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Energy & Sustainability

3 Big Questions for the Future of the Energy Industry

Michael Vidikan

CEO, Future in Focus
Solar energy is likely the future of the energy industry.

At Future in Focus, we’ve recently written about a variety of ways the electric power industry is ripe for disruption and change. The longstanding, overarching business model in the electric power industry involves a combination of power generation, power distribution, and retail sales over a common electric grid. Rising demand for power and high credit ratings have enabled capital investments in new capacity with reliable long-range payback through a combination of regulated and unregulated income.

Now, despite the fact that global demand will continue to grow, a variety of technical and societal drivers are poised to create major disruption of this business model. An overwhelming 94% of power and utilities executives surveyed by PwC for its 13th Annual Global Power & Utilities Survey say they expect “complete transformation or important changes to the power utility business model.” Transformational change is most widely expected in Asia, followed by Europe, and least expected in the Middle East and Africa.

But what are the major questions to answer about the future of the energy industry? Here are three:

What role will storage batteries play?

Giant storage batteries are in the early stages of development to be used with either renewables or conventional energy drawn from the grid, and should they become feasible, they would have a major impact on utilities and consumers.

For utilities, enhanced storage batteries will provide back-up systems that can augment the power supply during peak usage times.

For consumers, storage batteries could pave the way for greater energy independence, many of whom may eventually find it more economical to go off grid and provide their own sources of power. For large organizations that consume enormous amounts of electricity drawn from the grid, they could draw electricity during the night when rates are cheapest and then use the stored power during peak hours of the day when rates are most expensive.

In response to these drivers and trends, researchers at colleges and universities as well as those in the private sector are working on the challenge of developing and improving technologies that can economically store power generated from renewable sources— experimenting with everything from giant batteries and large spinning cylinders called flywheels to fuel cells, compressed-air storage tanks, and molten salt.

How far and how fast will distributed power generation grow?

While growth of distributed energy generation in Europe has been supported by subsidies, improving economics, according to PWC, means “we are likely to move into a phase where take-up is commercially and market-led.” According to the Edison Electric Institute, “as the cost curve for these technologies improves, they could directly threaten the centralized utility model.” Emerging technologies that could compete with utility-supplied power include solar photovoltaics, fuel cells, geothermal energy, wind, microturbines, battery storage, and electric vehicle enhanced storage. (In the US currently less than 1 percent of total electrical load has been lost to distributed energy generation.) Two-thirds of PwC survey participants (including 82 percent of those in North America and 77 percent of those in Asia) expect that future energy demand will be met by a mixture of centralized and distributed generation.

But distributed generation will create price pressure. One of the key technical challenges facing distributed generation is the need to provide steady power even though most distributed sources operate intermittently. Meeting this challenge adds costs, creating a business challenge: prices rise for consumers who continue to use central electricity sources. (Often, under current regulatory schemes, distributed-energy customers are effectively subsidized by other customers.) There is the danger of a vicious cycle, as rising prices drive more consumers to distributed power solutions, making the grid more complex and further raising costs and prices.

In the shorter term, organizations should anticipate that the advent of distributed generation could put upward pressure on conventional energy prices. Within this context, organizations that fail to adopt distributed generation or move to it late could suffer higher than necessary energy costs.

Which utilities’ models will succeed—and which will be disrupted?

Technology, regulatory, and consumer forces will require electric power companies to adopt new business models in order to remain relevant and competitive. Moreover, PwC respondents rated balancing cost, security, and the environment as growing considerations that are often in conflict. In particular, complex grids balancing distributed, intermittent power with central power sources may be more prone to blackouts, and shale gas production raises fresh environmental concerns.

The PwC report is clear that the very survival of power industry companies depends on their ability to adapt to forces of change. “How companies respond to these changes will determine whether they will be part of the future or join the ranks of companies from other industries whose business models have been eclipsed by technological and market change.” The rise of distributed energy generation “could shrink the role of unwary power utility companies to operators of back-up infrastructure.”

Demand-side management strategies are also expected to grow in importance. Businesses will find that there are real incentives to optimize their energy demand across various times of the day and days of the week. Big data analytics may help larger organizations optimize their energy usage and costs. There will also be opportunities to provide businesses and consumers with tools, software, services, etc. for demand-side energy management. One important question for energy and related firms is whether they will be the ones to innovate in this space— or if startups (e.g., Nest Labs) and infotech firms (e.g., Google) will identify and capitalize on these emerging opportunities first.

For more information about the driving forces creating new business models in electric power industry, you can download the full Future in Focus report here.

Michael Vidikan

CEO, Future in Focus

Michael Vidikan is the CEO of Future in Focus, a strategic foresight research and consulting firm. Future in Focus helps organizations see years or even decades into the future so they…