This is one of four articles related to the 2021 State of the Electric Utility Survey Report. To see the other articles and download the report, visit our State of the Electric Utility landing page.
Utility Dive today released its 8th annual State of the Electric Utility (SEU) Survey Report, which is chock full of data and insights about the power sector.
The report, based on a survey completed near the end of 2020 by electric utility executives and professionals, covers trends in load, generation, non-baseload technologies and utility regulatory and business models, among other topics.
While some of the survey results were inevitably impacted by the current pandemic, many of the trends from recent surveys were evident again, with some notable changes, as discussed below.
You can download the full report here, but for those who prefer a relatively quicker analysis, here are seven key takeaways.
1. Despite COVID impacts, the energy transition is as strong as ever
The COVID-19 pandemic has impacted the power sector in numerous ways, from supply chain disruptions to changes in how utilities monitor and address problems on their systems.
The two biggest impacts related to the pandemic, according to the 2021 SEU report, have been remote working and loss of revenue.
But throughout the report one thing is consistently clear: despite the pandemic, the energy transition is stronger than ever and the forces propelling it continue to grow.
That is clear from many of the key takeaways below — from the increasing projections for solar, to the growth of performance-based regulation.
"I, too, am shocked that, despite COVID, the [advanced energy] industry has been going pretty strong," said Lisa Frantzis, senior managing director at Advanced Energy Economy (AEE). Recently released AEE data shows the industry grew significantly last year, with revenues up 8% from $200 billion in 2019 to $216 billion in 2020, excluding ethanol. According to AEE, "advanced energy includes energy efficiency, demand response, energy storage, wind, solar, hydro, nuclear, electric vehicles, and more."
Part of the reason for the sector's continued growth may be that, after things shut down in the spring, the industry put a lot of emphasis on "figuring out how to get things moving again safely," said Ryan Katofsky, managing director at AEE.
In New York, for example, state agencies responsible for clean energy programs, like the New York State Energy Research and Development Authority and the Public Service Commission, basically came out and told the industry, "We've got your back and we're going to figure out" how to get things going again.
2. Renewables, sustainability or the environment continue to significantly outrank other top issues for utilities, but security and reliability concerns are close behind
As with the previous SEU survey, the top issue for utilities, by far, among a dozen priorities, is renewables, sustainability or the environment, with 45% of respondents picking it.
The next highest priority — reliability of the retail distribution grid — was selected by 29% of respondents and leads the second tier of top issues for utilities, which focus on reliability, resiliency and security issues.
As Sharon Allan, chief strategy officer at the Smart Electric Power Alliance noted, it's not feasible to add too many renewables without upgrading the grid.
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"You can't have clean without modern. To bring on new technology, you need to make sure it's done in a safe and economical way." That's why issues like reliability are the second highest priority for utilities.
Ralph Cavanagh, energy co-director at the Natural Resources Defense Council, echoed that view.
"I think that one of the lessons of 2021 is that those things are very much intertwined, and that security, reliability and the emergence of an increasingly decarbonized electric sector ... [are] not competing priorities," he said.
3. Solar remains number one for new generation; doubts are rising about the future of gas
Grid-scale solar energy retained its number one spot in this year's report, in terms of growth expectations among various energy resources, with 52% of respondents expecting a significant increase in the next 10 years. By comparison, 29% of respondents expect significant growth in wind and distributed energy resources over the next ten years.
But the changes in overall growth expectations between the 2020 and 2021 report for renewables, storage and distributed energy resources (DER) were fairly small — ranging from 1% to 3%. A much bigger difference in year-over-year expectations can be seen with natural gas, with the percent of respondents expecting a decrease over the next ten years jumping from 17% to 30%.
"It seems like the bridge keeps getting extended a little bit to the extent that gas is a bridge fuel from dirty to clean [energy]. There's this period...where we're right now getting the reliability right. And gas is definitely front and center in that conversation."
Natural gas is considered a bridge fuel by many on the path to a cleaner energy system. And utilities are continuing to invest significant amounts of capital in it. But expanding state mandates for clean energy along with pressure from various stakeholders are prompting increased scrutiny of such investments, perhaps reflected in the jump in those who expect a significant decrease in the resource in the next 10 years.
That being said, the vast majority of respondents (70%) still expect natural gas use to remain the same or increase in the next 10 years.
Power sector experts were not surprised by the findings.
"There's no question that a decarbonizing system is going to have less emphasis on gas," NRDC's Cavanagh said.
AEE's Katofsky pointed to the falling costs of wind and solar, the continued growth of storage, and the proliferation of 100% clean electricity standards, which can be found in at least 18 states as well as Puerto Rico and the District of Columbia, as key drivers.
"The increasing pessimism surrounding natural gas is certainly consistent with what what we see in California," said Seth Hilton, partner at Stoel Rives.
"Generally, in terms of California procurement, the mantra has been no new gas for a while now, and a focus on renewables and other forms of clean generation," he said.
But while there's increasing resistance to the use of gas, including in homes, "at the same time, we continue to extend the retirement periods for some of these units," noted Brian Nese, partner at Stoel Rives.
"It seems like the bridge keeps getting extended a little bit, to the extent that gas is a bridge fuel from dirty to clean [energy]. There's this period ... where we're right now getting the reliability right. And gas is definitely front and center in that conversation," Nese said.
4. Strong state and federal policies are important for decarbonization, but money, especially tax credits, is king
A growing number of states have some kind of mandate to reduce carbon emissions in their power sectors, with some aiming for full decarbonization within the next 30 years.
At the federal level, President Joe Biden has called for 100% clean energy by 2035 and Democrats have introduced the CLEAN Future Act to help achieve that.
Such policy actions are critical drivers of utility efforts to increase the amount of clean energy resources on their systems. But utilities, especially investor-owned ones, must also focus on their bottom line.
"Sustainability is wonderful, but it will not stand alone unless it's economically viable," said Jeremy Klingel, energy and utilities expert at PA Consulting.
Financial incentives, like tax credits, can help shift utilities' investment calculus in favor of renewables and are seen as the most effective approach for decarbonizing the power system.
Along with updated transmission infrastructure, financial incentives also saw the biggest percent increase in support compared to the previous survey, among the eight decarbonization drivers listed in the survey.
But while financial incentives are at the top, one move in the tax arena that would be "game changing," and provide incentives for taxpayers to invest in technology, would be to allow high net worth, individual taxpayers to monetize these credits for commercial projects, Nese said.
5. There appears to be less utility focus, and a decrease in challenges, surrounding distributed energy resources
While distributed energy resources are proliferating, there appears to be less interest among utilities in getting involved with the technology, either on their own or through third parties. The shift comes as grid operators are determining how they will implement FERC Order 2222, which allows aggregates of DER to compete in wholesale electric markets.
In the 2020 SEU report, some 49% of respondents said their company should build a business model around distributed energy resources by owning and operating DERs as a regulated utility through rate-based investments. In the 2021 report, that number dropped to 42%.
In addition, the option of procuring or aggregating power from DERs owned by third-party providers was selected by 43% of respondents in the 2020 report, but only 29% of respondents in this year's report. And while 10% of respondents in the 2020 report said they do not believe their organization should have a business model around DERs, that number rose to 16% in the 2021 report.
This overall trend can perhaps be reflected best in the shifting results for DER when it comes to utilities' top priorities — in the 2020 report, 29% of respondents picked DER as one of their top three priorities, but in the 2021 report, that dropped to 18%.
If the industry is a bit slow to act on the rising DER threats (opportunities), that could easily snap back with the passage of a Federal clean electricity standard or other market mover.
"If you're getting survey results like that, the first thing I would look to is to make sure that we stay serious about fixing the utility business model so it's consistent with decarbonization objectives," Cavanagh said.
But the financial health of many utilities is tied directly to increases in retail kilowatt-hour sales and if some of the most promising strategies to enhance decarbonization "automatically reduce your financial health, there's an obvious conflict of interest and attention," he noted.
"If we don't upgrade and update business models, these problems will persist. And we really can't afford that if we want the clean energy transition to accelerate," he said.
Guidehouse Partner Dan Bradley, in an email, offered a number of potential explanations for the shifts in DER interest, including some disillusionment in 2020 after the inflated expectations that peaked in 2019 and a greater focus on affordability coming out of the COVID economic downturn — "just as renewables took a hit after the 2008 recession."
Bradley further noted that "utilities move in a herd (famously) — you may see a rise in skepticism because utilities aren't seeing their peers moving as quickly as they thought they would. If the industry is a bit slow to act on the rising DER threats (opportunities), that could easily snap back with the passage of a Federal clean electricity standard or other market mover," he said.
But the overall prospects for DER remain robust, he added.
"In 2020 ... the growth in deployment of DERs was hampered by disruptions to the supply chain, including difficulties with sourcing and new construction. Despite these challenges, DER deployment is springing back to strong growth in 2021," he said.
In addition, while there is less interest in DER among utilities in the 2021 report, their ability to handle it appears to be improving.
Those who pointed to 'justifying emerging utility investments' as one of the most difficult challenges associated with the utility regulatory models in the states where they operate fell from 56% in the 2020 report to 42% in the 2021 report. And respondents who cited 'managing distributed resource growth and net metering' as a key challenge fell from 42% in the 2020 report to 36% in this year's report.
6. An electric vehicle boom is expected soon, but that's not reflected yet in load drivers or trends
Many analysts expect a significant increase in the number of electric vehicles on U.S. roads over the next decade, and companies are investing hundreds of billions of dollars to make that a reality.
The rise in the number of states adopting clean car standards and strong support from the Biden administration, which recently called for converting the federal vehicle fleet to EVs by 2030, will only strengthen those trends.
"Because there remains, even in systems like Hawaii ... a foundation of cost-of-service regulations that these performance metrics are being layered on top of, I would push back hard on those who say that, for example, utility regulation is in the process of being supplanted."
But while an EV boom is expected, that's not yet reflected in the top drivers of load for utilities, or the load trends they're seeing.
Not surprisingly, the top driver of load change for utilities in the 2021 report was COVID-19, selected by 58% of survey respondents, followed by energy efficiency and demand side management at 41% and increased electrification of transportation, buildings and other sectors at 32%.
In terms of overall trends, 71% of respondents in the latest survey said they saw stagnant or decreasing loads compared to 49% in the previous report.
But whether EVs ultimately become a top load driver or not, analysts expect electric utilities will be able to handle the additional demand.
"The California Energy Commission has done some studies on the expected load that might come from the increased use of electric vehicles. It's significant but not overwhelming. So I think it's manageable in the course of the transition to electric vehicles," Hilton said.
7. Utilities continue to be unsure about the merits of performance-based regulation, though many welcome some aspect of it
In December, Hawaii regulators issued an order that will make Hawaiian Electric the first U.S. investor-owned utility to transition away from cost of service regulation.
Hawaii is at the forefront of a growing number of states that are moving to performance-based regulation (PBR), whereby utilities are compensated based on their ability to achieve public policy and customer-related goals. But there are also a number of safeguards in the Hawaii example to ensure adequate utility finances.
Hawaii "provides an interesting model for other states to look at," said Katofsky. In addition to Hawaii, several other states, including Michigan and New York, are moving toward PBR, and the trend is likely to grow, Frantzis noted.
The number of survey respondents who selected PBR as the regulatory model that would best support their organization's business growth over the next decade remains a relatively small minority. But the numbers have inched up from 12% in the 2020 report to 15% in the 2021 report.
Similarly, respondents who cited a combination of PBR and traditional cost-of-service regulation as the preferred approach for their company rose from 35% to 38%.
But while utilities increasingly see PBR as a preferred model, Cavanagh said, it's not yet clear whether it really threatens the dominance of cost-of-service regulation.
"Because there remains, even in systems like Hawaii ... a foundation of cost-of-service regulations that these performance metrics are being layered on top of, I would push back hard on those who say that, for example, utility regulation is in the process of being supplanted," he said.
Editor's Note: All SEU survey results cited above have been rounded to the nearest percent.