The carbon-neutral utility has been saved
The push toward sustainable energy has gained substantial momentum in recent years. How can various technologies being used in sustainable energy generation help power utilities navigate the potentially difficult choices involved in "greening" their output?
There’s little doubt that the push to use sustainable energy sources has gathered substantial momentum over the past five years. Commercial and residential customers of power utilities are increasingly showing a preference for “green” or renewable forms of energy. In addition, regulations in a wide variety of jurisdictions are demanding greater energy efficiency in the construction of new buildings, as well as in the generation and consumption of power. For example, the New York State Energy Research and Development Authority has established regulations for energy-efficient products and green residential buildings.1 The State of California has, through a series of executive orders and senate bills, established a goal that 33 percent of electricity in the state be generated from renewable sources by 2020, increasing to 50 percent by 2030.2
At the same time, the development and initial adoption of a number of technologies by consumers, businesses, and utility companies are paving the way for both power consumers—individual customers as well as communities—and power producers—large-scale utilities—to become essentially carbon-neutral. These technologies not only give individual consumers an increasing ability to go “off the grid” with their own renewable energy sources, but also allow commercial consumers and communities to pursue the same goal on a larger scale. Large companies have made commitments to exclusively use green energy,3 and commercial and government “aggregators” have arisen that offer inexpensive renewable energy to consumers across their local utility’s grid. A prime example is Community Choice Aggregators, created by several counties in California, established under state law to provide an alternative to investor-owned utilities.4
This rising demand for sustainable energy forces utilities to make an unenviable choice: Either offer green energy as an option for those consumers who want it, or see their revenue base eroded. This choice is particularly stark for utilities that are vertically integrated, have existing generation assets, or whose residential and commercial rates are not fully decoupled.5
Both consumers and energy providers could benefit from understanding the technologies and associated economics and business models that are enabling this evolution toward sustainable energy. Consumers and energy providers alike have an interest in learning about technologies and techniques that could help them reduce their carbon footprint. For utilities, moreover, this understanding can help them navigate the potentially difficult decisions involved in “greening” their output, mitigating the risk of seeing demand and revenue cannibalized by distributed generation while offering consumers the choice to purchase energy generated from renewable sources, which many are coming to expect.
This article examines four types of technologies that are being used in sustainable energy generation, as well as their impact on consumer choice and power utilities’ potential business models:
While this article primarily focuses on power utilities, many of the principles discussed below can be applied to gas utilities as well as companies that consume significant amounts of energy.
The concept of carbon neutrality is complex, although Merriam-Webster defines it simply as:
The complexity of this definition lies in defining exactly what constitutes “carbon released.” For instance, is it the carbon released in generating electricity, or from customers burning gas? Does it include facilities and fleet carbon emissions? Measurements and claims around the amount of carbon released—and, hence, the practical impact of becoming carbon-neutral—can vary significantly depending on the definition used.
For purposes of this article, we propose to work with two simple definitions of carbon neutrality:
We recognize that these definitions may not satisfy some parties, as they do not include the carbon emissions of suppliers, of a utility’s fleet vehicles (although conversion to an electric fleet would, by definition, eliminate these), and so on. Nonetheless, our definitions offer a practical approach to breaking down the issues surrounding carbon neutrality and the potential impacts of new technologies.
There has been much discussion recently about potential changes to the US federal government’s approach to regulation of the energy sector and how that may affect the country’s generation mix. Projections show some sensitivity to policy changes, in particular slowing the shift from coal to natural gas. Yet overall projections still show an ever-increasing share of generation capacity shifting to renewables over the next 20 years.7
We see this trend toward a lower-carbon electricity grid continuing for three main reasons:
The current federal administration may not provide an added impetus toward reducing carbon emissions in the United States; however, this may simply not be needed with other forces and players driving the industry toward change.
Utilities and their customers are starting to embrace technologies that reduce the carbon footprint of their power use. They do this by reducing their overall energy consumption, by reducing the amount of carbon emitted in the generation of each kilowatt-hour of energy consumed, or by sequestering the carbon produced by power generation. These technologies fall into four broad categories.
Energy efficiency, a term that may also include demand-side management (DSM), is a broad category of approaches and technologies, which seeks to reduce the overall consumption of energy at a community, business, or residence. Consumers may adopt these technologies and approaches at their own homes or facilities, while utilities may seek new business models to promote, finance, or deliver them to customers within or outside their core service territory.
Energy efficiency approaches range from the decidedly low-tech to up-to-the-minute technological tools. Research and development of these technologies are being carried out by private companies, universities, and government departments. Some of these technologies may sound familiar, but new materials science discoveries and the use of sensors and other connected, Internet of Things technologies are taking many to a new level.
Put together in a new building, these technologies can have radical impacts on an organization’s energy consumption, and they are rapidly improving. For instance, Deloitte’s Amsterdam office (called The Edge) incorporates many energy efficiency technologies and techniques, and, at the time of its opening in 2015, was declared the greenest, most intelligent building in the world.12 It is now, in 2017, already being surpassed.
Consumers have a wide variety of options to reduce their energy consumption, and regulators are progressively enforcing the adoption of these technologies. For utilities, energy efficiency is the unseen threat, eroding revenue one kilowatt-hour at a time without the focused impact that, say, an aggregator would have. On the flip side, an opportunity for utilities can be to adopt new business models that support and create revenue from energy efficiency: by providing energy audits, for example, and/or by installing, leasing, or financing energy efficiency products.
Seattle City Light is a municipally owned utility that provides electricity to approximately 423,000 customers in the metropolitan Seattle area. Its commitment to decarbonization started in 2005, when an Earth Day mayoral resolution set the goal for the utility to become carbon-neutral. This resolution was followed by and enacted through a series of city council resolutions over the following two years. The driving force behind this effort was both a local culture that values environmental sustainability, and the realization that the city relies on snowpack to provide cheap, plentiful hydroelectric power. The utility has been carbon-neutral since 2005, a unique achievement in North America.
The utility’s first step toward carbon neutrality was to track all energy purchases and prepare a greenhouse gas inventory, which was then independently audited by the Climate Registry, a nonprofit greenhouse gas reporting organization governed by a number of US states and Canadian provinces. This inventory is now an annual activity, and includes calculating emissions from Seattle City Light’s fleet of vehicles, buildings, power generation, purchases for its retail sales, and any other business activity consuming energy.
After divesting its fossil fuel-generating capacity in 2005, Seattle City Light was able to focus on its hydroelectric facilities, something enabled by the local geography. An aggressive energy efficiency program to reduce consumption—for example, by installing LED street lights and helping residential customers with energy audits and efficiency measures—is in place. This efficiency program, which has been in effect for 40 years, is supplemented by some small-scale and community solar power generation (not particularly enabled by the local climate), which also helps reduce overall demand.
Seattle City Light can fulfill most of the area’s energy demand through its own generation fleet. Some power is purchased from Bonneville and a smaller percentage from other sources; these purchases include a mix of nuclear, hydroelectric, renewable, and fossil-generated power. The emissions from these purchases are calculated using regional mix standards from the EPA, and a final volume of emissions is then calculated.
Seattle City Light’s total greenhouse gas emissions are typically between 100,000 and 300,000 metric tons per year. The utility offsets these emissions each year by purchasing offsets from a variety of certified sources.
Through this journey, Seattle City Light learned that the first step to decarbonization is to identify and quantify an organization’s emissions. This allows leaders to target and reduce them until they can be offset in an economic fashion.
Many generation technologies have been developed, have become economically viable, or have become miniaturized to the point of offering utilities the option to install them on a small, localized scale. In some cases, the cost and footprint of installing generation technologies have become sufficiently low for individual homeowners or businesses to install them. As noted above, projections for generating capacity show an increasing shift to natural gas and renewables. In addition, most projections only assess utility-scale facilities and ignore the generation capacity provided by microgeneration.
When coupled with storage solutions, examined in more depth in the next section, these generation technologies could allow businesses or homeowners to generate and store a significant percentage of their own power consumption. For utilities, the installation, capital funding, leasing, or maintenance of these systems can all provide opportunities to create new businesses and business models.
Masdar City broke ground in 2008 with the goal of providing a high quality of life with a low environmental footprint. Located in Abu Dhabi, the city is designed around a clean-tech cluster, with a graduate school at the center surrounded by tenant companies focused on clean technology. In addition to its goal of using 100 percent renewable energy, Masdar City is a fossil-free zone seeking to achieve zero waste and zero emissions. According to a recent conversation with Khaled Awad, Masdar City’s former director of property development, the keys to developing programs like this are demand management and the recognition that carbon neutrality has to be part of an integrated macroeconomic strategy.
When asked about the lessons the Masdar City experience could provide for designing a carbon-neutrality program, Awad was clear: “Demand management rather than just economically optimized supply.” The challenge for utility executives, therefore, is to understand how to monetize demand management and energy efficiency measures to offset revenue losses from them. Another important enabler for Masdar City is its multi-utility approach, where water, trash, and power reduction targets are pursued together by a single provider. This integration is easier to achieve where utilities are provided by a public entity than where they are distributed across several investor-owned organizations. Vertically integrated utilities, especially investor-owned utilities, may find it more challenging to develop integrated approaches with other utilities and government agencies to spur economic development and demand management sales opportunities.
Despite the challenges, seeking a way to overcome them may be worth considering, especially for municipal utilities for whom financing a carbon-neutral approach may be as much of a challenge as anything else. By forging a series of integrated partnerships across government agencies and vendors, Masdar City was able to attract investment because of investor interest in waste management, water reduction, transportation efficiency, urban agriculture, and other integrated smart city solutions.
Awad went on to assert that a carbon-neutral strategy would likely be challenging if narrowly defined because it is difficult to achieve a positive internal rate of return or net present value. He recommends positioning carbon neutrality as part of a broader economic development plan where macroeconomic benefits are pursued collectively, “In simple terms, it is difficult for anyone to demonstrate financial value in carbon-neutral endeavors, especially when the oil price is $55. My recommendation is for utilities not to start a carbon-neutral initiative independently from other infrastructure elements. The silo principle that governs how cities are managed today will simply fail, financially and otherwise, in a carbon-neutral project.”
For all of these technologies to work together, power grids must be transformed. Instead of a mechanism for unidirectional energy transfer from large generating stations to consumers, the grid needs to evolve into a multidirectional digital energy exchange. To enable load balancing, which would require complete, exact information about what is happening at any point in time, a grid would need to generate, store, and evaluate a vast amount of data, and it would depend on a wide variety of devices in the field to manage the operational activities and financial effects of this dynamic interchange.
Together, these grid technologies can give a utility the opportunity to manage its existing grid as a physical energy exchange. It could create business models based on enabling other parties to buy and sell energy through the utility’s asset, deriving value by facilitating that exchange. For consumers, these systems can create the option to buy and sell energy when they have excess supply or demand.
This year, the first “clean coal” plant came online at Petra Nova, not far from Houston. Another, the Kemper plant in Mississippi, comes online later in 201719 (although recent press reports have questioned the economic viability of this and plants like it).20 At both plants, the carbon captured is piped to nearby oilfields and pumped into the reservoir to enhance oil recovery. These plants represent a significant step forward in carbon sequestration approaches, and offer a way for coal to continue to be a generation fuel in a “greener” age.
Constraints do exist for “clean” coal plant operation. The need for a suitable nearby geologic formation to act as the carbon store can limit the geographical range of such plants. Another limiting factor can be their high cost. Clean coal plants may be two to three times as expensive per megawatt-hour produced as a combined cycle gas plant (see table 1), and they can require ongoing operational costs that make them more expensive compared to their natural gas or renewable competitors.
An alternative method for carbon sequestration has, however, been available for considerably longer. Trees are quite efficient at taking carbon dioxide from the atmosphere and storing it in solid form. Accordingly, many afforestation and reforestation programs are being conducted by governments, nongovernmental organizations (NGOs), corporations, and private citizens. The largest programs have grabbed headlines, with India’s proposed $6.2 billion program to reforest 12 percent of the country being the largest effort to date. As the world’s third-largest greenhouse gas emitter, India plans to meet its 2030 goal of a 35 percent reduction from 2005 emission levels by sequestering 2.5 to 3 billion tons of carbon dioxide through reforestation.21
Smaller-scale programs can also have a large net impact. For instance, various programs, such as Philadelphia’s TreePhilly initiative, seek to add urban tree canopy coverage.22 This reduces a city’s energy footprint by lowering temperatures and cooling costs while simultaneously sequestering up to 48 lbs. of carbon per tree per year.
By partnering with local or international governments, and/or NGOs, utilities can create programs to offset, sequester, or otherwise bring to zero their net carbon emissions when coupled with the deployment of the technologies described above. These programs can be executed on a small, local scale, or by supporting larger-scale initiatives such as rainforest restoration.
Bhutan is a landlocked mountain kingdom in the Himalayas. It competes with another place for the title of the “happiest place on Earth,” being most famous for measuring Gross National Happiness and cherishing this measure of economic growth above the more conventional Gross Domestic Product (GDP). Despite this, at $2,836,23 Bhutan has one of the highest GDPs per capita in Asia, outpacing its neighbors in India, China, and Nepal.
Bhutan is committed to carbon neutrality as a country, with a constitutional requirement that 60 percent of its land be retained as forest. A series of targets and measures have been established as part of the Gross National Happiness program, which is founded on four pillars:
Each is designed to reduce poverty, promote equality, and ensure that economic development comes without unacceptable environmental impacts.
GDP has grown rapidly in recent years with the expansion of the tourism and service industries, as well as some construction and industrialization. A major driver for this growth has been Bhutan’s hydroelectric power industry. Four major run-of-the-river generation schemes were developed in the 1960s that produce a power surplus through the wetter months of the year, which is exported to power-hungry India. Small hydroelectric schemes provide the local power supply for more remote areas, and these are increasingly supplemented by renewables in the form of small-scale solar and wind.
In the dry summer months, power is imported from fossil fuel plants, predominantly coal, in India. Bhutan also imports hydrocarbons for transportation and cooking gas, there being no natural oil or gas resources in the country. These are more than offset by the nation’s sustainable forestry practices such that Bhutan is not just carbon-neutral, but carbon-negative, the only country on Earth that sequesters more carbon dioxide than it produces.
The implementation of energy efficiency measures, local generation from renewables, and carbon offsets from sustainable forestry all contribute to the effort to ensure that as Bhutan’s demand for energy grows, its carbon footprint does not. As with Seattle City Light, the combination of available hydroelectric sources and a commitment to energy efficiency, new renewable energy sources, and sustainable carbon offsets is the key to carbon neutrality.
Utilities may face a number of challenges that they will need to overcome or bypass in order to reduce their carbon footprint.
Whether you are a significant energy consumer or a utility, here are some steps that you should consider now to position yourself for the new low-carbon economy:
In closing, economics and consumer demand are driving forward the trend toward decarbonization. While these pressures may not apply equally in every country or geographic region, the economic forces in play make the pursuit of decarbonization a likely global trend for the foreseeable future. As renewables become increasingly cheaper, the grid more flexible and resilient, and gas the fossil fuel of choice, the goal of carbon neutrality is becoming achievable. While our case studies suggest that decarbonization can be achieved rapidly in some circumstances, the cost and timeline of achieving this goal vary greatly according to a utility’s or consumer’s regulatory environment, geography, and existing generation fleet. Hence, each utility and energy consumer must develop its own unique plan for implementation. By understanding your consumption and energy market now, you can better position your organization for success in the new low-carbon marketplace.