Who's got the power
Utilities Unbundled - Issue 15
Big industrial energy users are increasingly establishing their own energy supply. How will this influence the future of utilities?
“Our ideal would be to find a partner who could offer a complete 'one-stop shop' to manage energy complexity for us: design, build and operate the technology, and manage our demand and supply.”
— Richard Sturman, AstraZeneca
We are witnessing the beginning of a new age in how electricity is produced and bought by customers, with the growing deployment of distributed generation (DG) systems including:
- Combined heat and power (CHP) units
- Fuel cells
- Solar photovoltaics (PV)
Big corporations are investing millions directly into renewable energy projects. Others are keen to sign long-term power purchase agreements (PPAs) for renewable electricity with on-site or off-site renewable generators.
Could this partial “unplugging” of big industrial consumers from the grid affect the profitability of traditional utilities?
We talked to Walmart, P&G and AstraZeneca – companies at advanced, intermediate and early stages of the “DG lifecycle” – about their self-generation experiences.
Walmart: seeking global impact
US-headquartered multinational Walmart declared a long-term 100% renewable energy target, implementing solar, wind, biodiesel generators and fuel cells across its global operations. Its stated aim is to drive the production or procurement of 7 billion kWh of renewable energy globally by 31 December 2020.
David Ozment, the company’s senior director of energy, explains that Walmart’s primary financing tool has been PPAs and operating leases. “PPAs allow our renewable energy partners to do what they do best – which is own, install and operate systems – and allow Walmart to do what we do best – which is operate stores and procure energy.”
Early challenges were finding projects that could deliver at utility prices and negotiating shorter contracts. Complexity increased as Walmart extended its energy strategy internationally, as infrastructure, metering, availability of financing and other factors varied widely between countries.
To address this, Walmart has significantly invested in learning new non-core competencies, such as renewable technologies, contracts, construction oversight, interconnection rules and financial evaluation tools.
Energy expense savings are a clear benefit: "Our goal has been to procure renewable energy at, or below, utility prices," Ozment says. "Renewable energy supply contracts can give us price and budget certainty."
P&G: efficiency ambitions
Global consumer products company P&G has a 30% renewable energy goal by 2020, as part of a long-term vision to power its plants with 100% renewable energy. Its completed projects include solar PV in the US, Germany and China and a wind turbine in the Netherlands.
Steve Skarda, the company’s Energy/CO2 Leader, says the highest proportion of P&G’s energy consumption is thermal. The company is identifying developers interested in building CHP operations at its plants to leverage these thermal loads.
Like Walmart, P&G has had to learn many new competencies fast. “We have organized a global renewable energy team with leaders in purchasing, engineering, manufacturing and finance,” explains Skarda.
Operation of AstraZeneca's UK CHP sites is outsourced to energy services company Dalkia. Sturman says these relationships are key. Strong financial analysis for the business case and great legal competence on contracts are important, "but most of all, you need the right partner: on any future DG project, we'll be looking for someone we can trust to 'do the right thing' for AstraZeneca.
AstraZeneca: starting out
Today, about 4% of AstraZeneca’s energy comes from renewable sources. The UK-headquartered biopharmaceutical company is targeting a 20% CO2 reduction in the five years up to 2015 and a 30% reduction in overall energy consumption.
Global Energy and Climate Change Director Richard Sturman says: “We're primarily interested in DG for cost reduction, but increasingly carbon reduction is also a key driver. Setting our carbon target for 2015 focused our minds on how and where we get electricity, in the UK and globally.”
In the UK, Astra Zeneca has used gas CHP units for several years and runs limited self-generation in other countries.
Operation of AstraZeneca’s UK CHP sites is outsourced to energy services company Dalkia. Sturman says these relationships are key to getting strong financial analysis for the business case and great legal competence on contracts. “Most of all, you need the right partner: on any future DG project, we’ll be looking for someone we can trust to ‘do the right thing’ for AstraZeneca.”
“Our ideal would be to find a partner who could offer a complete ‘one-stop shop’ to manage energy complexity for us: design, build and operate the technology, and manage our demand and supply. I’m not sure anyone has a good track record of doing all this yet.”
Utility impacts and opportunities
Today's utilities are still the best providers of safe, reliable and low-cost electricity. With technological advances in DG pushing lifetime production costs closer to delivered utility costs, generating energy locally becomes a viable option. Further technological innovation will increase the pressure on the traditional utility model.
There is no "utility killer" on the horizon – yet. But in time, technology will make it cost effective for some customers to leave the utility behind, at least partially. As high-usage customers are the most likely to do this, the earned return of utilities could fall.
A more perplexing question is recovering costs to develop new power plants and transmission lines. Instead of a 30- to 40-year time horizon, utilities will need to factor in the potential loss of customers to DG in the next 10, 15 or 20 years. Again, there may be too few customers to recover investment costs without dramatic price increases.
Utilities need to find new business models that enable a cleaner, smarter grid to coexist and coevolve with DG. To achieve this, they need to be flexible and seek competitive advantage through investment in technology and innovation.
We are already seeing significant change in the generation business – notably Germany (see Distributed generation hits the big numbers), where DG is forecast to result in a 20% decline in market share and a US$3.1b loss in profit for utilities through 2020. Other countries preparing for change include the US and potentially the UK and Italy.
Although industrial companies are teaching themselves the energy business, they may not be getting the best deal. This is an opportunity that should inspire utilities to use their wealth of knowledge in new ways.
This is an abridged version of the full article in Utilities Unbundled.
For more information on this topic, please contact Charles-Emmanuel Chosson.