UTILITIES

CEOs grapple with an elephant in the room -- the future of electricity

When Tesla CEO Elon Musk entered a New Orleans ballroom full of utility CEOs earlier this month, he did so as an odd evangelist for expanding the power grid.

The Silicon Valley electric car entrepreneur sought to reassure America's powerful investor-owned utilities that the story of their industry doesn't end with flat or declining electricity demand. It doesn't end with rooftop solar or energy storage.

With summer heat rising off the Louisiana bayou, Musk was there to sell an electric dreamscape. In his rocket to the future, the realignment of the utility business around efficiency, natural gas and zero-carbon technology like electric cars and solar panels is profitable. Utility profits would rise with power demand for Tesla's latest model. Rooftop solar panels would pull some suburban homes off the electric grid, but industrial-scale battery packs would help manage a broad, interconnected array of centralized and distributed sources of energy.

"Where the future is going for utilities is actually quite positive," Musk said.

In a world aiming to reduce the effects of climate change, cars stop burning oil and homes turn to electric heating.

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"If ultimately all of that has to go to electric," he said, "that means the tripling of energy consumption by electric."

These days, one elephant in the room at any utility industry gathering is the broadest question you can think of: "What does the future of electricity look like?" The question is mind-bending and discouraging, given the complexity of regional differences in the United States around power generation and distribution, not to mention regulation. But in an industry where investors expect smart long-term planning around infrastructure projects, the answer to this basic question is getting harder to pin down. It's rooted in loose-fitting projections around economic growth, carbon regulations and technology.

Notably, Fortune 500 utility executives attending the Edison Electric Institute gathering where Musk spoke on June 8 viewed the future in starkly different ways, even as they agreed on the trend lines.

They agreed that advancing technology is driving changes. Doubling the energy efficiency of homes and businesses will shrink consumption and eat into profit margins. More old coal-fired units that utilities relied on for decades will close as regulations drive at slashing pollutants and smokestack carbon. Wind and solar power -- partly as a result of federal and state subsidies -- will continue to penetrate markets once exclusive to hulking power plants and cheap retail power production.

Then there's the "Internet of things," the electrification and interconnectivity of almost everything we use, and the consumer demands of a digital age.

Big changes. But differences in how the nation's highest-paid utility CEOs, all veterans of the industry, see their companies fitting into the new world also speak to the industry's state of confusion. With so much electricity running through centralized infrastructure, lawmakers and regulators long ago put limits on how far a large utility could reach into people's living rooms and compete with other technology providers.

"There's a lot of talk about the 'Internet of things' without a lot of specificity," said Branko Terzic, managing director of the Berkeley Research Group and a former federal energy regulator. "Clearly there are concerns about the future model of the utility, concerns about what the regulators will and won't allow on the customer side of the meter."

Taking margin out of the system

Where these CEOs stand matters.

"Look at the Pacific Coast states, prices can continue to go up and up and they don't mind it, all in the name of deploying more renewables and taking more baseload coal off the grid," said Robert Aiken, the chief lobbyist for Pinnacle West Capital Corp., a large Phoenix, Ariz.-based utility holding company. "I don't think you'll find that in parts of the Southeast."

Ted Craver, CEO of Edison International, operates the power company Southern California Edison in a state where rate designs encourage efficiency. California was among the first states to decouple electric sales from profits. In his state, engineers and the tech kings of Silicon Valley increasingly drive the policy bus, as utilities eclipse expectations for adding more renewable power to the grid and lawmakers ratchet up targets for clean energy and utility-scale storage.

For all that, Craver remains decidedly pessimistic.

"What we want to assume is we're going to see flat, perhaps even declining, sales of electricity from utilities," he said during a panel of top utility executives at the EEI meeting.

More electrification is obviously a good thing for business, Craver said. "On the other side of the equation, we're just scratching the surface on improvements in material science, many of which result in less energy use being required."

Big data, dynamic dispatch that incentivizes load reductions during peak hours, and "meat and potato energy efficiency" are cutting energy use, Craver said. "If it turns out I'm right, I don't want to be planning that we're going to have a tripling of electric usage," he said.

Christopher Crane, the CEO of Chicago-based Exelon Corp., put it bluntly.

"It's hard to see the load growth as projected yesterday," Crane said, referring to Musk's galloping optimism about electric cars providing business for utilities.

Electricity consumption charged ahead at a nearly 10 percent annual growth rate in the 1950s. It triggered a nearly 30-year buildup of power plant capacity, as electricity consumption continued to grow at a faster pace than the U.S. economy through the mid-1980s. Since 2000, however, electricity use has grown at a pace that's under 1 percent, and the U.S. Energy Information Administration said this spring that it expects electricity use to grow at an annual average rate of 0.8 percent through 2040.

Utility heads are struggling to understand how to accommodate shareholder expectations for sales growth and how to manage a capital-intensive business in a zero-growth environment.

"There's no question that margin is being taken out of our system," said American Electric Power Co. Inc. CEO Nick Akins.

Today, CEOs at the biggest U.S. power companies are analyzing different scenarios about the future, as a kaleidoscope of reasons for uncertainty about growth make the planning process difficult. And they're doing it for some of the same reasons as oil companies that have been "scenario planning" since the 1960s: Oil is periodically swept into the undertow of global economic and political turmoil, upending their growth projections.

For utilities, the undertow is the steady advancement of distributed generation like rooftop solar and other technology and regulations targeting carbon emissions. Another period of economic malaise that could further flatten demand.

'Offense and defense'

Utility executives are now openly playing with ideas.

The CEO of the largest investor-owned utility in the Southeast, Tom Fanning, chief executive of Atlanta-based Southern Co., joins Musk in unbridled public optimism about the future prospect for utilities.

"There are elements of offense and defense in everything we do," Fanning told the room in New Orleans as he fingered the edges of a large Starbucks cup.

"I like to say that when you see the inexorable changes coming to our industry, the technology and demographics -- and just the way people think about and consume our product -- it is clear that the waves are coming up on the beach. You cannot keep the waves off the beach."

Southern Co. dominates the power business in the Southeastern states. That's not the case for utilities operating in competitive Midwestern markets. In Georgia, the Legislature recently opened the door for utilities like Southern Co. subsidiary Georgia Power to enter the solar business. To that end, Fanning is gearing up to offer some form of rooftop solar financing program for its customers. Last month, Southern announced it would partner with Musk's Tesla on pilot projects around battery storage, and Southern is working with "smart home" thermostat company Nest Labs to collect more data on electricity use.

"If you look at Netflix and stream a movie, it's the equivalent of buying a new refrigerator when you think of all the services that get lit up downstream," Fanning said. He thinks Southern Co., and all utilities, will benefit from all that electricity flowing through the home of the future.

Fanning is also the chairman of the Federal Reserve Bank of Atlanta. What he says about energy's future rests, in part, on the idea that "a rising tide can lift all boats."

"I think the standard of living of all Americans can rise in a better economy, and they will use more energy," Fanning said.

That view of future utility earnings caught the attention of other CEOs on the stage that day.

"I don't buy the fact that this is a declining business," Fanning said.

"Even though that's what the numbers say?" Exelon's Crane interjected.

"Our numbers don't say that," Fanning replied. "Chris, what's your GDP growth in the Midwest?"

Akins, AEP's chief executive and now chairman of EEI, said the central issue is what role utilities play as distributed forms of generation and storage technology drive power distribution away from the utilities' wires. He split on whether utilities can grow.

"Efficiency and other things are predicated on resources being connected," he said. "But even this concept of a zero-energy home is a misnomer. They still consume. That's the value of the grid."

Reiterating comments made in an interview with EnergyWire in New Orleans, Fanning said utilities should be assertive about market share.

"So then if distributed generation is eroding your growth, own distributed generation," he said.

Twitter: @JoelKirkland2 Email: jkirkland@eenews.net

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