Whether it is new technologies, aging infrastructure or changing consumer expectations for sourcing power, the electrical utility industry is being challenged with new opportunities and threats. This year offers a variety of market trends to watch in 2018 and beyond.
As outdated equipment and infrastructure is replaced over time, new technologies — and the demand for power to support those technologies — have great potential to drive gains for thoughtful investors.
End of Life Asset Replacements: Much of the electrical transmission and distribution grid built during the rapid economic growth of the 1950s to the 1980s is reaching the end of its useful life. Aging equipment brings higher failure rates, which leads to increased outages that affect the economy and society. Also, older assets and facilities result in greater inspection maintenance costs, further repair and added restoration costs.
Amid the revitalization of older neighborhoods and a general trend toward increasingly high-density cities, the utility industry also is facing limited expansion options, space constraints and obsolete layouts for electricity supply. Outdated engineering designs can’t accommodate newer design practices or technologies that are better suited to today’s functional needs, load characteristics and consumption patterns. Traditional tools for power delivery planning and engineering are ineffective in addressing aged equipment, obsolete system layouts and the modern, deregulated loading levels that lead to complete rebuilds, asset relocations or innovative approaches.
Generation Mix Changes: The shift in electric power generation mix toward greater use of renewables will continue as wind and solar technologies mature and compete in the market. Regional regulators also are specifying a certain power mix, with subsidies and consumer demand supporting them.
Wind and solar generation are both intermittent generation sources, so a firm baseload generation capacity is required to produce power when the wind is not blowing or the sun is not shining. While both hydro or nuclear power generation can supplement, each are many orders of magnitude more expensive to install. They also tend to attract greater stakeholder activism because of the perceived risks and impact to the land and people. Natural gas is a viable option, as it offers lower emissions, has minimal land impact, is cost-competitive and can be quickly dispatched. Where feasible and cost-effective, some of the existing coal generation will be converted to natural gas plants, while other locations more suitable for new natural gas plants will replace some of the retiring coal generation fleet.
Where potential exists, small-scale, non-polluting hydro dams offer quick ramp-up capacity that can be regulated to suit demand, complementing wind and solar because of its storage capacity; such implementations also are economical over the life of the asset.
Reliability Enhancement-Oriented Projects: The North American Electric Reliability Corp. (NERC) continue to enhance regulations involving reliability, security, restoration and recovery of the critical transmission system to minimize impacts of regional outages on the rest of the grid. As a result, there are several bulk upgrades to the North American grid planned, including upgrade of the transmission protection system to more resilient design standards and operational requirements to deal with severe weather, as well as having appropriate generation reserves on the system for better regional interconnectivity.
Capacity Increase on Existing Lines: In regions where population or industrial growth is returning and the transmission right-of-way is surrounded by densely populated or developed areas, existing lines and substations need to be updated. For example, many older cities are reinventing themselves to attract new industries and commercial enterprises, such as warehouses, microbreweries and urban farming. As a result, they also are seeing load increases on older systems designed for the demand models of 50 years ago or more.
Shareholder Value: For investor-owned utilities, transmission asset growth is needed to meet earnings expectations. Asset growth will continue to be angled toward addressing issues of system reliability, supporting needed changes in the generation mix, and adoption of newer technologies. The utilities will seek support for increased automation and fiber communications to enhance the reliability of the transmission system and enable electrification and the adoption of newer technologies.
Smart Cities Revolution: Several new technologies have arisen that showcase what a smart city could look like. In the transportation sector, some of the developments include networked streetlight systems with sensors to help manage traffic congestion and crime watch, electric vehicle charging stations and systems for locating empty parking spaces. Remote health monitoring of assets is also underway for roads, bridges, buildings and even utility flows, such as sewage water to detect blockages and leaks.
Smart city developments require key components to make them work: electricity to power the remote sensors and telecommunications to return the data to a central place for processing. Electric and communication utilities are natural partners with cities to provide these components.
Artificial Intelligence (AI) and Automation Advances: While we are in the early stages of realizing the benefits of supercomputing and robotics, these technologies will have a major impact on nearly all aspects of our life, from how our food is produced to how goods are manufactured and shipped, as well as how we get to work and what we do when we get there. The critical component underpinning this revolution is supercomputing.
AI and automation need data warehouses and cloud computing centers that require significant electrical loads backed by robust communication connectivity. Robotics will be important in realizing the productivity gains in industrial production and goods distribution from manufacturing, construction and warehousing to end delivery. Again, this will require more power to automate these manual processes.
Interaction and Responsiveness: Our metropolitan areas continue to attract both the young millennial professionals and baby boomers. Empty nesters benefit from higher disposable incomes and expect efficient and customized services to suit their tastes and tight schedules. Used to getting instant and interactive services with multiple options to choose from, millennials also expect the same level of service and choice from their utility. From response times for new connection requests to restoration of power after a storm, as well as options for where their power is being sourced, demands have changed. This is a challenge for utilities to meet and manage expectations and a potential threat if responses are insufficient.
With every new opportunity that arises, there is the potential for disruption of traditional business models and revenue sources. Smart leaders pay just as much attention to these potential threats, with an eye toward how they can be contained, mitigated or leveraged.
From new (or increasingly cost-efficient) generation options to the ever-increasing risk of cybersecurity breaches, utility owners and operators must pay attention to a broad array of threats. How they manage these can make the difference between merely keeping up and demonstrating leadership.
Distributed Generation: The growth of distributed generation will put some pressure on the large utility-scale generation plants. However, this is expected to be limited because economies of scale will still favor large-scale facilities built in the countryside, away from dense populations and requiring a transmission connection. While distributed generation will not require long transmission connections, it still will need shorter distribution lines.
Microgeneration: As solar panels and battery storage costs continue to trend downward, residents are increasingly turning to rooftop solar on residential and commercial properties. This dynamic reduces the need for new transmission connections to utility-scale generation and regional connections.
Utility-Scale Energy Storage: Utilities and regional electric system operators have typically looked to transmission or localized generation to move power from one area to another in case of transmission congestion and regional system weaknesses. As costs continue to come down, utilities are looking at battery storage options to deal with temporary system weaknesses. Storage capacity still requires a distribution or transmission connection, though for shorter distances.
Landowner Objections: Over the past two decades, landowner challenges to transmission lines have continued to increase. This resistance puts pressure on utilities to find alternate solutions to transmission and will remain a major challenge in the foreseeable future.
Security and Data Breaches: As the distribution system becomes more automated, a layer of connectivity between homes and utilities is added with the increased use of smart meters, energy efficiency devices and interconnected devices (the Internet of Things). This has the potential to expose weaknesses in the utility system. In 2018, many more devices are expected to hit the market. Consumer adoption will increase, exposing more potential vulnerabilities in years to come.
New Market Entrants: The greatest threat to utilities is, perhaps, the challenge to the regulated utility rate and the model of traditional wired services and monthly billing. New technology companies are armed with consumer behavior data, superior technology offerings, customized and instant solutions, and growing brand loyalty. They attract customers with competitive, non-wired and environmentally friendly solutions.
The year ahead and beyond offers just one certainty: continuous change. Ultimately, electrical utilities stand to gain when they fully engage with the market forces at work.