Enhancing Utility Planning Through More Visionary Market Futures. Discussion Paper July 16,

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1 Enhancing Utility Planning Through More Visionary Market Futures Discussion Paper July 16,

2 There is strong evidence that something is fundamentally and rapidly changing in the electric utility industry. Evidence of such change includes the prospect of a future in which traditional utility electric load is flat or even declining, even as the economy grows; there are rapid advancements in technologies, notably in distributed solar and battery storage; and a clear desire among customers for a greener and more efficient future. Not surprisingly, the political/regulatory environment has started to take note of these changes and is pushing to make regulatory changes to empower customers to pursue their desire for a greener and more efficient future. California and New York, both large states, are frequently perceived as being at the forefront of this regulatory push, but other states, such as Minnesota and Massachusetts, are not far behind. In this environment, utility planners face a special challenge. On the one hand, their core activity is to develop plans that rely heavily on traditional forecasts covering a 20- or even 30-year outlook. On the other hand, utilities have to consider the possibility of a future that might be so different that it can only be imagined through a rethinking of mainstream assumptions which can undercut these public forecasts. As many historical examples show, the consequences of relying on traditional approaches can be large and dangerous. Shale gas has transformed the U.S. into an exporter rather than an importer of natural gas in two to three years. Rapid adoption of distributed generation and solar technologies combined with more economic storage can transform today s electric system into a plug and play platform for new services and technologies. To avoid the consequences of analytic timidity and a failure of imagination, electric utilities must enhance traditional utility planning. They must take it upon themselves to imagine alternative futures and engage in a rich debate about the future of the industry and its implications for utility planning. The Industry is Changing in Fundamental Ways Flat or declining load growth with significant distributed generation (DG) penetration A common view, following the Great Recession of 2008, was that utility load growth would resume its pre-recession trajectory once the economy recovered. While aggregate economic activity historically had a clear impact on load growth, the available evidence strongly suggests that electric load growth is in secular decline (Exhibit 1). Some forecasters have gone so far as to suggest that the economy can continue to grow with no growth in electricity sales. Continued energy efficiency is a fundamental contributor to this phenomenon. End-use electric efficiency is steadily improving many important applications e.g., lighting and building cooling. State regulators and federal policy makers believe that even more is possible in terms of energy efficiency. A review of state policies shows that states continue to support rising energy efficiency targets. At the federal level, continued progress on energy efficiency is seen as a factor to be built into the future, as the EPA A discussion paper issued by: Pace Global 2

3 20 Exhibit 1: Trends in Electricity Use and Economic Growth Source: Department of Energy has done in setting targets under its Clean Power Plan (CPP). Trends in distributed solar and storage A further negative factor for utility electric sales is that, even if end-use demand grows modestly, it may be completely offset by generation on the customer side of the meter. A combination of customer desire for greener power and a regulatory push to set goals for solar PV has created strong momentum for customer-side solar additions. One notable example, the California Solar Initiative, aims to transform the market for solar systems to make it price competitive and self-sustaining by setting a target of 3,000 MW of distributed solar by 2016, supported by state subsidies as well as utility targets. Because of the demand-push from state policies as well as technological improvements, the markets for solar systems are witnessing rapid change. In particular, the unsubsidized economics of solar systems is projected to improve steadily with falling installed costs (Exhibit 2). Rapidly declining solar costs at a time when utilities rates are increasing (rising costs with no load growth to offset them), coupled with a moderate improvement in storage technology could result in a sea change in the future faced by a utility. A discussion paper issued by: Pace Global 3

4 Example in North Carolina Exhibit 2: Improving Economics in Solar Source: BNEF Regulatory initiatives to require utilities to accommodate change Accommodating increasing levels of distributed resources (new generation on the customer side as well as increasingly sophisticated pricing strategies for energy efficiency and demand response technologies) will impact load factors and require important changes to electric utility distributions systems. Historically, utility distribution systems were designed and built with an assumption of one-way flow from central generation stations connected at high voltage levels to distribution feeders that would carry power to end-use customers connected to the system at even lower voltages. Accommodating increased levels of distributed resources will require a number of operational and equipment changes. Regulatory proceeding in many states are exploring these questions with the stated goal of finding the right technical, regulatory, and economic mix to make it possible to accommodate increased levels of distributed resources. These regulatory changes inevitably will have implications for how utilities do their planning in the future (Exhibit 3). Utility Planning Challenge In this rapidly changing world, the traditional utility planning exercise of creating a reference case and conducting sensitivity analyses of alternatives, all defined within the same world view, is of limited use. We believe utility planning groups should still create a reference case and some variants based on a current view A discussion paper issued by: Pace Global 4

5 Distribution Resource Plans must provide a roadmap for integrating cost-effective Distributed Energy Resources into the planning and operations of IOUs electric distribution systems with the goal of yielding net benefits to ratepayers. CPUC Order on DRP, August 2014 The DSPP will modernize its distribution system to create a flexible platform for new energy products and services, to improve overall system efficiency and to better serve customer needs. The DSPP will incorporate DER into planning and operations to achieve the optimal means for meeting customer reliability needs. NYPSC Order Launching Reforming the Energy Vision, April 2014 Exhibit 3: Current Planning Approaches will have to Change Source: BNEF of the world. Utilities would be remiss, however, if they did not explore several alternative scenarios based on fundamentally different states of the world. Creating such alternative scenarios and exploring their implications is the focus of ongoing work at Pace Global (Exhibit 4). Creating alternative futures (scenario example) Scenario planning exercises start with a proper framing of the mega question and a scan of the landscape. Frequently, a scan of the landscape results in the identification of trends and uncertainties. Trends are forces that are treated as given or baked into the cake. Demographic trajectories, for example, are frequently treated as a trend. In the electric industry, the inexorable penetration of efficient lighting can be treated as a trend. Uncertainties, on the other hand, are forces that cannot be treated as given, even directionally. Scenarios represent states of the world that emerge from the intersection of two or more distinct uncertainties. As one example, relative to a reference case, the rapid progress of distributed resource technology (both demand-side, supply-side, and storage) is a distinct uncertainty. Another distinct uncertainty is the direction in which societal/political consensus will move from a focus on low cost solutions under a natural monopoly to a world emphasizing customer empowerment, and utilities becoming a service provider to new market entrants. The intersection of these A discussion paper issued by: Pace Global 5

6 Shuffling and Shifting of Costs New World Order Reference Case Not Much Change Happy are the Regulated Utilities Exhibit 4: The Planning Challenge Source: Pace Global uncertainties can result in multiple scenarios. Of course there are variations to these themes based on timing of technology breakthroughs and where the utility is in the country. Pace Global s Proposition Pace Global believes that internal teams charged with planning have an obligation to sort through the changes that are affecting the industry and relate them to the specific circumstances faced in their jurisdictions. Not every state is California, but what happens in California will not stay in California. Pace Global believes that planning groups, at electric utilities, can add considerable value by providing internally consistent boundary conditions through scenario (states-of-the-world) planning exercises. These scenarios can be helpful in designing strategies that are robust in that they perform well in the status quo and alternatives scenarios, or have built-in flexibility and adaptability to adjust to alternative scenarios. Characterizing these scenarios, that define the boundary conditions, is an essential first step. Pace Global customizes its services to address a utility s circumstance. A discussion paper issued by: Pace Global 6

7 Scenario Overview Reference Case Status quo with continuing regulations and moderate technology improvements Regulation-Heavy Significant renewable and low carbon futures mandated, but no technological breakthroughs Rapid Technology Advance Low gas prices and continued improvements in distributed energy resources New Utility World Order Higher gas prices, storage breakthroughs and regulations pushing utilities to a service platform provider with rapid distributed energy penetration Exhibit 5: Planning Scenarios Example Source: Pace Global Scenario Based Planning Futures - Representative Example We strongly believe that to fulfill their mandates, utility planning staffs must consider dramatically different futures regarding technology, innovation and adoption, trace their implications, and engage the senior management team in a robust debate about how best the company should prepare for such possible futures. We suggest that there is much value in Pace Global working with your team to formulate futures, analyze them, and create a foundation for senior management debate. While each situation will be different, we envision an engagement proceeding as follows: An initial executive workshop to survey the landscape, identify the mega questions facing the company, and collaboratively discuss the known trends and future uncertainties. Creation, by Pace Global, of a reference case and alternative scenarios that must be addressed in the utility s planning (Exhibit 5 provides an example). Quantification, usually employing modelbased analyses, of the impacts of each scenario. Second executive workshop to discuss the Pace Global scenarios, impacts, and the implications for the company We anticipate that this type of exercise could be built into the company s planning cycle. A discussion paper issued by: Pace Global 7