POWER January 2016 - 37

2016 INDUSTRY FORECAST
Record Changes and
Uncertainty Reshape the
U.S. Utility Industry
Jessica Harrison
W
ind production in the U.S. hit record
highs in October 2015, natural
gas prices hit record lows, and
solar photovoltaic (PV) adoption is continuing
to grow to unprecedented levels. Energy
storage prices are projected to drop, several
states are proactively targeting alternative resources
such as demand response and distributed
generation, and the Clean Power Plan
has yet to be implemented.
Not surprisingly, the need for new business
models is a pressing issue on the minds
of utility industry stakeholders. This concern
is echoed in DNV GL's second annual Utility
of the Future Survey. A third of respondents
cited the need to find new business models
as the most significant challenge facing the
industry over the next five years.
Clean Energy Drivers Are Prompting
Diversification
Power generators are particularly prone to
business challenges stemming from lower
market prices, the rise of renewable energy
generation, and evolving policies on emissions
regulations. According to DNV GL's
Pulse Survey, 44% of respondents believe
generators will face the greatest challenge
with the rise of renewables.
Early indicators reveal owners of generation
assets looking to change their business
through diversifying their investments toward
clean energy and energy storage. For
example, in 2015, AEP announced plans to
increase renewable generation capacity by
roughly 8,500 MW and natural gas capacity
by 3,000 MW, dropping its share of coal production
from 50% to 45% by 2026. In addition,
the company recently invested $5 million
in Greensmith, a grid-scale storage software
and integration offering provider. NextEra
plans to invest $100 million in energy storage
over the next 12 months and is continuing to
grow its renewables fleet. Southern Company
recently announced the issuance of $1 billion
in bonds, with the funds planned for renewable
energy projects. Energy storage procurement
targets in California and Oregon also
will require utilities to invest in storage.
More broadly than the examples noted
January 2016 | POWER
above, we are already seeing a sizeable shift
across the U.S. in changes to fuel use. According
to the U.S. Energy Information Administration,
generation from natural gas has been
increasing, with July last year seeing monthly
natural gas-based generation surpassing coalbased
generation and the share of coal dropping
compared to natural gas across the country.
The Financial Outlook
The financial community more or less agrees
that significant challenges lie ahead. Moody's
recently revised its industry outlook for the
U.S. unregulated power and utilities sector,
giving it a negative outlook for fundamental
business conditions in 2016. However, the
ratings agency stipulated that the industry
outlook for U.S. regulated utilities in 2016
was likely to be stable due to expectations of
a supportive regulatory environment.
Moody's cited falling market prices and
weaker demand prompted by energy conservation
and slow economic growth and
noted a widespread shift to renewable energy.
Separately, it stipulated that New York's Reforming
the Energy Vision (REV) initiative
would have negative credit implications for
unregulated generators, particularly should
peaking plants see revenue declines from
REV-induced peak demand reduction.
More Forces of Change
Pressure will continue. State renewable energy
standards, for the most part, remain intact
or are even growing. Price drops in PV
and storage fuel expectations for these alternatives,
and many customers have plans for
continued adoption. Wal-Mart, for example,
has installed 105 MW of PV on roughly 6%
of its locations, making it the single largest
commercial solar generator in the country.
The retailer is targeting a doubling of its PV
investments by 2020. Even if natural gas
prices rise again and renewable incentives
decline, there's a strong likelihood that the
technologies prompting reduced volumes in
demand, thereby affecting the demand for
traditional generation, will continue.
Apart from falling demand and increased
regulation of emissions, another phenomwww.powermag.com
enon
likely to affect generation portfolios
is ramping capability. As variable resources
take a greater share of portfolios (and if loads
become less predictable due to end-user investments
in distributed energy resources),
ramping capability will likely become more
valuable. System operators such as CAISO
and MISO are beginning to explicitly account
for ramping needs. Demand for ramping capability
will potentially shift market demand
toward flexible assets. Natural gas turbines
and energy storage are technologies poised
to take advantage.
Apart from diversifying the bulk generation
portfolio, an additional question is whether we
will see more movement toward non-generation
technologies, such as storage, demand
response, and distributed energy resources.
As noted above, many utilities are investing
in energy storage. Furthermore, customers
and activists are calling for alternatives to coal
and natural gas plants. Duke recently modified
its plan to convert a coal plant to natural
gas and add transmission, deciding instead to
build smaller natural gas units and work with
customers to reduce peak demand through energy
efficiency and renewable energy. Southern
California Edison (SCE) recently faced
criticism for plans to invest in new natural gas
generating capacity. Critics said SCE had not
focused enough on clean energy resources.
Activists in Oregon have a ballot initiative under
way to require utilities to eliminate coal
generation by 2030. It may be too soon to see
diversification across the full value chain as a
standard option, but it is a feasible, potentially
long-term approach for many. Existing pressures
could make that a reality.
Diversifying is likely the best hedge at this
moment where the market is in flux. However,
the overall trend is clear: New energy resources
and generation sources are here to stay.
While utilities are starting to shift their investment
and generation portfolios, the question
of which business model will succeed is still
working its way out in the market. ■
-Jessica Harrison (Jessica.Harrison@
DNVGL.com) is head of section for Energy
Strategy, Markets & Policy Development
at DNV GL.
37
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POWER January 2016

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