By Michael Kuser
As homes become smarter and electric vehicles increasingly become the norm, there will be money to be made in managing how and when people use power. But investors are still in the early stages of figuring out how to make returns on the rapid changes overtaking the power sector, according to energy finance professionals.
Investment experts discussed new energy technologies, regulatory trends and the evolving business model for utilities at an Oct. 19 “fireside” chat hosted by Boston University’s Institute for Sustainable Energy.
Panel moderator Nalin Kulatilaka, of the university’s Questrom School of Business, asked how capital will be drawn to new energy technologies, whether for generation or energy storage — or the software that can manage energy better.
“Historically, energy investment has been with big instruments and now it’s going to be much more a mix of large and small, centralized and distributed,” said Michael Lapides of Goldman Sachs. “It’s going to have much more of a technology overlay to it. From a software perspective, we’re barely at the surface of what’s likely to happen in the broader electricity industry. What is the real customer usage level? What’s the normal?”
Utility or Tech Firm?
Stephen Byrd, who heads Morgan Stanley’s North American power research group, said that while traditional utilities appreciate new opportunities conceptually and are making efforts to adapt, he questioned whether they’ll become the agents or interfaces that enable customers to benefit from the advances in technology.
Such a company — he said he could think of several already operating in California — analyzes “the data within your house or business and says ‘here are all the ways we can change the pattern of your usage,’ and then links that up with the utility bill structure,” Byrd said. “I can see the day when one of those companies goes to a utility and says, ‘I’ve got a million of your customers and they’re all on an app on their phones, and we can press a button and shift your peak usage by around X%.’ What is that worth? We don’t know, but it’s worth a lot. That’s not the death of the utility, but there’s a lot of value there that I think the utility may not capture. Maybe a technology company captures that.”
Sheldon Simon, an equity analyst with Adage Capital Management, said a system built to move megawatts from central stations was not designed to accommodate the changing case of distributed — and variable — power generation.
“If you think about significant lumpiness in the U.S. electricity industry’s [capital expenditure] cycles, it’s almost always been very generation-friendly,” Simon said. “The grid is not built to have every house be a power plant, or to have so much intermittent generation as we’re going to have. We’re going to see some markets, far more than planned, where the intermittency creates problems for the grid operator.”
Barbarians at the Wall
It’s currently harder to create true value in power generation than in distribution and energy management, Byrd said.
“Truly new generation technologies are pretty rare to actually have an impact, though we’re watching some areas. There are a lot of very smart people focused on that,” he said. “It’s just very hard to beat the low-cost nature of larger, more centralized power plants. But I wouldn’t rule that out.”
On the disruptive power of wind, Byrd likened wind to a barbarian horde: “They’re going to spread everywhere. I can think of some nuclear plants that are castles along the wall that are being attacked by the barbarian horde. That’s an opportunity for some, and it’s a serious threat to others.”
Simon said “that in a very different way, utility-scale and distributed solar will have a very similar impact. It will be more localized, it will be closer to the customer, if not owned by the customer.”
Utilities now face the question of how to grow, which will partly be through fleet transformation, according to Lapides.
“A few years ago there were some very large utilities that owned almost no renewables, and now they’re major top-10 players in the industry because they have huge economies of scale and balance sheets,” Lapides said. “And they serve a lot of customers. Is that what happens with storage? Maybe. Is that what happens with software that deals with grid management? Maybe.”
Regulatory Trends
As technologies evolve and customers use less electricity or go elsewhere for power, utilities have to reallocate their fixed costs to a smaller base, which means that rates could go up for remaining customers. Kulatilaka asked how regulators would likely deal with that new situation facing utilities.
“If we’re entering a period where interest rates go up — they’ve been going down for 30 years — the regulatory models’ gist is that utilities will seek higher returns, forcing rates higher,” Simon said. “So there are limits to how high customer rates can go up when you have less utilization and fewer customers. That could be the real conflict that causes real stress on the industry, because at the end of the day, it is about the money, about what people can pay and what’s politically palatable.”
Speaking about the impact on the regulatory paradigm, Lapides said: “The answer’s out there staring us in the face. … The states that were early movers in decoupling, basically, whether they realized it or not, got their utilities out of the business of caring a lot about demand growth. Think about the implications. From an earnings power perspective, from an environmental perspective, from a planning perspective, it hits all of those three. It’s not rocket science.”
Simon expressed little confidence in the responsiveness of utility commissions.
“Regulators, with few exceptions, will not be forward-thinking,” he said. “They’ll swing the bat when the ball’s in the catcher’s mitt. They’re risk-averse, so they’ll step in when things get to be dire, and what they’ll do is unclear. … [Regulators] are not necessarily friends of the utilities; they just want to make sure that when people turn the switch on, the lights come on.”
