to explore the implications of this transformation at work for utilities and their supply chains; for consultants and their products offerings; for consumers; and think out loud about the shape of the industry future.  I encourage you to join in this crowdsourcing exercise in brainstorming with your comments.

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