The E.ON effect: Will U.S. utilities have their own energy transition?

By Bob Gibson

When E.ON, one of Europe’s largest utilities, announced this week it would spin off its conventional power generation business into a separate entity and refocus on renewables, efficiency and grid operations, an obvious question arose.

Could similar transitions be coming to utilities in the United States?

In a word, yes.

Read the statement from E.ON’s top executives on the company’s new direction here.

At least that was the conclusion among the 30 U.S. energy executives who traveled to Germany in September on a fact-finding mission with the Solar Electric Power Association (SEPA). After three days of intensive discussions with their German counterparts — including executives from E.ON — the SEPA group broadly agreed that the fundamental changes underway in that country’s energy market will be seen, in one form or another, in the U.S.

Members of SEPA’s fact-finding mission to Germany outside E.ON’s
headquarters in Dusseldorf. (Photo by Bob Gibson)

“In light of how the German market is structured, I think this is a good move for E.ON,” says Carmine Tilghman, Senior Director, Wholesale, Fuels, and Renewable Resources for UNS Energy, one of the executives on the trip. “They realize they missed some opportunities, and they need to redefine themselves to take advantage of future opportunities. I think we’ll see similar utility transitions, in varying degrees, throughout the US market over the next decade, utilities redefining themselves through the integration of renewable energy.”

At the same time, differences between the German and U.S. energy markets will influence the ways these changes might play out on in both countries.

— Germany has a sustained history of strong national energy policies, which include deregulation of utilities, support and subsidies for renewables, a commitment to phasing out nuclear power and ambitious carbon emission reduction goals. This comprehensive approach, known as the Energiewende, has overwhelming public backing.

—In the U.S., no national consensus has emerged on the issues Germans are aligned on, and electricity market structures, regulation and rules vary state by state.
—Germany has limited options for baseload generation, which in turn means limited potential for utility returns on such investments. The underlying drivers here include a relative lack of domestic resources — especially natural gas — the high cost of imports and the planned reduction in nuclear. Another key factor is Germany’s “merit order” wholesale market that always takes solar and wind energy, but on days of low demand can send the value of conventional generation into negative fitures.

—The U.S. has plentiful, low-cost natural gas, which is perceived as a major source of both future baseload power and flexible power to back up renewables.

—Compared to the U.S., Germany’s residential electricity rates are very high, but per-household use of electricity is just one-quarter of U.S. consumption.

Read more about SEPA’s fact-finding mission to Germany here and here.

Nevertheless, the SEPA mission noted some powerful trends that may bridge the gap on many of these differences.

The most fundamental is the economics of solar. Germany’s aggressive and sustained pro-solar policies and incentives have led to a permanent downward trend in solar costs on a global basis. As a result, solar is increasingly affordable in markets across the U.S., triggering a surge of customer interest and demand for more choice in power resource options. For the first time, self-generation is becoming an attractive option for a growing number of customers.

As a result, the U.S. is moving toward an increasingly decentralized grid. Distributed resources like solar, combined with demand response and efficiency, storage and advanced communication and control systems, are disrupting traditional models of energy production and delivery. These more fundamental changes are rooted not only in economics but in policies in a growing number of states.

Will these factors sooner or later compel U.S. utilities to redesign their business models? While no major U.S. utility has yet to make an E.ON-type announcement, the momentum for change is unmistakable and evident in every region of the country. Here are a few examples:

— Xcel Energy in Colorado is contracting for solar as a least-cost resource.
— Hawaiian Electric Company has announced a plan to move to 65 percent renewables, with a major emphasis on investments in its distribution grid to manage distributed generation.
— Public Service of New Mexico is among a growing number of utilities that are combining energy storage with solar on a serious demonstration basis.
— Duke Energy is testing the deployment of utility-managed smart inverters to enhance the value of solar.
— Consolidated Edison and Central Hudson Gas and Electric are actively engaged in New York’s Reforming the Energy Vision challenge, developing customer-focused programs in microgrids and solar integration.

A new development: NextEra Energy acquires Hawaiian Electric. Read the announcement here.

Reflecting on the hard lessons learned by the big German utilities over the past several years, Tilghman and other participants stressed that utilities in this country need to focus on what customers really want, rather than what individual utilities presume they need.

“It is very important for U.S. utilities to be proactive in developing business strategies that respond to customers’ energy service expectations on both sides of the meter,” said Greg Bollom, Assistant Vice President, Energy Planning for Madison Gas and Electric. “Waiting too long will only make it more difficult and costly to develop reactive strategies in the future, and that future might not be very far off.”

Solar has pushed innovation for a long time at the Sacramento Municipal Utility District, said Frankie McDermott, SMUD’s Chief Customer Officer.

But the trip to Germany “reaffirmed the need to keep your head out of the sand and be proactive with customers,” he said. “We are focusing on having the right products, delivered when the customers want them.  While we are often characterized as a monopoly, we are transforming our business with the assumption that we are in a competitive environment.”

Bob Gibson is SEPA’s Vice President of Education and Outreach.