3 ways power utilities are shock-proofing the electricity business

When Thomas Edison opened his first electrical power distribution center in lower Manhattan, he was the toast of New York. Well, at least to the 59 customers who happened to be within a mile radius of Pearl Street.

The limitations of Edison’s DC system left many New Yorkers unconnected from the fledgling power grid, but those people weren’t going to remain in the dark for long. Competing AC providers quickly seized the initiative and supplied the untapped demand, igniting a battle for market share between the rival technologies that left Edison railing against the dangers of what he saw as an inferior system.

Today’s power utilities have a similar challenge of adapting to a rapidly evolving industry. However, unlike during Edison’s time, today’s power utilities have the added challenge of meeting current demands by harnessing the inconsistent and disruptive power of renewables.

Renewable power, particularly in the form of solar and wind, is perfectly poised to seize the untapped demand pools of today. It has flexibility in terms of scale and location, the ability to operate both with established grids and away from them, as well as cost-competitiveness with fossil fuels. Add to that the urgent need to decarbonize, and you have create serious momentum.

But that potential comes with a catch – one power utilities have been grappling with for much of the past decade. The surge of renewable power into the grid, coupled with its inconsistent availability, has helped to squeeze returns for incumbent electricity providers in established power markets such as Europe and the US.

Germany’s two biggest power companies, E.ON and RWE, decided to split into two entirely separate companies last year in a bid to better capture the business potential of renewable power. The move provides an apt metaphor for the battle currently being played out between old and new in the global power markets.

While renewables are not totally to blame for the industry’s “lost decade” of returns, it’s a factor that can’t be ignored, as strong power utilities are key to the widespread deployment of cleaner power. The industry is also right to point out that the crippling cost of maintaining the grid infrastructure is a major stumbling block facing the roll-out of renewables. These are problems that must be addressed urgently as the rise of renewables, and the disruption that it brings, is only set to intensify.

A recent research program carried out by Climate Policy Initiative for the Energy Transitions Commission concluded that a power system based almost entirely on variable renewable energy generation is likely to provide lower cost power than a fossil fuel-based system by 2030, even without a carbon price.

This shift is backed up by policy pledges from the countries signed up to the Paris Agreement, with certain ambitious nations, such as the 48 members of the Climate Vulnerable Forum, committing to make their energy production 100% renewable "as rapidly as possible" and by 2050 at the latest. Certain developed countries are also making huge progress, such as Sweden and Denmark, which are on track to achieve their aims of going completely fossil-free by 2040 and 2050, respectively.

With this widespread shift to renewables starting to play out globally, the need for power utilities to adapt and fulfil their role as implementation partner is clear. But navigating the complex set of challenges faced by the industry during this transition is not to be underestimated.

One of the ways forward-looking power utilities are adapting to this challenge is by diversifying their generation portfolio to include more renewable energy sources and reducing exposure to fossil fuels.

This shift is taking root globally, beyond the long-established power markets of Europe and the US. For example, South Africa’s coal-focused power utility Eskom has now agreed to allow renewable power integration, despite long-standing opposition. Meanwhile, India and China have seen surging renewable output during recent years, backed by ambitious plans for the future.

Certain energy producers are leading the way towards a renewable future, such as Denmark’s DONG Energy. The company initially branded as Danish Oil and Natural Gas has now pledged to completely phase out coal by 2023 and decided to sell off what remains of its oil and gas business in order to focus completely on renewables.

A report by Accenture Strategy, based on Carbon Disclosure Project (CDP) data, found that large-scale low-carbon electricity generators could capture more than $100 billion in avoided costs annually by managing a low-carbon energy portfolio.

Secondly, leading power utilities are future-proofing themselves by embracing technology. The deployment of lithium ion batteries, smart metering and innovative grid-management solutions such as blockchain have huge potential to balance the inconsistent supply from renewables.

This could help solve one of the industries’ age-old problems of having to meet rampant peak demand, only to scale back generation drastically in off-peak periods. Not to mention the developing problem of having too much renewable power swamping the grid at certain hours.

Companies harnessing the power of technology include UK network operator National Grid, which is investing in 500 MW of battery storage capacity, partnering with Deep Mind to crack grid-optimization issues and making moves into the solar industry. Meanwhile, Enel’s battery-storage system on the Mediterranean island of Ventotene, in collaborate with Siemens, shows the utility sector is ready to integrate batteries at scale.

The Accenture Strategy report found that flexibility optimizers could tap into a $38-59 billion annual market by optimizing efficiency across the value chain.

Thirdly, power utilities are reaping huge rewards from more active engagement with corporate demand for renewables. Companies are sending loud and clear demand signals by committing to source 100% of their energy needs from renewables and by engaging with initiatives such as RE100, by The Climate Group in partnership with CDP.

In working with companies keen to shift their power supply to renewable sources, power utilities also get committed, long-term customers that can help navigate the disruption ahead. Around 90 companies – including major corporate power consumers like Tata Motors – have now joined RE100.

Urban areas around the world are also shifting to renewable power, as shown by the C40 network of the world’s megacities committed to addressing climate change.

Forward-looking power utilities are learning from the original pioneer of power distribution. Just as Edison eventually came to embrace the competing AC system and turn a challenge into a strength, today’s power utilities are increasingly working with renewables and technology to provide the power needed for the low-carbon transition.