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Black & Veatch Strategic Directions: U.S. Electric Industry
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The 2014 Black & Veatch Strategic Directions: U.S. Electric Industry report examines the accelerated pace of change affecting the U.S. electric utility industry with a focus on the market,......

The 2014 Black & Veatch Strategic Directions: U.S. Electric Industry report examines the accelerated pace of change affecting the U.S. electric utility industry with a focus on the market, technology, and regulatory drivers of change. The report provides an analysis of key issues including reliability, emerging and consumer technologies, renewables integration and infrastructure development while offering a look ahead at industry prospects.

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  • The 2014 Strategic Directions: U.S. Electric Industry report tracks an industry in the midst of change.
    This transformation is accelerating to keep pace with market dynamics and shifting technologies.

  • Reliability remains the core industry concern
    Electric utilities must meet their reliability goals in the face of changes in environmental and economic regulation.
    From year to year, shifts in this list represent a major change in the industry’s pulse.
    Infrastructure security, both physical and cyber, are increasingly top of mind because of high profile breaches and acts of vandalism.
    Cyber and Physical security were not even polled 3 years ago.

  • Nearly 42% of respondents cite increased environmental regulation as the primary threat to their long-term model.
    Ex. June 2014 Supreme Court ruling upholding EPA Greenhouse Gas Emission regulations
    New state by state Carbon emission standards will impact different regions based on coal generation and other fossil fuel capacity
    The second most pressing concern is aging infrastructure and associated capital costs.
    Uncertainty over cost recovery and the rising impacts of conservation and distributed generation are also top of mind.

    *Image Source:http://tdworld.com/features/linemen-rebuild-aging-infrastructure

  • All electric utilities struggle to balance the provision of reliable, always on service with a finite supply of capital.
    Achieving this balance depend on their unique situation. Ex.
    West coast utilities may not face the same emission concerns as those in the midwest and northeast where coal is a larger portion of the generation mix.
    West coast utilities DO have similar issues with aging infrastructure, aging workforce, new security mandates and changing customers demands.
  • Advances in renewable energy technologies, operational management and performance monitoring applications will enable utilities to address current and emerging issues.
    We will discuss this in greater detail throughout the report and in the technology section.
  • As we begin to explore the findings of the report in more detail, our focus shifts to the interconnection between fuel sources and supply, regulation and finance and how these forces are coming to a head
  • U.S. electric utilities are operating in an economy that is still recovering at a slow pace.
    Nearly 70 percent of utilities describe their current growth rate as flat or not at historic growth levels.
    Periods of Flat or declining growth make it challenging to undertake capital intensive investment programs. A parallel can be seen in U.S. water utilties:
    Ex. Many U.S. Water utilities are facing revenue challenges due to declining customer use from successful conservation efforts and inadequate pricing of water. While conservation efforts are encouraged, they do impact that bottom line making it challenge for operators to upgrade system infrastructure. This is compounded by resistance to pay higher rates for water that is delivered.

  • In addition to a slow growth economy, changes in the marketplace due to low cost natural gas; accelerating coal retirements due to more stringent emissions standards; and the drive towards renewable energy are affecting utilities’ long-term planning.
    It is clear that utilities are concerned about market and regulatory change –and their associated costs.
    40% of the top 10 issues relate focus on compliance and its costs.
    But, there remains significant uncertainty over future customer demand growth, fuel source reliability, new technology breakthroughs and more.
    The century of certitude that the industry has enjoyed, is waning.
  • Driven by competitive pressures from low-cost domestic natural gas, environmental regulations or a combination of the two, significant numbers of coal and some single unit nuclear facilities are slated to be retired.
    37% of respondents are considering or building natural gas generation facilities.
    50% of that group are using the new facilities for capacity replacement
    These retirements are creating a need to shore up and replace reserve capacity in many markets.
    To replace retiring capacity, ensure reliability and maximize ROI, many utilities are focusing on developing natural gas fueled generation.
    In addition, U.S. regions experiencing population growth, such as ERCOT and the Southwest, will require new baseload capacity to meet rising demand.
    Natural gas generation will facilitate greater adoption of renewable energy sources such as wind and solar-which will require back-ups to resolve intermittency issues.

  • When does 1 MW not equal 1 MW?
    A key element of industry uncertainty is how the industry will replace retiring generation capacity.
    Based on client feedback, many industry participants anticipated that the replacement levels would be at or close to a 1 megawatt to 1 megawatt replacement.
    Instead the rise of renewables, energy efficiency, improving storage technology and lackluster demand growth, indicate that replacement levels may not be at a one to one level.

  • As we look at elements of the financial picture for U.S. electric utilities, many have experienced sluggish topline revenue growth along with rising compliance costs and infrastructure upgrades to support new natural gas and renewable resources.
    Compliance is again, the number one driver.
    To provide new capital survey respondents cite regulatory compliance, new generation/transmission capacity, and aging infrastructure investments to be primary drivers for rate increases in the next 5 years.
    Even though we predict about 60GW of coal retirements, because of the overbuild situation, only about 50GW of new “entrants” are expected to result – and almost all of these will be natural gas combined cycle (NGCT).
    Currently it costs about $700 million in capital costs for a new 700MW CCCT.
    The capital costs (only) for 50 GW of replacement NGCC new entrants would be $50 billion. Siting, permitting, engineering and construction costs would be in addition to the capital costs.
    Though only 5.3% of respondents noted it, Black & Veatch expects that as distributed generation becomes a larger element of the capacity mix, utilities will have to shift from direct fee for service to one that includes a capacity charge. This will help alleviate the burden of maintaining a stable, reliable grid from those customer least able to support rising rates.
    The low % of respondents indicating direct fee for service vs capacity charge is surprising
  • As utilities make rate cases, results will be increasingly determined by their ability to accurately track and measure asset performance, age, and resiliency.
    Formal asset management programs provide data to support and justify planned expenditures.
    Earlier this year, Black & Veatch worked with a Midwestern utility to support its regulator capital submission. By incorporating system data and a comprehensive ISO 55000-risk-based approach into the planning process, the client was able to prioritize their investments and in turn, justify them to their regulator. This resulted in 100% approval of their more than $1 billion request, a rare occurrence in the industry.

  • While significant elements of the nation’s electric infrastructure are aging, its human assets too, are undergoing a transformation.
    Labor shortages are increasing as a result of an aging workforce
    Almost 70 percent of survey respondents have been in the electric industry for more than 20 years.
    40 percent have been in the industry for more than 30 years.
  • Within this aging workforce, nearly 75 percent of respondents indicated that power engineers and more than 50 percent selected management and administrative functions as the groups to be most affected by retirements in the next 5 years.
    There is also a need for skilled physical labourers. While larger scale new builds are no longer the norm, the lack of skilled personnel is placing added pressures on utility staffing. This may be further complicated by large scale projects on the periphery of the electric industry.
    Large scale LNG export facilities will require tens of thousands of skilled workers in the coming years.
    New natural gas pipelines and processing facilities will also require large construction and management capabilities.
    Utilities are revisiting traditional means of recruitment. Several are tapping veterans and supporting trade programs to solve staffing challenges.

  • The greater use of technology and data will provide utilities with new tools to improve reliability, comply with environmental and security regulations, and meet managed increased customer expectations.
  • The U.S. electric utility industry today stands at the beginning of a long-term transition to a grid in which distributed generation (DG) plays a much larger role.
    More than 60 percent of utility leaders believe DG will grow beyond its current 5 percent market share of U.S. power generation by 2020.
    In a report for the California Public Utilities Commission, Black & Veatch estimated that DG already reduced the state’s peak demand 1-2 percent in 2011-2012 with a projected increase to about 3% in 2014. 
    DG located behind the customer meter reduces the individual customer’s demand, and if the DG resources are operating during the peak load period then they will reduce the aggregate peak demand of the utility
    The magnitude of the peak demand impact depends on the generation profile of the DG technologies deployed—solar PV peaks around mid-day but declines in the afternoon/evening when many utilities experience peak load, whereas non-renewable DG such as gas-fired microturbines can generate 24/7 if desired
    However, in California, the majority of behind-the-meter DG is solar PV, which tends to shift the peak demand later in the day, and as the penetration of solar PV increases and peak demand shifts later in the day, the peak demand impact of solar PV will decrease

    Utilities also expressed concern about adverse grid impacts, rate implications, and lack of monitoring and control infrastructure.
  • Many utilities also argue that net energy metering tariffs—which most DG customers use—result in a cross-subsidy, because DG customers do not pay their fair share of fixed utility costs like transmission and distribution infrastructure.
    This creates an environment where maintenance of the capital intensive electric grid falls to those least able to support increased electric rates.
    Policies that are a net drain on the system are not sustainable in the long run.
    45.5 percent see net metering as a subsidy to the customer generation impacting utility financial results
    18.1% see a net benefit to the utility
    Net metering could provide a net benefit to the utility if it is determined that the value that solar provides to the grid in terms of energy/capacity/ancillary services/GHG reductions/etc. exceeds the rate that net metering customers receive for excess generation that is exported back to the grid
    8.3% not a subsidy to the customer generator
    Utilities that take a proactive approach to DG could result in net benefits and continuous reinvestment. Examples of proactive activities include analyzing customer profiles to see who will benefit most from DG and deploying accordingly and identify locations where DG deployment would be a net benefit to the grid. Black & Veatch calls this “flipping the DG equation”.
    Most utilities are not proactive on DG and therefore do not anticipate negative impacts of DG, instead they simply react when a negative impact is felt by upgrading their equipment or changing equipment settings; our point is that a few utilities are anticipating the impacts of DG and developing the tools for planning and operations so that they can avoid those impacts before they actually affect reliability or system costs

  • As utilities consider the implications of DG, they are reviewing policies
    This may be one of the first signals of an impending shift in their business model.
    17.2 % none of the above; this may reflect uncertainty about potential DG penetration
    20% are actively working to change net metering tariffs.
    There are many different potential ways to change the structure of the NEM tariff:
    Adjust the rate at which NEM customers are compensated for excess generation exported back to the grid, if utilities believe that the rate is currently too high, or eliminate any compensation for excess generation, or set the compensation equal to the wholesale electricity price
    Eliminate the NEM tariff, and create a “value of solar” tariff which compensates customers for all of their solar generation (not just the portion exported to the grid) at a fixed rate based on its value to the utility in terms of energy/capacity/ancillary services/GHG reductions/etc. (customers pay for their consumption on the normal retail rate, which is netted out each month against the “value of solar” credits they receive)
    Allow virtual net metering (this is a mechanism for customers to benefit from solar PV systems not installed on their own property—the idea of “community solar” allows customers to buy a share of a larger solar project and virtual net metering is the billing mechanism

    26.7 % I don’t know
  • From a utility perspective there is significant interest in energy storage. From utility-owned renewable assets to those purchased through PPAs, Technologies like energy storage can begin to address some of the challenges associated with DG.
    The main value in energy storage is in its expected ability to meet peak capacity requirements.
    The challenges created by the intermittent nature of renewables are expected to grow as more DG is deployed.
    For example, in California, peak power demand rises throughout the day before peaking around 7 p.m. just as solar assets cease production.
    This creates a surge in demand for traditional generation.
    Energy storage could help smooth this transition.
    Bulk energy storage to capitalize on rate arbitrage
    Storage to defer distribution and transmission system investment
  • Some utilities are enhancing operational capabilities to accommodate DG on their grid before negative impacts are felt.
    AMI is the foundation of this posture of readiness.
    60 percent of utilities report that their utility has advanced metering in progress or in place at their utility .
    The electric grid is catching up to telecom and ISPs in terms of using sophisticated networks of metering devices, sensors, and controls to run the distribution system more efficiently (this is the “smart grid” concept)
    Technology delivers benefits for both the utility and its customers. The key to unlocking these benefits lies in the data AMI delivers. 
  • The fundamental challenge for many utilities remains understanding the full range of capabilities of the new technology.
    Data analytics will provide insights that allow utilities to transform business processes and improve a wide variety of operations.
    Utilities are recognizing the importance of creating a data culture. Nearly three quarters of respondents have a data analytics program in place or in development.
    However, many of these programs are in their early stages. Data is currently being used to create a historical record vs. predictive or prescriptive analytics.
    Those that have programs in place can are working toward integrating data and solutions to improve business processes, enhance reliability, meet mandates, and improve customer service.
    In terms of addressing DG issues, data analytics can provide many benefits, such as:
    Using data from smart meters to monitor voltage throughout the distribution system and detect voltage fluctuations caused by DG
    Using solar resource data and other inputs to forecast distributed solar generation on the distribution system
    Detect when individual customer DG systems fail or underperform
    Provide customer engagement tools related to DG, e.g., a tool for a customer to analyze the cost-effectiveness of installing solar PV, energy efficiency measures, buying an electric vehicle, participating in demand response programs, etc.
  • Customers are demanding a higher standard of reliability, performance and service from their lifeline utility providers. This includes video, telecom and electricity suppliers. Electric utilities are using data to understand how to improve performance across their operations.
    From improved asset performance to better customer engagement and maintenance planning, data analytics offers utility leaders a more complete picture of their organization than ever before.
    As investment planning continues, we predict AMI’s use for improved rate design and price stabilization/dynamic pricing purposes will increase.
    Smart Networks will leverage the smart grid to connect devices
    Smart information will be highlighted by data analysis and integration and the use of smart single-use infrastructure
    AMI and Data Analytics will be the hallmarks of a smart utility with multi-system and multi-facility aggregation
    SII will feature multi utility and physical-cyber integration
  • Without question, new and enabling technology will reshape many aspects of the electric utility industry including consumer interactions.
    While we have largely been focused on the industry side of the equation, a more informed consumer can play a role in helping utilities meet their goals.
    Third parties understand this shift in conversation.
    The multibillion dollar acquisition of Nest Labs, along with high profile activity in single-family rooftop solar has focused attention on the potential for in-home technology to impact electric utility operations.

    Responses Programmable, controllable thermostats 27.8%
    Direct load control 26.5%
    In-home displays 15.9%
    Pricing signals to connected devices 10.6%
    Other 2.4%
  • Utilities are working to provide consumers with resources to better manage energy consumption.
    25% have implemented subsidy/incentive programs
    Customers, now accustomed to a more high touch relationship with service providers are increasingly engaged and utilities are responding.
    A quarter of respondents are actively working with customers to increase consumer participation in demand side management.
    The most visible example of this engagement is via smart thermostats that increase visibility into consumption.
    Note that the extra 22% were “I don’t know”.
  • Regulation is a common thread impacting shifts from generation through customer delivery.
  • Some utilities are aligning their generation portfolio assets to address increased federal regulations concerning cross-state air emissions, proposed carbon emissions rules and surface water regulations, as well as renewable portfolio standards.
    Other utilities are holding off on making larger investments in power generation until there is more certainty around the recently proposed Environmental Protection Agency (EPA) CO2 rules for existing plants.
    The rule would establish state-specific carbon dioxide reduction goals while allowing states or regions to develop customized compliance methods. These include mixing four options: dispatching gas plant generation ahead of coal generation; energy efficiency; increasing low-carbon renewable and nuclear energy generation; and heat rate improvements to coal-fired generation plants.
  • The increasing use of wireless and IP-based technology to improve system efficiency creates hundreds and potentially thousands of new access points that can be vulnerable to nefarious characters.
    In fact, each new smart meter that helps improve outage response or customer billing, represents an access point to the operating system.
    Current security systems are evolving under guidelines set forth in NERC CIP V5.0, but intrusion tactics are evolving rapidly.
    Yet, right now nearly half of report participants indicate their security systems currently do not integrate across their administrative and SCADA networks.
    The key differentiator between older security measures and the new involves the level of comprehensiveness.
    Previously systems were protected on an asset by asset basis leaving gaps and vulnerabilities that could be exploited.
    NERC CIP 5 calls for an integrated system-wide approach to security. For example, a key element of cybersecurity involves minimizing the risk of intruder access by physical means.
    Further, customer systems must be segmented from SCADA systems to minimize the potential harm that hackers can unleash on a system.
  • Since Feb. 2014 there has been a tremendous amount of focus on physical asset security due to the series of stories regarding the Metcalf substation attack. Though nearly 7 months had passed since the attack, the Wall Street Journal’s coverage spurred a national and congressional conversation.
    Within weeks, FERC requested NERC develop a new physical security standard on an expedited timeline.
    In our polling, we saw that cybersecurity moved up two spots to the number four issue and more than 40% of the industry expects that there will more physical attacks on facilities than current levels.
    This is in contrast to less than 7% who thought the number of attacks would decrease.
  • Finding opportunities for growth in the midst of change will be a key component of survival in these transformative times.
    Utilities must seek regulatory support to adjust their business models.
    Without flexibility in the regulatory structure electric utilities may go through an upheaval similar to what occurred in the landline telephone business where despite a 100 year+ head start, new providers offering similar services were able to break long standing monopolies and in some cases replace incumbent service providers as the dominant market player.
    The critical difference for electric utilities is their lack of a breakthrough technology like wireless services to bail them out.
    One opportunity to manage the high fixed costs is a shift to a Capacity vs. Energy provision revenue model.
    DG customers would pay a fee to utilities in order to backup their systems. This would ensure the reliability of their services, while providing a revenue stream to utilities who currently pay the full cost of maintaining always-on infrastructure to customers that do not contribute funds on a consistent basis.


  • 2. AGENDA Industry Overview Change is Accelerating Industry Shifts Markets & Economics Technology Policy Crossroads 2
  • 3. INDUSTRY OVERVIEW 3 Change is accelerating
  • 5. BIGGEST THREATS TO LONG-TERM MODEL 12 August 2014 5 USEA | Environmental Regulation Aging Infrastructure
  • 6. BALANCE OF REGULATION AND OPERATIONS IS CRITICAL TO SUSTAINABILITY 12 August 2014 6 USEA | Regulatory imperatives and operational needs impact capital allocation OPERATIONAL NEEDS REGULATORY IMPERATIVES • Infrastructure upgrades • Changing workforce • Customer demand • Reliability • Emissions standards • Security mandates
  • 8. INDUSTRY SHIFTS 8 Markets & Economics
  • 9. EVOLVING MARKETS AND ECONOMICS DRIVE INDUSTRY SHIFTS 12 August 2014 9 USEA | Slow demand growth is challenging capital investment 6% 26% 43% 14% 6% DecliningFlatGrowing slowly, not at historical rate Returning to historical growth rates Surpassed historical growth rate
  • 10. COMPLIANCE COSTS ARE TOP OF MIND 12 August 2014 10 USEA | Market forces impact long term planning Compliance Costs Fuel Policy Economic Regulation Environmental Regulation Reliability
  • 11. 23% 14% 51% 12% NATURAL GAS REVOLUTION TO RESHAPE POWER SECTOR 12 August 2014 11 USEA | Shale gas revolution impacts power producers Plan for Natural Gas Fueled Generation Planning to build I don’t know No Facilities under construction
  • 12. REPLACEMENT MAY NOT BE ONE TO ONE 12 August 2014 12 USEA |
  • 13. REGULATION, FIXED COSTS AND NEW GENERATION TO DRIVE RATE INCREASES 12 August 2014 13 USEA | Rate structures will need to evolve Estimated cost of 50GW of replacement NGCC
  • 14. FORMAL ASSET MANAGEMENT PROGRAMS CAN HELP UTILITIES STRETCH CAPITAL 12 August 2014 14 USEA | Risk-based approaches are key to future capital planning
  • 15. 12 August 2014 15 USEA | Almost 70% of survey respondents have been in the electric industry for more than 20 years 13% 18% 26% 43% SYSTEMS AREN’T THE ONLY THING GETTING OLDER … Less than 10 years 11-20 years 21-30 years More than 30 years
  • 16. MASS RETIREMENTS LOOM CREATING NEW CHALLENGES FOR OPERATORS 12 August 2014 16 USEA | Focus on STEM education and craft training Yes No I don’t know Organization Impacted by Workforce Retirements 68% 24% 8%
  • 17. INDUSTRY SHIFTS 17 Technology
  • 18. Distributed generation is having a profound impact on utility planning RISE OF DG RESHAPING CUSTOMER PROFILES 12 August 2014USEA | 18 Anticipated DG Market Share % Responding More than 20% 5% 11-20% 14% 6-10% 43% Approximately 5% (current market share) 12% Less than 5% 15%
  • 19. NET METERING CREATES REVENUE CHALLENGES FOR MANY UTILITIES 12 August 2014 19 USEA | Current solar incentives can lead to higher rates for on-grid customers No Subsidy Net Benefit Subsidy 46% 18% 8% Utility Leaders’ View of Net Metering
  • 20. GROWTH IN NON-UTILITY SOLAR ASSETS IS DRIVING REVIEWS OF DG POLICIES 12 August 2014 20 USEA | New approach requires fair distribution of costs among all customers 34% 20% 7% 6% Currently reviewing net metering Actively working to change net metering tariffs Allowing "virtual net metering" Using a "value of solar" rate structure
  • 21. HIGH HOPES THAT ENERGY STORAGE WILL SMOOTH POWER FLOWS 12 August 2014 21 USEA | 70% 51% 41% Meet peak capacity requirements Renewables integration Frequency regulation BULK STORAGE DISTRIBUTED STORAGE PURPOSE OF ENERGY STORAGE
  • 22. ADVANCED METERING CREATING MORE INTELLIGENT NETWORKS 12 August 2014 22 USEA | Electric Grid catching up to telecom and ISPs
  • 23. UTILITIES EMBRACING DATA, BUT ROOM TO GROW 12 August 2014 23 USEA | Electric Utilities lag retail / banking sectors in use of big data 40% 34% 17% 8% Yes, in place Assessing / in development No I don't know
  • 24. VALUE FOUND IN AMI AND DATA ANALYTICS ACROSS THE ORGANIZATION 12 August 2014 24 USEA | Growing recognition of the role of data across the organization Smart Network | Smart Information | Smart Utility | Smart Integrated Infrastructure
  • 25. TECHNOLOGY IS CHANGING THE UTILITY- CUSTOMER RELATIONSHIP 12 August 2014 25 USEA | Consumers are becoming more active in home energy management Programmable, controllable thermostats Direct load control In-home displays Pricing signals to connected devices
  • 26. UTILITIES SLOWLY EMBRACING RESIDENTIAL DEMAND-SIDE MANAGEMENT 12 August 2014 26 USEA | Utilities are engaging customers to meet efficiency goals 25% 14% 3% 36% Subsidy / Incentive Programs Smart Thermostats Other Nothing
  • 27. INDUSTRY SHIFTS 27 Policy
  • 29. CYBER SECURITY POLICIES DIRECTED AT PROTECTING CRITICAL INFRASTRUCTURE 12 August 2014 29 USEA | New technology can increase system risk Security systems currently do not integrate across environments 48% Integrated security systems with proper segmentation, monitoring and redundancies 32% I don’t know 20%
  • 30. PHYSICAL ASSET SECURITY GAINS PROFILE, WILL FUNDING FOLLOW? 12 August 2014 30 USEA | Coverage of attacks are on the rise Attacks / Threats Investment Need % View   42%   46%
  • 31. CROSSROADS 31
  • 33. www.bv.com