How will the grid need to evolve to meet the pledges made by the United States in Paris? During today's OnPoint, Larry Kellerman, managing partner at Twenty First Century Utilities and the former president of Goldman Sachs' electric power business, discusses the market and regulatory forces that are driving change to the utility business model. He explains how utility customers will be impacted by the evolving industry dynamics.
Monica Trauzzi: Hello, and welcome to OnPoint. I'm Monica Trauzzi. With me today is Larry Kellerman, managing partner at Twenty First Century Utilities. Larry is the former president of Goldman Sachs' electric power business. Larry, it's great to have you here.
Larry Kellerman: Thank you very much, Monica. Pleasure to be here.
Monica Trauzzi: Larry, you recently founded TFC Utilities with a mission of transforming regulated utilities to drive the adoption of clean energy and efficiency. With many utilities already making significant alterations to their business models and the Clean Power Plan certainly driving transformation in the sector, where do you see your biggest window for contributing?
Larry Kellerman: Our biggest window, Monica, is going to be in the area of customer-facing initiatives, energy production, energy conservation, and energy management tools, products and services that exists on the side of the electric infrastructure where utilities have historically been hesitant to operate, which is the customer's side of the meter. We believe that by leveraging, democratizing and making available one of utility's greatest assets, which is its low-regulated transparent cost of capital to help customers acquire and implement products and services on their side of the meter, we not only can help implement a lot of the initiatives that are behind the Clean Power Plan and the Paris initiatives but also help to evolve the grid in a manner that is shaped not by our will but by the will of our customers.
Monica Trauzzi: Many utilities have been resistant to this sort of consumer side of things. How do you overcome those hurdles with those utilities?
Larry Kellerman: We overcome those hurdles by owning utilities. So we are focused on the owning, operation and optimization of the regulated utilities that we ourselves own and manage. So our objective is to be the best utility that we can be, and in so doing what we are not going to do is patent or protect or hide what we are accomplishing. What we want to be is, if you will, a city on the hill, an example that other utilities can elect to copy and emulate in the future. So we wish to be a good example for the remainder of the industry.
Monica Trauzzi: So you mentioned Paris, the Clean Power Plan. We've all had a little time to digest the Paris agreement by now. What role do you see for utilities in meeting the goals that have been set forth in Paris?
Larry Kellerman: Clearly in this country as well as in a number of other countries, the electric power generation sector is a major contributor to greenhouse gas emissions. The utilities sector needs to be a leader in minimizing the amount of greenhouse gas emissions that they contribute into that problem set going forward. And I believe the majority of the utilities in this country either are actively embracing or are at least planning on adopting plans and initiatives that will help them to be part of the solution.
Monica Trauzzi: Right. And so a big part of the U.S.'s pledge in Paris is the Clean Power Plan. Does the power plan sufficiently foster a pathway to a 21st-century grid?
Larry Kellerman: In and of itself it is a step. Is it everything? No. It requires state-by-state implementation, which a lot of people, including myself, believe is not necessarily the way that the utility industry has organized itself historically, which has been more around regional planning than state-by-state implementation. A power plant may be in one state but it may be owned or controlled by a utility in another state as a result of regional operations of the grid on a historic basis. But is it a start? Yes. Is it a good start? Yes. It establishes targets that I believe are very achievable overall in the aggregate across the country.
Monica Trauzzi: So you think this regional approach that many states are taking a look at now is kind of the successful approach for the Clean Power Plan?
Larry Kellerman: I believe it is the logical evolution. It is how the grid and the generation assets in the grid have grown up as a result in many parts of the country in terms of interregional cooperation and joint ownership of assets by utilities historically, and therefore it is a logical evolution of where the Clean Power Plan will likely be driving in the future in order to optimize its implementation.
Monica Trauzzi: So what's going to be the critical driver for transforming the utility model towards that future model? Is it Paris? Is it the Clean Power Plan, or is it sort of the market dynamics that we're seeing at play already that are driving utilities to make cleaner investments?
Larry Kellerman: It's the market dynamics, and underlying the market dynamics it is the transformational set of new products, services and tools, the technological changes that are occurring. Many, if not most of those changes are occurring at the customer side of the meter, the customer-facing activities and the assets, including everything from rooftop solar to Tesla battery walls to Nest thermostats to there's an entire ecosystem of increasingly lower costs, increasingly accessible to consumers at both the residential, commercial and industrial level assets, products and services that help consumers better manage their energy and in many cases produce their own energy locally, cost effectively, and in a clean and green manner.
Monica Trauzzi: But many of these new technologies leave the grid vulnerable. How do you keep the grid safe?
Larry Kellerman: You keep the grid safe by evolving it over time from the current approach, which has been developed over many, many decades which is effectively a hub-and-spoke system where you have large-scale remote power plants that were built in that fashion because of the dynamics of economies of scale. New technologies are busting apart the old paradigm that you need those types of massive economies of scale, a thousand, 2,000 megawatts in a single location in order to drive the cost down. At this point in the evolution of technology one can have much lower scale in terms of generation assets in order to be cost-effective. What that means is that the grid evolves over time from the current hub-and-spoke-oriented system into a set of tightly interconnected and intersecting micro-grids. That is an evolutionary process that will take place over a number of decades, but that is the direction that is logical and makes sense given the state and the trajectory of technology.
Monica Trauzzi: All right. We are going to end it right there. Thank you so much for your time, I appreciate it.
Larry Kellerman: Thank you.
Monica Trauzzi: Nice to have you on the show.
Larry Kellerman: I appreciate it very much.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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