WHAT IF? Scenario Ideas for the Energy Business Cycle Recovery

What If?

That is the question that always comes to mind when we consider alternatives.

    • What if things had been different?
    • What is prices had been higher or lower?
    • What is we had thought of that idea first?

For many years at Global Energy Decisions, a best practice that served us well was to look at the pattern of consulting requests incoming from clients to take the pulse of the changing energy market place.  We had many uses for this insight:

  • Identify Customer Pain Points.  By taking our pattern data and adding adult beverages we had some very useful discussions with our sales executive and account managers seeking to validate the data and inform our thinking about what was going on in the markets.  Sales guys want to sell stuff so they would interpret the data in terms of business problems or “pain points” that they hoped to solve with a solution they might pitch.  This front lines sanity checking of the data was always useful for both the analytics geeks as well as the sales team.
  • Challenge Conventional Wisdom.  The tendency is always to take current conditions and project them forward.  Unfortunately things are never good forever, nor, thankfully, bad forever either. But whether you are a strategy advisor as I am helping my clients think about their business future in terms that are practicable, insightful, and actionable—or a sales guy trying to figure out what a client in this lousy market is willing to buy, it is useful to offer a fresh view of things to whet appetite and get the client’s creative juices flowing so he can get out of his current funk and focus on where he wants to take his business rather than just being swept downstream by the raging red ink of stimulus spending.
  • See the Possibilities and Sweet Spots Ahead.  The energy industry is accustomed to a boom and bust market environment so those who have been around for a while often see the bust side of the business cycle as their best opportunity to use the time available to get ready for the build-up, then recovery and then the next boom stage of the cycle before their competitors see it.  The job of a strategy advisor then is to help the client break out of his funk and see the possibilities across the business cycle—then work backward to get ready for what’s ahead.

At Global Energy we built an outstanding product in our Global Energy Horizons scenarios.  The product was good because we had a great team of experienced consultants setting the stage to put the qualitative power of scenario analysis to work with the quantitative power of market and financial analytics to make the scenarios actionable across our long term reference case forecast.  The product turned into an outstanding one when we blended the active participation of scores of clients to ‘cuss and discuss’ the scenario drivers and building blocks, implications and consequences, to get to the “sweet spots” where the overlap of scenarios revealed those strategy options that just seemed to work well across several or all the scenarios.

YUREKA!

Well, Global Energy Decisions is gone to be part of the ABB kingdom and that great team of consultants spread across  firms like WoodMac, SAIC/RWBeck, Navigant, Nexant, IHS and others.  But I hope they have not forgotten the power of scenario analysis to torment the clients into action in time to take advantage of the sweet spots presented as the energy business cycle moves forward.

Based upon my current reading of customer pain points as my own clients ask me questions that reveal patterns, I want to suggest four new Energy Business Cycle Scenarios to consider.  I no longer have my great Advisors ‘geek squads’ to do the simulation analysis of these scenarios, but they no longer have me driving them to think like an insurgent to dream up these ‘hair-on-fire’ ideas.

So here are four energy business cycle scenario ideas to consider:

SMART GRID GRINCH

  • A muddling through view of the future
  • Federal stimulus spending and state PUC orders will drive smart meter installations reaching 20% of customers by 2013 but worries over deficit spending and rising utility rates will slow growth of smart meters thereafter and savage the share prices of major smart grid vendors.
  • Utilities will largely see savings from reduced meter reading costs and distribution automation but benefits for customers never materialize and rates keep increasing creating a lingering ‘Bakersfield Effect’ of grumbling that spreads from customers to politicians to regulators.
  • That Bakersfield Effect will force regulators to slow down on new demands that drive up rates—a growing number of states with 20% RPS targets will ‘declare victory’ and go no further.
  • Few states will adopt dynamic pricing sufficient to send demand response price signals needed to change customer behaviors.
  • With little new high voltage transmission especially crossing state lines to provide market access for promising large scale wind and solar energy projects investors back out especially in markets where RPS target achievement is near.
  • Both utilities and merchant power generators invest heavily in capacity creep, uprating and life extensions to fill the vacuum created by reduced renewable energy activity.
  • New capacity additions are driven by demand recovery with natural gas combined cycle as the fuel of choice since the technology is proven, the costs are affordable, siting is easier and lead time reduced especially if new units can be ‘tucked into’ existing sites.
  • Continued expansion of unconventional natural gas production means plentiful supplies of natural gas at moderate prices averaging in the $5 to $6 per mmBtu range over the forecast period. Gas prices will rise from current low levels as current held-by-production (HBP) contract pricing terms expire and are replaced with more flexible terms in competitive markets.
  • Coal fired generation market share erodes slowly as natural gas eats share but existing coal plants continue to operate with most adding scrubbers to reduce emissions levels.  Surplus coal finds a market in coal exports mostly to Asia.
  • The traditional utility business model with competitive wholesale power generation largely survives in tack by the end of the scenario having more staying power than the renewables, emissions reduction and tech-driven smart grid policies that were championed with subsidies that proved unsustainable over the long term.

RELOAD: AMERICA’S NEW INDUSTRIAL REVOLUTION

  • A return to growth scenario
  • Elections in 2010 and 2012 sweep into offer new leadership focused on reducing deficits, stimulating economic growth and restoring America’s competitive global advantage.
  • The President and Congress quickly agree to sweeping changes to usher in a new American Clean industrial revolution for domestic energy production, manufacturing, infrastructure building, rejuvenating education, technical skills and services to support them.
  • Congress reforms tax laws creating a flat, fair tax structure and vastly reduced compliance costs.
  • Markets respond by unleashing the hoarded cash with enthusiasm investing for growth and hiring to seize the opportunities in the new climate.
  • The new National Energy Security Action Plan approved by Congress gives FERC authority over all high voltage electric transmission preempting the states, sets goals for new nuclear and new clean coal baseload generation as part of balanced national IRP goals to be set by FERC, reauthorizes Yucca Mountain nuclear waste disposal on a fixed schedule, sets a 20% RPS national target and orders the Federal Power Marketing Agencies to take over as lead agency in their market areas for developing domestic energy resources on Federal lands, and modifies the Endangered Species Act and other environmental laws to require a reasonable balancing of economic interests and environmental interests in all environmental proceedings and in definitions of the public trust, public benefit and public interest in any litigation.
  • The new National Manufacturing Restoration Action Plan creates a National Industrial Development Bank authorized to make loans to facilitate new industrial projects and grants to state and local governments to match the infrastructure investment by state and local governments using tax increment financing credits to pay the Federal share.
  • Congress enacts National Energy Efficiency Standards Action Plan on a nationwide basis largely adopting the existing California standards as the interim standards since they have successfully reduced the state’s energy intensity to 50% of the national average.  The law creates an ongoing review process to propose modifications for FERC approval over time.
  • Industrial energy demand quickly rebounds to historic level of 1-2%per year and the pipeline for new energy projects responds to match rising economic growth.  New additions to energy supply improve the resource balance of the nation’s energy mix while energy efficiency standards and faster introduction of new technology begins to reduce energy intensity, reducing emissions levels overall and even reduces expected rate increase levels by lowering average system costs through competition and better technology.

JOIN ME: THE CUSTOMER AGGREGATION CHALLENGE

  • An insurgent-driven disruptive technology scenario
  • Customer aggregators like EnerNOC, Comverge, C-Power and others scale their business by aggregating commercial and industrial customers offer constant energy management to reduce costs through energy efficiency, demand response, net metering and new technology.
  • Using smart grid-enabled technologies and meter data management they are able to scale their business across markets, use their active energy management to shift load and make money for the aggregator and its customers.
  • Aggregators expand services offering a growing range of IT and OT solutions to improve the customers’ operating efficiency and achieve their corporate sustainability targets.
  • Over the scenario the scale of these customer aggregators give them the ability to move markets, bid into organized markets, provide back up services and exercise market leadership.
  • By the end of the scenario these middle men come to powerfully dominate the competitive power markets and use that power for good or not to achieve savings for customers and create value for themselves.  Rather than fight them, merchant energy players form alliances with customer aggregators seeking preference in bilateral trades priced to achieve the performance targets of the aggregator using the competitive market to clear the positions. This creates conflicts among market participants and calls for new rules to govern customer aggregation.

POWER UP: VIRTUAL DER @ WORK

  • A Utility Empire Strikes back scenario using distributed energy resources (DER) business model and a customer friendly stakeholder involvement process to build broad public support.
  • The inability to bring renewable energy resources from remote locations due to transmission limitations or in-state sourcing rules limits the options for renewable procurement.
  • Some utilities feel threatened by large merchant renewable energy players and don’t like the terms offered for the resources in a market constrained environment.
  • Achievement of RPS targets and reluctance by regulators and policy makers to up the ante frees utilities to pursue options on their own to add resources.
  • C&I customers see corporate sustainability as an important factor in plant location which utilities want to capture for load growth.
  • Utilities use the virtual power plant concept to offer customers opportunities to participate in distributed energy projects ranging from wind turbines, solar roof system, energy storage, PHEV recharge services and others as part of a utility procurement strategy.
  • The utility partners with VPP participants to capitalize the upfront cost, use net metering to measure production, and provide utility maintenance services through contractors to keep the system performing to accepted levels.  At the end of the contract term, the utility transfers the depreciated equipment to the property owner and uses net metering to pay for excess production.
  • The result is a substantial growth of distributed energy resources across the utility service territory with customers involved as full partners in the projects creating broad customer support for the program.
  • The strategy largely insulates the utility from competitive encroachment by customer aggregators, increases the market share of DER for the utility relative to peers and allows reasonable rate recovery of costs without the ratepayer.
  • To meet the backup needs from the increased DER resources the utility also build mid merit gas combined cycle generation beyond any capacity creep additions to resource can be achieved through life extension, uprating or other baseload resources.

So What?

So don’t get stuck in the rut of projecting today’s current market conditions forward—Think different!

Scenarios like these—or others you can imagine empower you to rehearse your future for the buildup and recovery side of the energy business cycle ahead.