From renewable energy to new rate designs, the electric utility business today faces many disruptive challenges.
Many of these problems, however, can be viewed as new opportunities to grow and evolve the traditional utility business model. Utility Dive analyzed some of the biggest utilities' second quarter earnings calls to gain insight into the trends shaping the electricity business.
Here are four common problems facing utilities today and how industry incumbents are confronting about them:
1. THE EVOLUTION OF UTILITY BUSINESS MODELS
It should come as no surprise: the electricity sector is changing and, as a result, utilities are rethinking their business models. "[N]ew technologies, new regulations and ongoing cost pressures are just some of the forces that require new thinking and action," CEO Lynn Good said in Duke Energy's second quarter earnings call. "As we position the company in the industry for the future, we must innovate every part of the business to address these challenges."
Many other utilities voiced similar concerns, although not all indicated they would employ the same approach. Ameren's divestment of its merchant generation business to a Dynegy affiliate marks the company's transition to "a purely rate regulated electric, natural gas and transmission company focused on growing our investments in energy infrastructure, benefiting our customers, communities and investors," Chairman, CEO and President Thomas R. Voss noted in Ameren's earnings call.
Some struck a slightly different tone and suggested that, despite the disruptive challenges, the essence of the business model would remain unchanged. Exelon President and CEO Christopher Crane said in an earnings call that they "faced a number of challenges" in the second quarter but that the company "is focused on the fundamentals of our business throughout the growth process."
Despite some reluctance to move away from current models, many in the industry are already evolving their businesses. NextEra CEO and President James L. Robo said his company had "undertaken a company-wide initiative aimed at rethinking our approach to all aspects of how we do business." Like many in the industry, however, Robo noted that "we are only just beginning to move into the implementation."
As the electricity industry evolves, expect to see new approaches and business models emerge. It may be necessary for survival and success.
2. REGULATORY REFORM
As the electricity industry changes, so too will regulation. In their second quarter earnings calls, a number of utility executives touched upon how their companies are approaching regulatory reform. CEO Lynn Good noted that Duke Energy "must [...] engage in leading public policy discussions" and innovate regulatory mechanisms.
Rate designs, in particular, have sparked the interests of utilities seeking to secure or boost their returns on investment. Ameren Chairman, CEO and President Thomas R. Voss noted in an earnings call that "the lack of a modern framework that better supports capital investments made between rate cases limits the level of discretionary investment [Ameren Missouri] can reasonably make in our energy infrastructure."
Edison International Chairman, CEO and President Theodore F. Craver stated in an earnings call that rate design reform is "an important long-term priority" to the company's ability to develop infrastructure, maintain grid reliability and recover fixed costs. Craver touched upon the one of the biggest concerns of many utility executives today—distributed generation and rooftop solar, in particular. "Recovering fixed costs for the grid and the rates of all residential customers is important as the state moves towards a more distributed and smart grid model. This is especially true since the grid facilitates and enables distributed energy resources and will require significant utility investment," he said.
As the traditional one-way energy value chain is disrupted and the sector becomes increasingly consumer-driven, electric utilities will seek to reform regulatory models, whether that is to protect their investments or incentivize new ways of doing business.
3. SHIFTS IN GENERATION RESOURCES
The trends are clear. Despite reluctance on the part of some, industry incumbents are gradually moving away from coal-fired energy generation and towards renewable energy generation. Many utilities, including NextEra and Xcel Energy, are filling a significant portion of their new generation projects with renewable resources such as solar and wind. The vast majority of utilities are not looking to build new coal-fired power plants but, instead, are retiring existing ones. NV Energy President and CEO Michael W. Yackira said in an earnings call that the company plans to retire its coal plants in Southern Nevada and replace those coal plants "basically, megawatt for megawatt" with "a combination of renewable energy projects."
Some utilities, however, are replacing retired coal units with demand response and other dispatchable resources. Kenneth Cornew, president and CEO of Exelon Generation, noted in Exelon's earnings call the market's "increased reliance on planned resources" as more and more coal plants are phased out. Utilities facing shortfalls must decide how they will replace lost capacity, whether through demand-side management (DSM) or new generation projects.
Some in the industry are concerned that renewable resources are not sustainable in the long-term as they are currently only cost-competitive due to subsidization. Exelon CEO and President Christopher Crane said that "Washington picking winners and losers on subsidies, it is not a long-term plan" and "a long-term large scale business model on a highly subsidized product is something that we watch closely."
4. UNPREDICTABLE WEATHER
Utilities are not in control of the weather, but they are affected by it. End-users consumption of power is partly dependent on weather conditions, while extreme weather events can cause end-users to have no power at all, as we saw last year with Superstorm Sandy. The second quarter of 2013, however, saw a trend of many utilities being impacted by what many called "mild weather."
NRG Energy CEO David Crane painted the picture that many industry players experienced: "[our] results have been impacted by a continuation of extraordinarily mild weather." This problem was particularly pronounced in Texas, Crane said, where typically scalding temperatures resulted in reduced energy consumption in "the critical summer air conditioning season." Utilities such as Ameren, NextEra and Exelon also noted "milder," "cooler" or "unfavorable" weather in their respective territories compared to the same period last year. Duke Energy CEO Lynn Good noted that the company's positive results were "partially offset" by weather conditions. "In the second quarter of 2012, we experienced above normal weather and we are seeing below normal weather during this year's quarter," she said.
Despite their impact on performace, weather conditions can be nearly impossible to predict in advance, and the issue is ultimately out of utilities' control. As NRG CEO David Crane noted, "It is what it is and we are doing our best to achieve the best financial performance possible in the current commodity price environment."
Would you like to see more utility and energy news like this in your inbox on a daily basis? Subscribe to our Utility Dive email newsletter! You may also want to read Utility Dive's interview with Brad Davids, vice president of utility solutions at EnerNOC.