CAPTURING VALUE FROM DISRUPTION - TECHNOLOGY AND INNOVATION IN AN ERA OF ENERGY TRANSFORMATION - PWC
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PwC global power & utilities
Capturing value from
disruption
Technology and innovation
in an era of energy transformation
www.pwc.com/utilities
Contents
Introduction3
Executive summary 4
Technologies and disruption 8
High-efficiency gas turbines 9
Small modular reactors 10
Distributed generation 11
Micro-grids and smart grid networks 13
Energy storage 15
Electric vehicles 16
Beyond the meter 18
Early-stage technologies 20
Possible futures 21
‘Losing touch’ 23
‘Off grid’ 24
‘Mobile and virtual’ 25
‘Data rich’ 26
‘Scaled down’ 27
Scenario round-up 28
A whole new emphasis on innovation 29
Winning in tomorrow’s market 32
This report has been written by a team from Strategy& in conjunction with
PwC’s global power and utilities centre of excellence to assist companies in
the fast-changing power utilities environment. It is part of a series of PwC
reports examining the various market and business models that could
emerge in the power sector, the implications of the new energy ecosystem
for customer strategies, and the increasing importance of innovation for
success in the sector.1
1 http://www.pwc.com/gx/en/industries/energy-utilities-mining/power-utilities/
publications.html
Cover image courtesy of Coffice Architecture & Urban Planning (Arch. Francesco Colarossi, Ing. Paolo Colarossi, Arch. Luisa Saracino)
Introduction
In the next 20 years, more innovation will occur in the utilities sector than has
occurred to date since the time of Thomas Edison. Whether companies enjoy
the promise of this innovation depends on how they embrace the potential of
new technology as the vanguard for industry evolution.
The pace of technology-driven change As today’s utility CEOs think about In this report we look at the
is accelerating well beyond the speed how to reposition their company for technologies that are likely to drive
the power sector believed possible. success in this rapidly changing industry disruption and change in the utilities
No aspect of the value chain – from landscape, they need to work closely sector over the next 20 years and what
upstream generation, through grid and with their leadership teams to discuss they mean for incumbents and new
network operations to beyond the meter the following questions: players in the market. Much of our focus
– is unaffected. The utilities sector will and examples come from the United
develop very different performance • How might disruptive technologies States but the trends and changes
roles, technology landscapes, customer impact our business over the next described are applicable to many other
platforms and business models than five to ten years? parts of the world as well.
those that served it over its first 100 • What should we do to capture value
years. From a scale-driven, centralised from these disruptive technologies? The report is part of a series of PwC
and standardised model, the sector initiatives looking at the impact of
• How do we leverage disruptive
is set to evolve to one that is digital, energy transformation. In an earlier
technologies to create competitive
distributed and personalised. report, The Road Ahead: gaining
advantage?
momentum from energy transformation,
Technology economics will drive part • What can we do to build a we discussed the various market and
of this shift and be complemented sustainable innovation capability business models that could emerge. This
by changes in customer behaviours that supports new business models? was followed by Customer engagement in
that reshape the provider–consumer an era of energy transformation in which
Identifying strategies to manage these
relationship. Those companies that we examined how the energy ecosystem
challenges should add significant value,
recognise and embrace this shift will is evolving and the implications for
but evaluating the questions at just
find success as a valued, innovative customer strategy. In this latest report
one point in time is not sufficient. Key
solutions provider to their customers we look at the scenarios that could
assumptions and the market conditions
and partners. Those that fail to arise from the fast pace of technological
that will affect the discussion will
recognise this new technology-driven evolution. We paint a picture of how five
change, so utility executives must
market model will find themselves possible future scenarios (among many
figure out ways to conduct an ongoing
forfeiting their natural rights to grid possibilities) could unfold and affect
dialogue. Also, leaders may want to
enhancement and to the customer utilities as technology evolution pushes
think about potential scenarios for
relationship. forward. And we conclude with a look
some questions if there is a high level
at what it will take to win in tomorrow’s
of uncertainty around key elements
market and, in particular, the need for
that greatly influence the future. We
utilities to think very differently about
will revisit these questions later in
how to embrace innovation as a market
this report and share perspectives for
enabler.
utility executives to consider as they
think about the impact of disruptive
technologies on the future of their
business.
Capturing value from disruption 3
Executive summary
The last 100 years have witnessed an explosion of technology as the industrial
revolution progressed into the era of the consumer. Technology development
windows continued to shrink while markets grew at increasingly faster rates
than occurred in the past. But the power sector has not kept pace with other
industries and has been neither a leader nor a fast follower of technology
adoption.
The sector has maintained a natural achieve 50 million customers, it only
reluctance to ‘jump’ into new technology took 18 years for personal computers,
without extended periods of testing 15 years for mobile phones and ten
and evaluation – sometimes lasting years for the internet to achieve the
decades. But in the immediate period same level of customer adoption.
ahead, utility companies will need to And consider the short time frames
completely change their approach to for various applications, games and
innovation and technology adoption or novelty devices to reach similar levels.
face becoming increasingly sidelined as This now happens in single-digit years
a series of transformative waves hits the as technology-based product and
sector. application value is made available to
consumers at internet speed.
The accelerating pace of change
Disruptive technologies
A look back on various technologies
that have appeared since the 1960s Numerous technologies are emerging
illustrates the slow pace of technology that could dramatically affect the future
deployment among utilities. Whether of the utilities industry and current
automated generation control in the costs. We focus on those that appear
1960s or advanced gas turbines in the more likely to be commercialised within
1980s, it took 15-20 years for utilities the next ten years and could have
to widely adopt what was available a widespread impact on traditional
in the market. Similarly, control and elements of power infrastructure (see
digital relays were available for system panel). These technologies are discussed
operations in the 1980s but again it took in the first half of this report, with
15-20 years for this technology to widely a look at both their economics and
take hold in the grid and network. likely proliferation. The choice of these
And advanced metering rollout is still technologies is also supported by many
a long way off high penetration, even of the findings of a study on the future
after more than ten years of technology of energy systems in Germany, Europe
availability. and the world by the year 2040, which
included in-depth consultation with
Contrast this pace of adoption to what 80 recognised international experts
has happened in new industries over from the energy sector and related
the last several decades. While it took industries.2
more than 55 years for telephony to
2 Delphi Energy Future 2040, Delphi-study on the Future of Energy Systems in Germany, Europe and the World by the Year 2040, German Association of
Energy and Water Industries (BDEW), Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, PricewaterhouseCoopers AG WPG (PwC),
2016.
4 PwC global power & utilities www.pwc.com/utilities
process, interpret, and convert these
Figure 1: Technologies with big impact potential – next ten years
data to offer knowledge-based, value-
added energy management services to
High-efficiency customers.
gas turbines
Early stage ‘Scaled down’ – large business
technologies customers start to install their own
Small modular decentralised and scalable generation
reactors for their own usage. As technology
continues to progress, smaller and
Beyond
the meter
smaller commercial and industrial
Technologies
customers migrate toward a new era
with big impact Distributed of ‘site-based’ generation. Traditional
potential generation utilities see a diminished role with their
next ten years
larger customers and are not able to
avoid disintermediation for their largest
Electric load entities.
vehicles
Micro-grids
and smart For each of these scenarios we look at
grid networks the implications for utility companies
Energy
storage and their possible responses. Many of
the technological developments add to
the real threat of separation between
utility companies and their customers.
And when customers determine they
are willing to consider or outright adopt
emerging technology alternatives,
For utilities, this accelerated pace of wholesale energy at the cheapest price they will seek out these products and
change that comes with technological with an energy ‘hub’ performing all services from wherever they can. If the
change is both an opportunity and a routine and value-added functions for sources of this information are those
threat. As customers become more the consumer. offering the technology or products
aware of technology possibilities that themselves, rather than the utility, then
can provide useful applications in their ‘Off grid’ – the centre of gravity
disintermediation between the utility
lives, they are quick to seek out these shifts away from the main grid to on-
and its network and its customer is not
offerings. Customers are not receiving site generation and storage as well
long to follow.
their product and technology knowledge as distributed generation attached to
from their utilities; rather, they are micro-grids. The grid becomes more A new ‘technology push – customer
obtaining information from non-utility akin to a source of back-up power and pull’ era
sources on the internet, other customers utilities face a number of dilemmas
and non-traditional entrants to the on what role to play in a more The utility industry has entered an era
utility grid and customer businesses. diversified power system and how to of ‘technology push – customer pull’.
maintain underused and costly power The rate of technology improvement
Five future scenarios infrastructure. and performance enhancement grows
shorter and interest from customers in
What could these technology ‘Mobile and virtual’ – electric incorporating technology to improve
breakthroughs mean for incumbents vehicles become the norm, creating their lives accelerates faster. When this
and new players in the market? Whether the need for substantial infrastructure technology push’ and ‘customer pull’
companies are providers of power investment and the opportunity to collide, transformation of an industry
generation, managers of an electric use vehicles as a mass storage source. ensues, which is precisely where the
grid or retailers of power and energy Local utility networks and circuits face utilities sector finds itself today.
solutions, many of the technology tremendous strain. Utilities have the
evolutions we discuss could have a potential to capture several sources The ability of the utilities industry
significant impact on their businesses. In of value from this scenario but face to weather the sea change evolution
the second half of the report, we look at considerable competition from a range that comes from ‘technology push’
how five possible future scenarios could of other players. and ‘customer pull’ depends on how it
unfold and affect utilities as technology responds in the next several years to the
evolution pushes forward. ‘Data rich’ – ubiquitous, intelligent challenges that it has begun to face. At a
sensors collect energy flow and minimum, utilities will need to shorten
‘Losing touch’ – a future where performance data across all levels of the the time between technology availability
utility companies lose touch with their network, and regulators require utilities and adoption.
customers as other players take control to allow data access to third parties.
of the customer energy hub. Incumbent Value shifts away from traditional
utilities provide simple delivery of utilities toward those who can collect,
Capturing value from disruption 5The industry will also need to ‘raise which to take market space from other
its game’ in communication with competitors and increase opportunities
its customers so that it becomes the for commercialisation of technologies
trusted source for technology-enabled and market solutions.
products and services. It would also be
wise to shift from a defensive posture Winning in tomorrow’s market
on technology to an offensive attitude
that sees technology evolution as a As the pace of technology evolution
natural progression of its role and value and customer behaviours changes,
to customers. How fast the industry incumbent utility roles will need to
is able to do this depends on its view transform in tandem. From a legacy of
of the pace of technology economics gradual acceptance of new technologies
and customer adoption itself, and to one of rapid adoption of emerging
its willingness to move from being technology and continuous optimisation
a protector of the status quo to an of business models, the future utilities
advocate of market change. industry will need to accelerate its own
pace of change.
The need to be better at innovation
Creating competitive advantage will
Utilities will need to think very come from utilities seeking to utilise
differently about how to leverage emerging technologies as a lever to
innovation as a market enabler. extend existing relationships, foresee
Innovation hasn’t been a major focal future customer needs or create markets
point for executive management for products and services that did
in utilities companies. Technology not previously exist. This means that
advancement has largely come from executive managements will need to
the OEMs serving the industry. And abandon their desire for high degrees
the innovation that has taken place has of predictability and learn to take and
generally been directed at selected R&D manage greater market entry, business
activities related to generation. Utilities execution and technology deployment
haven’t felt a strong need for wider risks than they have been used to.
innovation, not seeing it as a capability
that the utility industry believed would Utilities will need to become adept at
be required as a table stake for market growing the portfolio of market-directed
success. But that’s changing fast ideas. Moving from conceiving ideas
and companies need to find ways of to creating commercial value will be
embedding a culture of innovation into one key to success. Commercialisation
their core thinking. will depend on blending the right
mix of offerings, pricing, channels
In the emerging future marketplace, and partners. Each of these in its own
innovation will be a differentiator right – and particularly when bundled
between those companies that will together – positions a utility to compete
be recognised as market leaders and effectively in the market.
those that will simply be ‘part of the
pack’. Innovators will be acknowledged Figure 2: Strengthening commercialisation – the capabilities that utilities
for their unique insights into their will need
customers, creative approaches to the
market, tailored product and service
portfolios and distinctive market Technology Innovation
channels that access traditional and
non-traditional customers.
Offerings Financing
Innovative utilities will be capable of
‘trendspotting’ within the market and
responding with offerings that anticipate
and fulfil personal and business Commercialisation
commercial needs. They will also be Partnering Branding
agile enough to rapidly shift their
market focus when customer buying
patterns and technology evolution
cause a change in course. Ultimately, Pricing
Channels
innovation will become a fundamental
ingredient of a company’s ‘go-to-market’ Origination
strategy. And it will become a means by
6 PwC global power & utilities www.pwc.com/utilitiesViewpoint
Raising utility innovation
performance
Innovation that is shaping
Breakthrough innovation: break- energy’s future
through strategic moves that create or unlock
markets and build the utility of the future,
Larry Monroe
e.g. customer energy management
Chief Environmental Officer and
Advanced innovation: advanced Senior Vice President, Research
and Environmental Affairs,
thinking that moves the business forward Southern Company
to enhanced market positioning, e.g. asset
deployment The US utility industry has long been involved with research and development in the power
and gas sectors. While the historical focus of most companies has largely been on supporting
Incremental innovation: incremental the activities of other research organisations through funding, some companies have led the
gains within the business driven by an sector in applied research, creating value for both themselves and the industry as a whole. As
a leader in the research, development and deployment of new, innovative energy technologies,
operational focus, e.g. performance Southern Company has committed billions to the pursuit of applicable research and
execution development, particularly in the area of coal generation and carbon capture.
Partnering with the US Department of Energy (DOE) and numerous other organisations,
Southern Company manages and operates the National Carbon Capture Centre (NCCC)
in Wilsonville, Alabama, which focuses on developing advanced technologies to reduce
greenhouse gas emissions from coal- and natural gas-based power generation. Southern
Company is also at the forefront of advanced nuclear research and was recently
A golden opportunity could lie ahead awarded up to US$40 million in grants from DOE to explore, develop and demonstrate
“Generation IV” non-light water reactor technologies.
for utility companies that embrace
innovation and commercialisation Larry Monroe, chief environmental officer and senior vice president of research and
environmental affairs, oversees Southern Company’s research and development efforts.
of ideas. Foreseeable technology With deep insights into the operating challenges facing the industry – whether related to
deployment in just the next ten years generation or other areas – he is leading Southern Company’s broad innovation for the
will unlock greater value discovery and advancement of its enterprise, generating fleet, operating infrastructure and customer
base.
technology development targeted at
energy production, storage, delivery, Southern Company is leading the way in developing real, innovative solutions that will
shape America’s energy future. Headquartered in Atlanta, Georgia, and with more than
management and optimisation. Utility 4.5 million customers and approximately 44,000 megawatts of generating capacity, we
companies have the opportunity to are one of the largest utilities in the United States. Since the 1960s, we have actively
transform how countries, economies, engaged in and supported research and development across our generation, power
delivery and end-use enterprise, with the longstanding emphasis on protecting the
producers and consumers alike think environment leading to a current focus on carbon capture and sequestration. We have
about energy, its use and its value. But been fortunate to be involved with the DOE and others in our industry to champion these
companies that cannot see through efforts and to accelerate technology innovation for the customers and communities we
are privileged to serve.
the haze of emerging technology
development and applications, or think A broad innovation scope
it is too far away for them or customers While we have been actively engaged with the DOE and our industry in the development
of 21st-century coal generation, our focus has been much broader and is growing in
to consider today, may find they don’t scope every day to include battery energy storage deployment, smart grid infrastructure
get a second chance to stake out a future and advanced nuclear. In 2015, Southern Company established the Energy Innovation
for themselves. Centre (EIC) to complement the work within the NCCC and focus on emerging
technology becoming available throughout the downstream value chain - for example,
electric vehicle charging in the network and smart behind-the meter devices. The stand-
up of the EIC further signals our commitment to leading the power industry in providing
innovative solutions for customers and in positioning Southern Company at the forefront
of technology development and deployment.
The specific focus of Southern Company’s research and development and EIC functions
is to advance our business capabilities in technology understanding and deployment and
engage the broader employee base in technology evolution and customer value creation.
We recognise that our customers – whether residential, commercial or industrial – are
aware of the technology revolution that is happening around them and are seeking to
both understand what it means to them and how they can take advantage of it.
In both areas, we are educating our employee base so they are aware of how our industry
is changing and how their roles and interfaces with customers will also evolve. Beyond
the obvious value in being at the forefront of the power sector revolution, we believe that
enabling our most valuable assets – our employees – is just smart business and will pay
dividends to us and our customers in the future.
Extending innovation to customers
As Southern Company continues to explore emerging technologies and further advance
their deployment, we will be in position to make these technologies more relevant
and valuable to customers. We will also be able to offer a wider range of products and
services to our customers that leverage this technology knowledge. On this point, we
recently completed the acquisition of PowerSecure International Inc., a leading provider
of distributed infrastructure, which broadened our ability to deliver customer-focused
energy solutions on a national level.
Southern Company has been committed to fundamental research and development and
innovation for decades. Our recent activities illustrate that our long legacy of advanced
technology evaluation and deployment will continue and drive our commitment to our
industry and to our customers. As we begin a new cycle of technology development and
deployment, we look forward to even greater promise in the next 10 years than we have
witnessed in many decades.Technologies and disruption
Research laboratories, universities, trade associations, vendors, governments,
and utilities have been continually working on new technologies of all types for
application to the utilities sector. Many of these newly deployed technologies,
such as renewables and smart meters, have proven to be valued additions to the
structure of the electric grid. But even more robust and disruptive technologies
are being tested and developed that can further change the way in which
utilities and their customers think about their energy future.
A look at the current technology operating in perceived future market
landscape shows that many non- conditions.
traditional supply options already exist.
But more will develop and costs will However, relative economics can vary by
continue to decline. Figure 3 compares region based on local policy incentives,
the levelised cost (the real per kilowatt renewables capacity factors, fuel prices,
hour cost normalised over the assumed and other factors. Moreover, this
operating lifecycle) of selected current view provides only a static look into
generation technologies in the US. This comparative technology economics,
comparison offers a current view into while future decision-making needs to
relative performance and cost based consider how these current costs could
on currently available technologies be dynamically affected.
Figure 3: Indicative levelised costs of generation technologies
2016 Baseload – current technology Peaker Renewables
$/MWh
150 Total incentive savings 143
Net Incentives
120
97
90
63 64 63 126
60 51 54
36
30 55
42
33
0
Initial Capital Super- Utility-Scale
Costs NGCC Nuclear NGCT Hydro Wind Solar Thermal
critical Coal Solar PV
$/kW $1,030 $5,400 $2,960 $980 $3,120 $1,830 $1,770 $6,910
2020 fuel prices (delivered, per mmbtu 2016 dollars): Include PTC or ITC and 5-year accelerated depreciation savings
$4.1 natural gas, $2.0 coal, $0.9 uranium
Note: Note: 6% nominal (4% real) after-tax WACC, 2% inflation rate; taxes excluded; $25/ton CO2 starting in 2025; renewables
exclude backup power; nuclear includes fuel disposal, site decommissioning, and maintenance capex spend
Source: Multiple industry reports including EIA, SNL, NREL, LBNL, and OpenEnergy; power plant project database; Strategy& analysis
8 PwC global power & utilities www.pwc.com/utilitiesA similar view across technologies
a decade ago would have indicated
High-efficiency gas Moreover, OEMs are investing in next-
generation ‘high-efficiency turbines’
significantly different relative economics turbines which promise further efficiency
than those existing today. Higher improvements comparable in relative
natural gas price expectations, solar PV The development of natural gas magnitude to the introduction of
module costs almost ten times higher combined cycle (NGCC) technology in combined cycle technology. Innovation
than current costs, and optimism for the 1990s was a significant efficiency in temperature tolerances through
Gen III nuclear reactors and potential breakthrough in the evolution of advanced ceramic coatings, advanced
carbon pricing would have favoured natural gas generation. In the US, metallurgy and improved blade cooling
baseload nuclear power and given only for example, NGCCs became the systems could bring efficiencies up to
niche opportunities for solar and wind predominant new-build baseload 65% or 5,250 Btu/MWh.4 The result
across most regions. In contrast, current option in the early 2000s – well before would be further improvements in
conditions favour natural gas, wind, and the emergence of unconventional gas. dispatch costs and, in turn, a further
solar, but new technologies, including Rising gas prices in the mid-2000s reinforcement of gas’ advantage relative
storage and next-generation nuclear followed by the downward shift in to coal and nuclear alternatives.
reactors, could reconfigure the playing overall electricity demand in 2008 put
field again. a near halt to NGCC expansion. But A more complex business case
the slowdown was short-lived.
Numerous technologies are emerging The gradual evolution of turbine
that could dramatically affect the future NGCCs have benefited from both efficiencies, combined with falling fuel
of the utilities industry and current the steady retirement or merit order prices, has so far made the business
costs as illustrated. We focus on those displacement of aging coal plants with case for utilities investing in currently
that appear more likely to be broadly a long-term fuel cost disadvantage and available turbines a relatively easy sell
commercialised within the next ten environmental policy pressures, as well – especially when compared to coal and
years and that could have a widespread as most developed countries’ nuclear nuclear alternatives. The introduction
impact on traditional elements of new-build prospects effectively being of high-efficiency turbines (65+%
the power infrastructure. Several of placed on hold. With fracking-enabled efficiency), on the other hand, is likely
these technologies are discussed in supply shifts spreading beyond the US to bring correspondingly higher capital
the remainder of this chapter with a and global LNG flows picking up, the costs (and perhaps maintenance costs)
look at their economics and their likely position of natural gas as the primary and complicate buying decisions. When
proliferation. baseload capacity fuel source has been comparing newhigh-efficiency turbines
enhanced. Additionally, natural gas with currently available turbines,
has solidified its position as the ‘bridge’ upward capital cost pressure will need
fuel to a future emissions-reduced to be lower on a levelised cost basis than
environment. corresponding efficiency improvements.
Efficiency gains OEMs are keenly aware of this trade-
off, and when the technology becomes
The increased certainty for gas turbine commercially available, are likely
sales has, in turn, provided business to price their products accordingly.
case support for original equipment Traditional NGCCs in low gas price
manufacturers (OEMs) to invest in markets are well positioned as a
efficiency improvement innovation. preferred generation option relative to
While NGCC turbines from the 2000s coal and, in most cases, nuclear. The
build-out reached about 48% thermal exception is when large subsidies are
efficiency (around 7,200 Btu/MWh), available, fuel diversity outcomes are
current GE and Siemens products more highly valued or 80-year lifecycles
exceed 60% thermal efficiency (around are considered. High-efficiency turbines,
OEMs are 5,500 Btu/MWh).3 on the other hand, will more likely
investing in next be competing with their less efficient
predecessors and utilities are poised
generation high- to benefit from resulting technology
design innovation and OEM pricing
efficiency turbines competition.
which promise
further efficiency
improvements.
3 US DOE FE Advanced Turbine Programme: Suggested Next Steps for UTSR, DOE National Energy Technology Laboratory, 21-23 October 2014.
www.netl.doe.gov/File%20Library/Events/2014/utsr-workshop/wed/Dennis-Final.pdf
4 A Look at GE’s New State-of-the-Art Gas Turbines, Greentech Media, 7 April 2015.
https://www.greentechmedia.com/articles/read/ges-new-gas-turbines-are-state-of-the-art-but-are-we-getting-too-cozy-with
Capturing value from disruption 9Small modular The potential of small reactors (3) the ‘load-following’ attributes of
some designs ease pairing with
reactors While the traditional nuclear OEMs intermittent renewables.
struggled to make scale economies
Although the falling cost of gas of ‘big box’ nuclear attractive to plant A mix of new commercial nuclear
generation and low emissions relative owners, several companies sought to participants are pursuing SMR designs
to coal are driving a medium- build off the compact features of nuclear – from public entity offshoots such
term upward shift for natural gas submarine reactors to commercialise as NuScale and the Korean Atomic
generation plants, nuclear power SMRs, a subset of ‘Gen III+’ Energy Research Institute (KAERI),
retains long-term ‘option’ value as a technologies. While scale economics to diversified industrial players like
source of non-intermittent, emission- drove up capacity footprints for ‘big box’ Babcock & Wilcox (B&W) and Holtec.
free power. Less certain, however, is designs, the potential for modular unit No designs have been licensed and
utilities’ preference for traditional ‘big addition offers potentially comparable commercial prospects are mixed, but
box’ (e.g. 1,000 MW unit capacity) levels of cost savings. NuScale, with the support of over
nuclear versus small modular US$200M in US government funding, is
reactors (SMRs) as alternatives to gas Moreover, three specific SMR targeting a 2020 licence and 2023 first
generation differentiators may enable ‘incremental’ unit completion6.
customer adoption relative to ‘big box’
Modern nuclear technology emerged nuclear:
in the early 2000s when established
nuclear OEMs such as Westinghouse, (1) reduced capital needs widen the
Areva, and Rosatom invested in ‘Gen III’ number of utility companies (or
reactor designs with enhanced safety governments) able to finance
features, longer operating lifecycles and nuclear;
improved thermal efficiency. In the US, (2) lower capacity sizes (50MW to 330
for example, spiking natural gas prices MW) more easily allow for scale-up
and prospects for imminent carbon flexibility to match load growth,
pricing supported talk of a ‘nuclear and;
renaissance’ in utility industry planning
circles as recently as 2010.
Dampened demand for big nuclear
Figure 4: Nuclear vs. natural gas combined cycle (NGCC)
A decade later, results have been
mixed as the market for ‘big box’
nuclear diverged with 85% of 2006-15 Levelised cost, $/MWh
capacity adds coming from non-OECD Natural gas price,
US$/mmbtu
countries, most of which are countries
10
with relatively undeveloped nuclear
regulatory regimes and supply chains5. 9
Asia
Moreover, a significant share of China 8 2020
and eastern Europe reactor deliveries
7
has come from Chinese and Russian Nuclear favourable
suppliers. 6
Eur.
5 2020
Western and Japanese suppliers are left N.A.
4 2020
struggling to pay back sunk investments
with ‘slivers’ of demand – initial ‘first 3 Nuclear limited to
diversity play
of a kind’ (FOAK) units in China and 2
a handful of units in the US, Europe
1
and elsewhere. Sluggish ‘big box’ Nuclear
0 capital cost,
nuclear take-up not only directly slows US$/kW
4000 4500 5000 5500 6000
investment payback but also prevents
vendors from moving beyond FOAK
deployment challenges. Significant Note: Gas prices and capital costs in real 2016 dollar terms; future natural gas price ranges
cost and schedule deviations in initial are estimates based on multiple industry perspectives with Asia low end based on US
deployments – from Finland, France and futures plus liquefaction / gasification and transport costs; capital costs indicate overnight
the US – are further dampening nuclear cost basis
new-build prospects in a low gas price Source: Multiple industry reports including EIA, CME Group, Cheniere / Wood Mackenzie,
Platts, Bloomberg, Strategy& analysis
environment.
5 World Nuclear Association, operating plant database.
6 World Nuclear Association. Small Nuclear Power Reactors summary.
10 PwC global power & utilities www.pwc.com/utilitiesEstablishing the business case
Distributed and mandate support have enabled fuel
cells and combined heat and power
However, unlike the declining generation (CHP) technologies to be deployed in
renewables and storage cost curves, commercial and industrial applications.
SMRs share some of the upward cost While natural gas and nuclear
estimate trends that characterise the ‘big alternatives battle for their share of Advantages of DG
box’ options. Even moderately rising future utilities’ baseload generation
nth-of-a-kind (NOAK) capital costs would portfolios, a more fundamental Although scale economies have typically
challenge project economics in low disruptive trend is accelerating constrained DG take-up, these are partly
natural gas price economies (especially as distributed energy generation offset by several inherent configuration
if carbon pricing settles at or below technologies increasingly become and operational advantages. Firstly,
around US$25 – 30 per ton CO2). A economical for utility customers. the typical smaller project size demands
range of factors may point to stronger After years of being limited to just a less up-front capital, which benefits
SMR demand prospects in emerging back-up power option during grid areas of the world where capital for
countries. Specifically, utilities with outages – in the form of inefficient, large infrastructure projects is scarce.
moderate load growth potential, mid- high-emission and noisy diesel turbines Secondly, DG solutions can be more
scale capacity replacement needs, for customers who place a high value easily sized to match demand with
demands for lower emission alternatives on uninterruptible power – distributed supply and installed quickly (in days
to coal, and/or higher-cost natural gas generation (DG) is rapidly evolving. or weeks) compared to years for larger
import reliance would be more inclined utility-scale power stations. Both of
towards SMR take-up. Rooftop solar has rapidly become the these benefits are useful when supply
‘flagship’ DG technology, most notably must be ramped up quickly. Finally,
Utilities seeking a zero emission in Hawaii, California, Spain, Germany, since DG technologies are installed in
baseload alternative to natural gas and China, through a mix of policy close proximity to demand, they offer a
should keep a sharp eye on current SMR support, favourable solar insolation better level of control and operational
pilot projects. For example, the eventual and high retail power costs. While advantages to the grid. Several DG
outcome of the UK’s recently announced solar photovoltaics (PV) has further technologies are poised for stronger
SMR competition and KAERI’s potential cost reduction potential and thus scope commercial viability due to declining
Saudi Arabia deployment will provide for improved commercial positioning, technology component costs and
a yardstick for future technology other DG technologies are also rapidly improving operations performance. For
adoption. Even these few data points, maturing and opening up an array example, despite already benefiting
however, will not be fully reliable of generation sources (including from five years of 16% year-on-year cost
indicators. The challenge will be community solar and wind, and micro- reductions, rooftop solar economics are
projecting from the FOAK capital costs turbines) and size alternatives (from projected to improve further through
what the next and then the NOAK costs small, premises-based to 20 MW balancing of system cost reduction.8 In
will be. If a nuclear vendor (SMR or big systems). For example, technology addition to technology improvements,
box) can provide capital cost certainty advancements combined with incentives
of US$5,000 - US$5,500/kW7, then they
would be within the levelised cost parity Figure 5: Residential solar PV system costs in the US
range with even US natural gas plants.
The operational and financing benefits $/W
afforded by modular capacity addition
7
widen utility value-risk trade-offs and,
$6.2
in turn, make SMRs a viable part of
more utility portfolios. The business 6
case is even stronger in growing, higher
natural gas price markets such as East 5
Asia and Europe.
4 $3.7
-14%
3
$2.3
2 $1.6
1
0
2010 2012 2014 2016 2018 2020
Source: Source: Credit Suisse, DOE, SEIA, Strategy& analysis
7 Strategy& analysis – proprietary levelised cost of electricity modelling.
8 Credit Suisse, NREL, Lazard, DOE, SEIA, Strategy& analysis.
Capturing value from disruption 11‘soft costs’ for acquiring customers, Disruptive potential installations indicates that distributed
permits, installation, and financing are PV reduced 2013 expected load growth
subject to further decline. While the long-term opportunity for in California and New Jersey by 47%
industry disruption is substantial, the and 42% respectively12.
Critically, the emergence of rooftop electricity value chain is unlikely to
solar as a viable complement to grid- completely shift to DG. Traditional Utility responses
supplied power for users in certain central generation supply sources will
markets is helping open the door to DG continue to provide baseload diversity It is clear that relying on the traditional
more widely. Firstly, the availability and be complemented by local sources model where up to 80 – 90% of bills
of rooftop solar has helped stimulate that provide load-sourced capacity. are variable would be detrimental to
customer interest in mitigating Customers using premises-based or many utilities. High levels of renewable
dependence on grid-sourced power. beyond-the meter solutions are likely to penetration in Germany have driven
Secondly, the availability of excess continue to depend on the central grid power prices negative when renewable
residential rooftop solar power is for emergency or peak energy use for energy generation accounts for a large
creating an opportunity for customers to many years. percentage of power generation. This
move from being just energy consumers trend, combined with over-investment
to energy ‘prosumers’, selling excess More importantly, the ways that DG in fossil generation capacity, has
power produced back to the grid under sources interact with the central grid are significantly affected the financial
often favourable net metering rules. expected to change dramatically as the performance of several European
Thirdly, as solar developers such as number of DG uses and configurations utilities, forcing them to shutter or sell
SolarCity create business models, e.g. continues to expand. For example, underperforming assets and rethink
leasing, that help overcome financing DG assets can operate in isolation to their business proposition for customers.
constraints, DG becomes more provide lower-cost baseload electricity
accessible to a broader set of customers. or for back-up power. In addition, DG Going forward, utilities will need to
may be tied to the grid and provide closely monitor both the technology
DG growth extra capacity and help utilities better cost trajectories and policy dynamics
manage peak load or provide resilience, to assess the timing and magnitude of
The key theme for DG solutions of all particularly in localised applications, disruptive threats and prepare their
sizes is that technology improvements, like campuses or military installations. strategic response. In many regions,
combined with various government Wider disruption will nonetheless rooftop solar can be expected to reach
incentives to encourage adoption, have be constrained by cost and operating parity with retail rates in the next
driven rapid DG deployment growth at a factors. For example, capacity factors decade. Clearly, utilities will continue
pace that was not forecast ten years ago. for some distributed generation (e.g. to play an active role in the marketplace,
As customers become more comfortable rooftop solar) are much lower than whether directly through offering on-
with DG technologies as a whole and traditional central generation due to less premises DG options to their customers
R&D investment, scale manufacturing favourable siting, scale economies and or indirectly by providing alternatives
and government incentives lower costs, intermittency. such as community solar. Given the
DG’s competitiveness with centralised challenges of defining new regulatory,
power generation will expand in some Even if not poised to replace grid- customer and innovation strategies
regions. based power, these smaller-scale to help mitigate customer loss to DG,
supply sources are putting pressure it is not too early for utilities to start
Looking ahead, global DG deployment on incumbent market positions and planning proactive responses now.
is projected to grow at above 10% CAGR portfolio competitiveness. For example,
in the next few years – growing from a even small amounts of DG penetration
US$76bn business in 2014 to US$126bn in the US could wipe out the majority
by 2019. By 2019, solar is expected of expected commercial and residential
to dominate with a 65% market share, load growth, a key historical driver
followed by CHP at 22% and fuel cells for utility earnings11. Analysis based
at 6.7%.9 GE estimates that distributed on overall demand growth and PV
power capacity additions, including
gas turbines, reciprocating engines and
solar PV in electric, power, mechanical The long-term
drive and propulsion applications, will
grow from 142 GW in 2012 to 200 GW
opportunity for
in 2020, increasing from US$150bn to industry disruption
US$206bn in annual investment.10
is substantial.
9 Global Distributed Energy Generation Technologies Market, 2015-2019, Technavio. 31 December 2014.
10 Rise of Distributed Power, GE. 2014
11 GTM How to Really Disrupt the Retail Energy Market With Solar, April 2014 - http://www.greentechmedia.com/articles/read/Slide-Show-How-to-Really-
Disrupt-the-Retail-Energy-Market-with-Solar
12 Ibid.
12 PwC global power & utilities www.pwc.com/utilitiesMicro-grids As the technology for smarter, more
resilient grid management improves,
needs not fully met by the current
grid, whether they be enhanced
and smart grid it will also enable the development reliability, service in remote locations
networks of more self-contained micro-grids
(Figure 7). We use the term micro-
or increased usage of renewable
energy. With this combined source of
After decades of limited grid technology grids in this context to describe small, supply and protected delivery network
evolution and investment focused on self-balancing networks that have the infrastructure, customers may avoid
expanding access, the emergence of ability to break apart from the larger or minimise the impact on power
‘smart meters’ in the 2000s helped grid for autonomous operation and availability of all but the most severe
utilities establish a foundation for an then seamlessly re-combine to function disasters.
intelligent and resilient grid to manage as part of the whole on demand. These
micro-grids have their own generation, Globally, the micro-grid market is
energy flows. More than 600 million
e.g. community solar, and/or storage expected to represent an industry of
smart meters have been deployed to
capacity that can complement the US$8.4bn by 2020 and US$12bn by
date worldwide and an additional 180
traditional supply of energy. The 2030, with about 40% of capacity in
million are expected in the next five
technology deployed in micro-grids is campuses and commercial or industrial
years, mostly in Asia-Pacific.13 Yet this
not too dissimilar from that discussed locations and 40% in military or
is far from global saturation.
elsewhere in this section. remote area applications.15 In the US,
New grid investments focus on the Department of Energy recently
distribution automation, transmission The customer appeal of micro- announced dedicated funding to
modernisation, network operations grids advance the design of community-scale
software and grid analytics, and around micro-grids. But growth potential will
Customer interest in micro-grids has depend on costs. It is far from certain
US$400bn is expected to be invested in
risen due to handful of high-profile as system costs, and in turn the share of
grid modernisation by 2020.14 While
extended outages, such as occurred in customers willing to pay some premium
the US had been the investment leader
New York and New Jersey following for reliability, remain uncertain.
in last decade, China is now a smart grid
Hurricane Sandy. Moreover, even high-end forecasts for
infrastructure spending leader – with
the State Grid Corporation of China growth do not represent a near-term
Micro-grids appeal to customers with disruptive threat to utility business
itself set to spend around US$31bn to large, concentrated load or critical
upgrade the provincial grid by 2020. models.
infrastructure that have specific
Total global smart grid investment is
on a steady and significant upward
trajectory (figure 6).
Figure 6: Global smart grid market (USD billion spend)
65 63
61
60
57
55 53
50 48
45 44
40
40
35
US$bn
30
25
20
15
10
5
0
2014 2015 2016 2017 2018 2019 2020
Source: Technavio; Strategy& analysis.
13 Smart Electricity Meters to Total 780 Million in 2020, Driven by China’s Roll-out. ABI Research. 02 June 2015.
14 Global Smart Grid Technologies and Growth Markets 2013-2020. GTM Research. July 2013
15 Remote Microgrids Will Surpass US$8.4 Billion in Annual Revenue by 2020, Navigant Research, 25 September 2013.
Capturing value from disruption 13Implications for utilities systems and platforms on top of their layer. Nonetheless, ‘big data’ analytical
existing infrastructure, the system capabilities are enabling the grid to be
Micro-grids can be beneficial to utilities, architecture has become a patchwork digital and intelligent.
as they can reduce the need for capacity of hundreds of systems that lack a clear
investment for peak demand. However, structure. These complexities make it Traditional OEMs such as GE, Siemens,
self-contained micro-grids are a long- difficult to implement analytical systems and Schneider Electric are developing
term threat to utilities, particularly for coordination and control of a multi- and acquiring software technologies
if they can become broadly cost- faceted micro-grid. that bring analytical capabilities to their
competitive with utility rates, as hardware. Global solution companies,
customers will rely less on traditional Most importantly, utilities need to like Toshiba and Honeywell, are also
energy sources delivered through monitor the potential timing and scale expanding from their traditional
existing transmission and distribution of micro-grid expansion. A severe hardware-only solutions to more
networks. Continued micro-grid event, a government-driven mandate, holistic, software-based, end-to-end data
adoption could open multiple pathways and/or system economics proving management solutions for their utility
for utilities, from taking on a role of to be on a par with other reliability customers. Other ‘big data’ startups,
micro-grid developer for customers solutions could jump start deployments. such as C3 Energy, Space-Time Insight,
inside (or outside) the service territory, In the meantime, it is likely to be a Bit Stew Systems and Focus Energy, are
to playing a marketplace role. In the niche market – well suited for utility further leveraging analytical software to
latter, integration and coordination of participation but less likely to be a drive intelligent decision-making from
supply and demand of electricity across strong disintermediating threat to the data gathered across utility operations.
dozens or hundreds of micro-grids current network.
would become the key function, while
physical operation and maintenance Future developments
activities are minimised.
Looking forward, the energy grid of the
A lack of common standards across future will be digital and ‘intelligent’,
the hardware and software required perhaps with neural network
for integration is a barrier to the capabilities that enable ‘human brain-
development of a common ‘plug and like’ processing of large amounts of
play’ platform by suppliers and thus the information simultaneously and able
customer adoption of micro-grids. The to focus on the most important sensory
OpenADR Alliance has standardised inputs. There remain challenges
many elements for demand response, in standardisation, managing and
but there are other controls that operate linking massive amounts of data from
under different data standards. Also, different systems and implementing
as most utilities have added new the data layer on top of the physical
Figure 7: Global micro-grid market (GW capacity)
10 9.7
9
8.1
8
7 6.7
Continued micro-grid
6 5.7 adoption could open
5
4.9
multiple pathways for
GW
4.4
4 utilities.
3
2
1
0
2014 2015 2016 2017 2018 2019
Source: Technavio; Strategy& analysis.
14 PwC global power & utilities www.pwc.com/utilitiesEnergy storage These lower costs, in turn, help open up
new opportunities for energy storage.
Significant investment
For the moment, North America leads However, one recent report estimated
After decades of limited application,
the deployment of advanced, non-hydro that 5,000 MW (1,5000MWh) of grid-
a ‘next generation’ of energy storage
energy storage, with around 860 MW integrated distribution storage will
with new technology options and new
of installation capacity at the end of be cost effective in the US at installed
demand drivers is fast developing.
2015. Japan, China, India, Germany costs of US$350/kWh.21 This indicates
Historically, bulk energy storage
and Australia have also begun to see broad adoption is not imminent but
in the form of pumped hydro was
significant installations, and by 2020, it is not discouraging significant
used to store excess energy from off-
the US share of installations is expected investments in additional manufacturing
peak coal generation and expended
to fall to 40%19,with the German capacity. Players such as Sonnen,
to replace costlier natural gas on-
manufacturer Sonnen already having Tesla, Panasonic, LG Chem and contract
peak generation. From the 1920s
deployed more than 10,000 systems.20 manufacturers such as Flextronics and
to mid-1980s more than 22 GW of
others could bring these costs down
pumped hydro was installed in the
Given the uncertainties of technology even more rapidly than expected.
US. Currently, around 127 GW has
and scale economics , energy storage
been installed around the world, with In addition, energy storage has
cost curves vary widely. Optimists
Japan, China the US and, several received sustained US venture capital
point to the last decade’s silicon solar
European countries leading in capacity investments of over US$250m annually
cost evolution as potentially analogous
development.16 since 2012, even though investments
but the high proportion of rare
earth materials in batteries (versus in other clean technologies have
In recent years, the rapid growth
commodity silicon and labour that declined.22 Innovation is occurring,
in intermittent renewables on
could be automated in solar modules) including the identification of new
the grid has rejuvenated utility
is a cost-reduction constraint. At the battery chemistries as well as further
demand for energy storage – both to
same time, commercial viability varies optimisation of existing lithium ion and
complement renewables, but also to
by application (frequency regulation flow battery technologies.
defer transmission and distribution
investment in congested parts of the vs. price arbitrage vs. capacity market
grid and to improve local frequency participation).
regulation. In addition, direct user
demand has emerged, due in part to
the expansion of high-volume and
Figure 8: Battery storage costs
energy-intensity data centres and other
customer segments placing a high value
on uninterruptible power.
US$/kWh
The changing economics of storage $800
technologies
$700
While most historical activity has been
in pumped hydro storage, new interest $600
is in advanced storage technologies.
$500
Billions have been invested in lithium-
ion batteries, other chemical batteries, $400
thermal batteries, and physical storage
technologies such as compressed air $300 BNEF
and flywheels, resulting in accelerated Navigant
$200
performance and cost reductions. EIA
Lithium ion battery technology costs, $100
Averaged
for example, are projected by the US
Department of Energy to fall by over $0
10% per year over the next seven 2015 2020 2025
years.17 In Germany, costs have fallen by
80% since 2010.18 Source: RMI “Economics of Grid Defection”, 2014
16 Utility Scale Energy Storage Systems – Benefits, Applications and Technologies, Purdue University – State Utility Forecasting Group, June 2013.
17 US Department of Energy Strategic Plan 2014-2018, US Department of Energy, April 2014.
18 Sonnen Ships Its 10,000th Battery, Putting Pressure on Tesla and Utilities, Greentech Media, 17 February 2016
19 Global Advanced Energy Storage Systems Market 2016-2020, Technavio, 9 December 2015.
20 Op. cit. 17.
21 Deploying Up to 5,000 MW of Grid-Integrated Electricity Storage in Texas Could Provide Substantial Net Benefits According to Brattle Economists,
The Brattle Group, 10 November 2014.
22 US Cleantech Investments and Insights: Q4 2015, PwC, 2015.
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