Wednesday, March 21, 2007

Wanted: A real energy services company

You know what the electricity business needs? It's own nascent Google, or Microsoft, Boeing, General Electric, or Blackberry type of company working to apply practical business models to consumer energy services around electricity delivery and consumption. A company, in other words, strong enough, technologically rich enough, politically savvy enough, and suitably capitalized to capture consumer imagination and sentiment. A company that can change the balance of power in the electric utility business from the supply side to the demand side, and make good money doing it. In my forthcoming book, "Lights Out: The Electricity Crisis, the Global Economy, and What It Means To You," I pose the issue rhetorically, but, in reality, it is serious business.

I was privileged to speak at an industry conference last week at Carnegie Mellon's Electricity Industry Center (part of the Tepper School of Business). The audience was small but the brain power was highly concentrated. Leonard Hyman, one of the keenest industry experts and observers I know, delivered a dinner address on the ten challenges facing the electricity industry. Afterwards, I asked him if he saw a company, large or small, that could truly act as a force for change in the business. Always refreshingly honest and blunt, his answer was, in a nutshell, no.

On the plane ride home, I sat next to a professor from the conference, an economist and an active member of GridWise, an industry center for collaboration on progressive electricity delivery. I asked her a similar question: Who do you see on the demand management side of the business that could truly disrupt the existing state of inertia? She mentioned a company called Site Controls Inc. I thought about companies like Silicon Energy (now owned by Itron). Then she mentioned Enernoc. I appreciated her insights, but on reflection, I wondered whether these companies had the staying power to truly dominate this part of the business. Maybe Enernoc has a shot if its IPO plan, announced February 13, goes well.

I thought about some of the electric utility subsidiaries, like DTE Energy (affiliated with Detroit Edison Co), Keyspan Corp, and Sempra, all of which appeared to be aggressively pursuing a national market in energy services, at least up until a few years ago. It was always unclear whether these subsidiaries were truly interested in demand response and management or in expanding supply through different market channels. There are fledgling companies out there pursuing the micro-grid business model, although I often feel they end up taking two steps back for every one step forward. Sixth Dimension was one, Encorp was another. There are several others. Large conglomerates like Emerson have all the pieces internally to dominate this end of the business. but I don't see an aggressive posture or a market strategy in place to do so.

We often joke in the industry that the core competency in the electric utility is "managing the regulator." It really isn't a joke. Success in the electricity industry often takes far more energy devoted to regulatory policy and politics than it does to technology or the customer experience. Most of these companies lack that recognition or else they proved that they were good at managing the regulator in their service territory, but not that of another utility. Another issue is that we are not even close to a national market in electricity, in fact we've regressed in recent years, and so state regulators still hold tremendous power over the process.

However, I'd like to put the question out there. What company(ies) do you see that can break the traditional electricity service paradigm? I'd love to hear your suggestions keeping in mind the elements noted above: technologically rich, political and regulatory savvy, well capitalized--and not distracted by revenues coming from other parts of the value chain. Suggestions welcome!

Friday, March 09, 2007

Industrial Ecology as a means of reducing the carbon footprint

I'm off to Carnegie Mellon University next week to give a presentation on Pearl Street Inc's E-Equity(TM) methodology at their annual Electricity Conference. E-Equity is a way to incorporate the principles of industrial ecology, a field of study mostly hovering in academia, into the evaluation of power generation options. Industrial ecology studies the "externalities," or the social costs of businesses that are not reflected in the financial accounting.

Pearl Street's E-Equity model looks at the "holistic" costs of power generation. It assigns values for "externalities" such as emissions and discharges and looks at the impact a plant has on the community in which it is sited as well as larger positive/negative impacts on the plant's business/environmental "ecosystem." E-Equity also includes economic penalties associated with defense-related expenditures to protect our global energy supply lines.

One area where defense-related externalities come into play is with the projected massive imports of liquefied natural gas (LNG) into the U.S. 25% of our fossil fuel deficit could be made up by LNG in 20 years, according to the Energy Information Administration. A rational person would have to assume that some amount of the U.S. global defense budget should be apportioned to petroleum and LNG, although I'm sure both sides of the political spectrum could argue for days about what that percentage might be. The bottom line, though, is that renewable energy, coal-based power, and nuclear plants all evaluate more favorably compared to LNG when this externality is fully exposed.

We performed an analysis of defense externalities for a mine-mouth coal project in Illinois and found that $30-million in annual value could be credited, when compared to an LNG-fired combined cycle plant. The larger point isn't how accurate this number is (we had to make some educated assumptions), but that it is a significant value. The fact is, any option--wind, solar or coal gasification--that uses a domestic source of energy would come out favorably when compared to LNG. In fact, it is my contention that, unless defense costs are factored into the long-term economic story around these options, we are doomed to repeat the cycle of relying on imports when OPEC and the other exporters decide to prevent demand destruction by lowering or stabilizing prices. This has a grave impact on the ethanol program. You can just see ethanol become the first "synfuels" of the twenty-first century once petroleum prices stabilize under $50/barrel.

Another E-Equity dimension we'll be talking about at Carnegie Mellon is looking for carbon credits up and down the electricity production value chain. For example, when a power station recycles flyash into concrete manufacturing, each ton of flyash recycled eliminates close to one ton of carbon dioxide! That's because it replaces Portland cement, which is an energy-intensive product. Here's another example: If you burn petroleum coke in a power station (a few plants burn 100% pet coke, many utiilty plants co-fire pet coke), a byproduct of petroleum refining, you avoid the carbon impact of mining and transporting coal long distances. All of the energy options on the table should be put under the E-Equity microscope.

There are great examples of industrial ecology being applied by forward acting owner/operators and project developers. When financial values for carbon are fully exposed through cap and trade policies, these best practices should become more prevalent.