PwC global power & utilities

Capturing value from
Technology and innovation
in an era of energy transformation

     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


Cover image courtesy of Coffice Architecture & Urban Planning (Arch. Francesco Colarossi, Ing. Paolo Colarossi, Arch. Luisa Saracino)
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
                                                                                         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
                                             utility executives to consider as they
                                             think about the impact of disruptive
                                             technologies on the future of their

                                                                                                  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
                                                   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),

4 PwC global power & 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
  the meter
                                                                                          smaller commercial and industrial
                                                                                          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.
                                                        and smart                         For each of these scenarios we look at
                                                        grid networks                     the implications for utility companies
                       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 5
The 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
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
Raising utility innovation
                                                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
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

         150        Total incentive savings                                                                                                     143
                    Net Incentives



                                      63                  64                                                                 63                 126
          60        51                                                                                    54

          30                                                                                                                 55

  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
A 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

3 US DOE FE Advanced Turbine Programme: Suggested Next Steps for UTSR, DOE National Energy Technology Laboratory, 21-23 October 2014.
4 A Look at GE’s New State-of-the-Art Gas Turbines, Greentech Media, 7 April 2015.

                                                                                                               Capturing value from disruption 9
Small 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, $/MWh
capacity adds coming from non-OECD                  Natural gas price,
countries, most of which are countries
with relatively undeveloped nuclear
regulatory regimes and supply chains5.                     9
Moreover, a significant share of China                     8                                                                     2020
and eastern Europe reactor deliveries
has come from Chinese and Russian                                                                         Nuclear favourable
suppliers.                                                 6
                                                           5                                                                     2020
Western and Japanese suppliers are left                                                                                          N.A.
                                                           4                                                                     2020
struggling to pay back sunk investments
with ‘slivers’ of demand – initial ‘first                  3                                               Nuclear limited to
                                                                                                             diversity play
of a kind’ (FOAK) units in China and                       2
a handful of units in the US, Europe
and elsewhere. Sluggish ‘big box’                                                                                                 Nuclear
                                                           0                                                                    capital cost,
nuclear take-up not only directly slows                                                                                           US$/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

5 World Nuclear Association, operating plant database.
6 World Nuclear Association. Small Nuclear Power Reactors summary.

10 PwC global power & utilities
Establishing 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
widen utility value-risk trade-offs and,
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
                                                          2                                                            $1.6


                                                          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 -
12 Ibid.

12 PwC global power & utilities
Micro-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
                                                                        55                            53
                                                                        50                   48
                                                                        45          44








                                                                             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 13
Implications 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



                7                               6.7
                                                                                      Continued micro-grid
                6                        5.7                                          adoption could open
                                                                                      multiple pathways for

                4                                                                     utilities.



                    2014     2015        2016   2017     2018     2019

Source: Technavio; Strategy& analysis.

14 PwC global power & utilities
Energy 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.
The changing economics of storage                         $800
While most historical activity has been
in pumped hydro storage, new interest                     $600

is in advanced storage technologies.
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
performance and cost reductions.                                          EIA
Lithium ion battery technology costs,                     $100
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.
                                                                                                                       Capturing value from disruption 15
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