2021 power and utilitiesindustry outlook

Power & Utilities

2021 power and utilities industry outlook

About the study : Deloitte postelection survey To understand the outlook and perspectives of organizations across the energy, resources, and industrials industries, Deloitte fielded a survey of more than 350 US executives and other senior leaders in November 2020 following the 2020 US presidential election. The survey captured insights from respondents in five specific industry groups: chemicals and specialty materials, engineering and construction, industrial products, oil and gas, and power and utilities.

Accelerating energy industry convergenceIn 2020, the US power and utilities industry led the clean energy transition despite federal policy headwinds. Pressure coming from stakeholders ranging from citizens to shareholders intensified in the past year, hewing closely to the recommendations of the Paris Climate Accord. Many utilities, their host cities and states, and their business customers announced plans to fully decarbonize over the next three decades—and continued to do so in the aftermath of pandemic-driven shocks to the electricity load. In fact, as intermittent renewables recorded record-high penetration and peak oil demand came into focus, COVID-19 helped to crystallize the urgency of the energy transition and the industry convergence it entails.

In 2021, a new administration could usher in an acceleration of this energy transition and convergence. Biden’s campaign platform called for a national net- zero greenhouse gas emissions target by 2050 and a $2 trillion investment to help equitably achieve this target. The power and utilities industry is expected to lead this transition, as the Biden plan envisions the industry achieving an even more ambitious target of zero emissions by 2035. While a Republican-led Senate may narrow the scope and/or extend the timeline of these plans, agreement on an infrastructural stimulus could serve as a vehicle to advance the energy transition, as could executive authority over emissions.

The broader energy industry could start to converge in the coming year, as many players seek to serve a growing clean power market in an economy increasingly moving toward electrification. Within the energy industry, the oil majors’ diversification strategies will likely increase their investment across the power sector’s value chain. Automakers’ increased shift toward electric vehicles (EVs) could also help enhance the electric grid via charging infrastructure and battery storage development. They might even seek to become renewable and electric service providers, as Tesla is doing.1 Technology companies may do the same as they enable vehicles, homes, and businesses to both be served by and serve as distributed energy resources (DER). The convergence of the electric, transportation, and building sectors may witness companies with varying levels of regulatory, technological, and capital constraints and opportunities partnering and/or competing with power and utility companies. All these companies are looking to establish a strategic foothold in a new energy landscape characterized by five trends: consolidation, new economies, new battery business models, increased scale, and heightened disaster readiness. Our 2021 renewable energy outlook explores variations on these same five trends.

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FERC enables competition through regulation

The Federal Energy Regulatory Commission (FERC) issued a landmark ruling in September 2020 that could help consolidate the competitive landscape for the energy industry’s convergence in 2021. By leveling the playing field for DER to participate in wholesale capacity, energy, and ancillary services markets, Order 22222 could help spur innovative technologies and aggregations of rooftop solar arrays, EVs, and smart building devices. The order is unlikely to be challenged given that, several months prior, the US Court of Appeals for the D.C. Circuit upheld a similar order applying to storage.3 As a result, regional transmission organizations (RTOs) and independent system operators (ISOs) could revise their tariffs over the next year to establish minimum DER aggregations no larger than 100 KW, in addition to technical and operational terms regarding location, metering, and bids.4 This ruling is significant given that, in a Deloitte postelection poll (see “About the study”), surveyed power and utility executives ranked regulatory hurdles as the single greatest obstacle to greater integration of DER into the grid.

In another move that may further consolidate the competitive landscape in favor of clean energy, FERC recently took a position of being open to carbon pricing. More specifically, FERC clarified its jurisdiction over and support for wholesale electric market rules on carbon pricing. This may encourage additional states in 2021 to join the 11 states that currently have carbon pricing.5

A key area to watch is whether FERC will dampen some of the momentum from these actions that enhance the competitiveness of clean energy sources by handicapping their ability to clear capacity markets. In addition to its order requiring the Pennsylvania New Jersey Maryland (PJM) Interconnection RTO to apply a minimum-offer price rule, FERC recently undercut a New York ISO (NYISO) pro–clean energy provision by upholding rules that artificially place a price floor on these resources’ market bids. As a result, storage and renewables are unlikely to be able to clear the capacity market, depriving DER of a key revenue stream.

Another challenge to the reach of Order 2222 is states’ ability to opt out if DER aggregations include third-party demand response programs. A demand response provider recently petitioned FERC to close this loophole and enable greater market competition.6

Consolidate: Regulatory landscape

In 2021, the new administration may have an opportunity to choose two Democratic nominees to fill FERC’s current vacancies and to appoint a new chair. Flipping the agency to a Democratic majority could yield FERC decisions that are more supportive of clean energy targets.

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Emerging DER aggregation platforms expand digital utility infrastructure

DER integration into the grid would require a new digital infrastructure to aggregate and manage these resources in grid-enhancing ways. The issue is pressing: Wood Mackenzie projects that cumulative US DER capacity may reach 387 GW by 2025, with DER installations between 2016 and 2025 accounting for more than a fifth of all generation and storage installations. Following a pandemic-related dip in DER capacity additions this year, growth is poised to recover in 2021, with a mix that is shifting from mostly nonresidential to mostly residential, solar, and EV load management.7

The big question is to what extent utilities, third parties, and customers can cost-effectively manage this DER digital infrastructure. Indeed, Deloitte’s postelection poll of various power and utility executives found that close to a quarter of respondents believe insufficient or low value streams are the single greatest obstacle to greater integration of DER into the grid. More than a fifth of respondents believe the greatest obstacle is the inability to include DER-related investments in the rate base. At one end of the spectrum, utilities could actively deploy DER in strategic locations as nonwire alternatives to distribution infrastructure upgrades and orchestrate them to help balance the grid. Alternatively, utilities could allow customers’ DER to operate autonomously. Another option is for a third party to manage the DER fleet, balancing utility and customer interests. Finally, customers could respond to real-time wholesale price signals. This latter scenario raises competitive issues for power and utility executives, 60% of whom, among Deloitte’s survey respondents, consider self-generating customers to be utilities’ greatest competitor in providing power to customers.

Each of these configurations will be tested in 2021, and best practices may emerge. For example, one utility that can own and rate-base customer-sited DER works with a software partner to manage a network of more than 2,000 residential batteries. The utility saves on payments to ISO-New England by discharging during peak demand and passes those savings onto customers. Customers can choose a decade-long battery lease from the utility or bring their own devices and receive payments from the utility based on the capacity they allow the utility to use.8 Taking a different tack,

Create: New economies

Southern California Edison (SCE) partnered with rooftop solar developer Sunrun to manage a network of 300 residential batteries as a virtual power plant. Customers pay for the batteries out of pocket, and Sunrun commits to operating them to the customer’s financial benefit.9 In other instances, Sunrun sells backup power to customers. SCE is also piloting automated customer DER responses to real-time pricing in partnership with a transactive energy company.10

DER aggregation platforms can integrate both stationary and vehicular battery storage to help integrate renewables.

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2021 power and utilities industry outlook

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Mobile battery business models develop around EVs and charging infrastructure

The electrification of transportation and charging infrastructure is also poised to experience unprecedented growth in 2021, opening a significant opportunity for utilities to grow earnings. In terms of market developments, while US auto sales fell 9% between the third quarter of 2019 and the third quarter of 2020 amid the pandemic, Tesla sales increased 22%.11 In 2021, we may see the introduction of new, longer-range batteries in truck and SUV models from Tesla, other startups, and established automakers, which may further bump EV sales and accelerate their timeline to parity with gasoline-powered vehicles. New EV manufacturers such as Canoo and Polestar could also attract attention to the EV marketplace overall and provide expanded opportunities to potential customers.

Policy game-changers could also boost EV market prospects in 2021. At the federal level, a new administration could reinstate EV tax rebates and higher fuel efficiency standards and more than quintuple the number of charging stations. And in September, the governor of California (the country’s largest state automotive market) issued an executive order to end the sale of new gasoline cars in 2035.

The governor’s announcement, in the context of California’s rolling blackouts, provided a stark reminder of the stakes of EV load growth management and highlighted the role of utilities in EV infrastructure development. Evening charge surges, fast charging, and EV clustering could all burden the grid and require significant infrastructural upgrades without time-of-use and other dedicated EV charging rates, customer engagement, and utility involvement in charging infrastructure siting decisions. Conversely, grid interactive EV charging could help support the grid and absorb excess renewables production, complementing the similar role of utility and residential stationary battery storage.

Here again, utility involvement ranges from siting, owning, and operating charging stations to providing EV charging tariffs and rebates. In Deloitte’s postelection poll, 98% of power and utility executives surveyed believe that utilities should play a primary or secondary role in EV infrastructure development. In other cases, automakers are developing exclusive fast-charging networks (e.g., Tesla) or partnering to develop public charging networks (e.g,. GM/EVGo). And independent EV charging network operators are attracting private equity investment.12 The big question is which model

Reinvent: Battery business models

can most rapidly and cost-effectively expand its network to assuage the range anxiety constraining suburban EV adoption and to fill the charging deserts hampering urban EV adoption.

Regulators are increasingly coming around to the idea of a leading utility role in EV charging infrastructure development, portending a wave of charging program approvals in 2021 that could help grow utility revenue. Regulators have already approved $2.6 billion in utility investment in transportation electrification, mostly in California, which recently approved a record $436 million charging program.13 Other players eyeing charging infrastructure investments include oil companies.

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Oil companies are investing in the power sector

The growth in renewables and clean technologies has engendered interest in the sector from new entrants, including some of the larger oil companies. Over the past several years, oil company investments in storage technologies, transport electrification, and renewable energy have increased noticeably.14 This trend is expected to continue in the longer term as oil companies move beyond the immediate impact of the oil price drop and COVID-19–related demand decline. In fact, the companies that had already invested substantially in new business models, such as renewable energy, found that even as oil price volatility increased in 2020, the comparatively stable returns on renewable investments were a welcome addition.15 As the US offshore wind industry takes off next year, US oil majors could be positioned to transpose their offshore drilling expertise to the nascent industry. They could similarly play a leading role in advancing a US green hydrogen economy. Consequently, the power and utilities industry may find itself increasingly partnering with, and in some cases competing with, oil companies in such areas.

Scale up: New entrants and frontiers

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Digital strategies to help address wildfires, COVID-19, and cyberattacks

Several disasters buffeted the power and utilities industry in 2020, bringing disaster readiness to the forefront going into 2021. Utilities may increasingly deploy some digital tools to address the “twindemic” of COVID-19 and extreme weather events such as wildfires.

The first set of solutions revolves around a remote workforce. Utilities are using digital tools to enable remote work for safety purposes. To prevent exposure to the coronavirus, utilities are equipping workers with virtual reality in lieu of in-person training, with digital contract management tools to avoid physical meetings, cloud-based solutions to enable work outside of the office or any specific location, and digital customer engagement options to avoid the need for in-person interaction. Postpandemic, these tools may continue to provide a return on investment by offering additional flexibility, elevated customer experiences, and emergency contingencies.

The second set of digital solutions pertains to a remote workplace. The idea is to prevent unsafe conditions from occurring in the field. To protect equipment from succumbing to an extreme weather event, utilities are using artificial intelligence (AI) to model extreme weather events, identify where the infrastructure might be hit, and how to best mitigate the risk. Next, to prevent equipment from sparking a disaster, utilities are deploying Internet of Things sensors to enable predictive maintenance, drones to identify faulty equipment, computer vision to classify the resulting data, and machine learning to preliminarily analyze it.16 Again, these tools can provide a return on investment above and beyond fortifying disaster readiness. They can also help cut costs, facilitate remote work, and allow workers to focus on higher-value tasks.

Alongside their investments in digital solutions, utilities can be expected to reassess and upgrade their cyber defenses after the US Department of Homeland Security warned of an increase in cyberattacks right before the elections from foreign groups specifically targeting the energy sector.

Fortify: Disaster readiness

Digital strategies for disaster readiness could take center stage in the coming year, as COVID-19 is likely to remain a risk for at least part of 2021, weather events continue to become more common and more extreme, and utilities conduct cyberattack postmortems. Chief among these digital strategies is AI, which most power and utility executives surveyed (55%) in our postelection poll think is, by far, the most important digital technology for utilities right now.

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2021 power and utilities industry outlook

Decarbonization and digital strategies to drive industry convergence in 2021

In the coming year, the evolving energy landscape is expected to be characterized by five trends: consolidation, new economies, new battery business models, increased scale, and heightened disaster readiness. In this context, our postelection poll showed that most power and utility executives surveyed think that utilities should primarily focus on decarbonization strategy (33%) and digital strategy (29%) over the next year. Key areas to watch with a change of administration include the uptake of distributed energy resources, EVs, and hydrogen. Meanwhile, pending FERC decisions and new FERC appointments could shape the extent to

which this uptake can translate into market participation. These trends in turn would expedite the process of convergence we are seeing as new entrants and incumbents position to serve a growing clean power market in an economy gradually electrifying. The recent uptick in antitrust activity around big technology companies may also alter the competitive landscape by limiting their penetration of the energy sector. Expanding to the international market, carbon taxes could be a game-changer in both the energy and trade sectors.

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Let’s talk

Jim serves as the vice chairman, US Power, Utilities & Renewables leader, as well as a lead client service partner for Deloitte Consulting LLP. A consulting principal based in Tampa, Jim has more than 30 years of consulting experience working with global power and utility and renewable energy clients. He is focused on helping clients with complex and critical challenges within the power and utility industry and brings a strong passion for making a difference with some of our largest power and utility and renewable energy businesses and their customers.

Jim ThomsonVice ChairmanUS Power, Utilities & Renewables LeaderDeloitte LLPjamthomson@deloitte.com+1 813 230 3714

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Endnotes

1. 1 Ed Clowes and Olivia Rudgard, “Tesla applies for UK electricity provider license,” Telegraph, May 2, 2020, https://www.telegraph.co.uk/busi-ness/2020/05/02/tesla-applies-uk-electricity-provider-licence, accessed October 2020.

2. Federal Energy Regulatory Commission (FERC), “FERC opens whole-sale markets to distributed resources: landmark action breaks down barriers to emerging technologies, boosts competition,” https://www.ferc.gov/news-events/news/ferc-opens-wholesale-markets-distribut-ed-resources-landmark-action-breaks-down#:~:text=The%20Federal%20Energy%20Regulatory%20Commission,regional%20organized%20whole-sale%20electric%20markets, accessed October 2020.

3. Note that Order 841 removed barriers to storage participation in wholesale markets and their compensation for capacity, energy, and ancillary services across all ISOs, even if the storage is connected at the distribution level and providing services in retail markets. Catherine Morehouse, “DC Circuit upholds landmark FERC storage or-der, rejecting claims it violates state authority,” Utility Dive, July 13, 2020, https://www.utilitydive.com/news/dc-circuit-upholds-landmark-ferc-stor-age-order-rejecting-claims-it-violate/581436, accessed October 2020.

4. FERC, “Staff presentation item E-1,” https://www.ferc.gov/staff-presenta-tion-item-e-1, accessed October 2020.

5. “US FERC says it has jurisdiction over power market carbon market price plans,” Reuters, October 15, 2020, https://www.reuters.com/article/us-usa-ferc-carbon-price-idUSKBN2702Q7, accessed October 2020.

6. Earthjustice, Complaint of Voltus, Inc. requesting fast track process-ing, October 20, 2020, https://earthjustice.org/sites/default/files/files/2020-10-20_voltus_complaint.pdf, accessed October 2020.

7. Ben Kellison and Fei Wang, “What the coming wave of distributed energy resources means for the US grid,” Greentech Media, June 18, 2020, https://www.greentechmedia.com/articles/read/coming-wave-of-der-investments-in-us, accessed October 2020; Wood Mackenzie, “United States Distributed Energy Resources Outlook,” July 2020, accessed October 2020.

8. Green Mountain Power, “Tesla Powerwall,” https://greenmountainpower.com/rebates-programs/home-energy-storage/powerwall, accessed October 2020.

9. Sunrun, “SCE Bill Too High? Get Peace of Mind with Solar Panels and Solar Battery Storage Today,” https://www.sunrun.com/utility/ca/sce, accessed October 2020.

10. Opus One Solutions, “Opus One Solutions deploys first transactive energy management software at Southern California Edison for a DOE demonstration project,” June 23, 2020, https://www.opusonesolutions.com/news/opus-one-solutions-deploys-first-transactive-energy-man-agement-software-at-southern-california-edison-for-a-doe-demonstra-tion-project, accessed October 2020.

11. Zachary Shahan, “US Tesla sales up 22% in 3rd quarter, US auto sales down 9%,” Cleantechnica, October 12, 2020, https://cleantechnica.com/2020/10/12/us-tesla-sales-up-22-in-3rd-quarter-us-auto-sales-down-9, accessed October 2020.

12. Bethany Villarreal, “SemaConnect Secures Investment from Trilantic North America,” https://semaconnect.com/blog/semaconnect-se-cures-investment-from-trilantic-north-america, accessed October 2020.

13. Rebecca Elliott, “Spread of electric cars sparks fights for control over charging,” Wall Street Journal, October 17, 2020, https://www.wsj.com/articles/spread-of-electric-cars-sparks-fights-for-control-over-charging-11602927000, accessed October 2020.

14. Richard Stubbe, “Oil & gas majors pivoting to renewables in pandemic: Q&A,” Bloomberg New Energy Finance, August 4, 2020, https://about.bnef.com/blog/oil-gas-majors-pivoting-to-renewables-in-pandemic-qa, accessed November 2020.

15. Nasdaq, “Oil price crash opens a window of opportunity for renewables,” Oilprice.com, March 27, 2020, https://www.nasdaq.com/articles/oil-price-crash-opens-a-window-of-opportunity-for-renewables-2020-03-27, accessed November 2020.

16. John McCormick, “California utilities hope drones, AI will lower risk of future wildfires,” September 11, 2020, Wall Street Journal, https://www.wsj.com/articles/california-utilities-hope-drones-ai-will-lower-risk-of-fu-ture-wildfires-11599816601, accessed October 2020.

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