Future Prediction Getty Jan 5e297f62dbcf9

Can We Predict the Future for Electric Utilities?

Jan. 23, 2020
Enhancements to our electric grid for safety, reliability, resiliency, and cost-effectiveness are expected to be a priority.

Picking the events and trends that will shape the electric power sector during the coming decade may be a fool’s errand. After all, who would have guessed in 2010 that the growth in renewables would exceed that of fossil fuel and nuclear power alternatives by 2020. This is during the same timeframe that the United States became the world's largest producer of oil and gas. Also, did anyone predict planned blackouts across a large region on multiple occasions like we’ve experienced in California? These examples are a stark reminder of how challenging it is to be in the electric utility business. Are there clues that may indicate trends for the coming years?

Major corporate actions by companies that do business in the industry sector of interest are a good point of reference regarding expected trends. However, as we will see, they are not always correct. GE, Siemens, and other major manufacturers of large gas turbines, clearly major players in the power sector, bet heavily on growth in the turbine market last decade. GE even cut back on its wind turbine business at the same time. Bad bets. Both GE and Siemens had to take significant write downs for their over emphasis on the large gas turbine market. Experts in the turbine market expect it will remain soft for several more years.

An eyebrow raising move by ABB last year was the announced sale of its US$11 billion grid business to Hitachi. Does this mean a downturn for transmission and distribution (T&D)? Probably not. Already a big player in the T&D sector, Hitachi is doubling down on the grid with this move. ABB's rationale for the decision is it wants to focus on industrials, manufacturing and automation, citing better profit margins, lower risk, and less volatility going forward. Hitachi’s goal for the acquisition is to build a comprehensive energy platform, taking advantage of ABB’s power grid strength and broadening it with Hitachi’s infrastructure and digital expertise. Both companies are clearly betting on the digital transformation of the industry and society as a winning trend. However, ABB appears to see greater volatility in the utility sector.

Another point of reference for industry trends is to follow the money. Capital investment forecasts and mergers and acquisition (M&A) activity are relevant indicators. Merrill Corp., a leading global software provider for participants in the M&A lifecycle, predicts potential weakness in the energy and power M&A market for the beginning of the decade. However, the firm forecasts continued growth in alternative energy deals, which accounted for 42% of all energy deals in 2019. In a Merrill Corp. survey, 38% of dealmakers cited energy storage as the largest opportunity area, with solar installments at 24%, grid technology at 15%, alternative fuels at 14%, and wind projects at 10%.

The utility sector is relatively unique compared with other industries in that regulated utilities file detailed resource plans with state commissions. So, it isn't terribly difficult to collect intel regarding where utilities think things are going in coming years. This past year, Xcel's resource filing made a stir when the company voluntarily proposed a plan to decarbonize its operations by mid-century. Its plan includes coal retirements, more renewables, storage, and interim gas-fired additions. Other major utilities with significant fossil generation, including Duke, Southern, and AEP, also have made commitments to reduced carbon futures. The move to replace aging coal plants with gas and renewables will be a continuing trend in the coming decade since it reflects currently prevailing public sentiment and facilitates recovery of past and present utility investments.

The focus on renewables reinforces dealmakers' bet for more energy storage projects. The U.S. National Renewable Energy Laboratory (NREL) also believes storage will become increasingly important, particularly as we strive to marry storage with intermittent resources. In one study, the NREL estimated the United States would need as much as 120 GW of storage under an 80% renewables scenario compared with the current 22 GW of storage from pumped hydropower, and another gigawatt from batteries.

Finally, in our quest to glimpse the future decade in the electric industry, we look to industry experts for their educated prognostications. Data available to Statista indicates the annual U.S. investment in smart grids will increase from US$8.3 billion in 2020 to US$13.8 billion in 2024. Whether the power source is fossil fuel or renewables, and whether the electrons are delivered for use upon creation or from storage, enhancements to our electric grid for safety, reliability, resiliency, and cost-effectiveness are expected to be a priority.

Continued investment in cost-effective renewables, some gas, storage, and grid modernization with a modicum of volatility appears to be the prevailing best intel for the coming decade. For those who hoped this piece would address such age-old questions as the future of fusion, one view maintains fusion is a technology of the future — and always will be.

About the Author

David Shadle | Grid Optimization Editor

Dave joined the T&D World team as the editor of the Grid Optimization Center of Excellence website in January 2016.

Dave is a power industry veteran with a history of leading environmental and development organizations, championing crucial projects, managing major acquisitions and implementing change. Dave is currently a principal at Power Advance, LLC, an independent consulting firm specializing in power project development, research and analysis, due diligence and valuation support. Dave is also a contributing consultant for Transmission & Distribution World. Prior to Power Advance, Dave held business and power project development positions with The Louis Berger Group, Iberdrola Renewables, FPL Energy and General Public Utilities. He is a graduate of Pennsylvania State University, the New Jersey Institute of Technology and Purdue University.

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