In my last post, I took a look at the midterm elections and their impact on the energy industry. But the November election results were just one part of a suite of energy industry trends that emerged in 2018. In this article, I review my top five takeaways from 2018.
Aggressive carbon reduction goals swept the nation
Across the country—at state, municipality, utility, and corporate levels—decision makers set aggressive carbon reduction goals in 2018. As usual, California led the charge, passing a particularly ambitious policy in September that calls for 100% clean electricity by 2045. DC followed suit in December, with a Renewable Portfolio Standard of 100% by 2032.
And it’s not just government policies—utilities are also setting their own aggressive targets, independent of state policy. Most notably, in December, Xcel Energy set a goal to provide 100% renewable energy by 2050, showing real leadership and building on its legacy of clean energy investment. All across the country, utilities are setting deep carbon reduction goals—a trend I expect will continue in 2019.
Companies, too, continued to build brands around sustainability and clean energy. 2018 broke the record for corporate renewable procurement. This continues a clean business trend from recent years—in 2017, the Climate Group announced that companies with combined annual consumption of 150 terawatt-hours had signed onto 100% clean energy by 2020 commitments.
Customer relationships increased in importance
The utility business model is becoming increasingly threatened by customer defection from the grid—whether through rooftop solar, third-party energy procurement, or community-choice aggregation (CCA) participation. In California, where CCAs have been most prolific, the California Public Utility Commission expected that, by the end of 2018, customers who moved away from 100% reliance on investor-owned utilities for electricity would make up 25% of retail load. This suggests that utilities can no longer rely on all customers in their service territory to buy all their power from them, putting utility cost recovery at risk.
As utilities grapple with customer choice in the market, the importance of their relationships with customers only increases. In 2018, we saw the nature of utilities’ customer relationships continue to change. Utilities took a variety of different steps to cement their customer relationships based on their unique circumstances. Some utilities began to adopt a platform model where they serve as a hub for clean energy, some provided customer-centric offerings that go beyond energy to provide additional value to the customer, and some began to build offerings that integrate services across different parts of the utility.
Coal consumption continued to decline
In 2018, the Energy Information Administration expected a 4% decline in coal consumption from 2017—setting the record low annual coal consumption since 1979. This decline began in 2007, when coal consumption peaked in the US. Relatedly, the US closed more coal-fired generation capacity in 2018 than in any other year in history, with an expected 15.4 GW shut down in 2018.
Alternative regulatory models began to emerge
The utility business model is changing, and we’re starting to see the regulatory environment change, too. In 2018, it became even more clear that the traditional cost-of-service regulatory model, which allows utilities to recover the costs of service plus a return, no longer meets all the needs of utilities. The traditional regulatory model favors infrastructure investment and limits utilities’ abilities to invest in new products and services like clean energy and transportation electrification. As utilities become cleaner, more distributed, and more customer-focused, the traditional model will no longer be able to meet all utility needs.
As pointed out in Rocky Mountain Institute's Navigating Utility Business Reform, there are many facets of regulatory reform, from performance incentives to changes in treatment of expenditures, to incorporation of new value-add services. Commissions across the country (e.g., Pennsylvania, Vermont, and Hawaii) opened dockets in 2018 that tackle some aspect of alternative utility regulation. This trend will continue into 2019, as states wrestle with how best to regulate utilities in a changing environment.
Electrification was central to the deep decarbonization discussion
As outlined in a great 2018 Regulatory Assistance Project paper, beneficial electrification is good for both customers and utilities—and the planet! It saves customers money in the long run and reduces negative environmental impacts. In 2018, we saw utilities contend with how to implement beneficial electrification in their service territories. The concept of electrification is simple—convert historically-fossil-powered end uses (like cars and hot-water heaters) to electricity, which will only grow cleaner with time. As utilities face stagnant sales forecasts, electrification has the added benefit of increasing sales for utilities, which can decrease the cost burden for customers.
Electric transportation has emerged as a clear strategy for success. According to Advanced Energy Economy, $880 million in EV infrastructure programs were approved in 2018, with $1.5 million still pending. This number is up from $58 million in 2017 (over 15 times more investment). As electric vehicle adoption continues to accelerate in the US, utilities that invest in transportation electrification infrastructure will be well-positioned for the transformation. Building electrification, which encompasses space and water heating, is a slightly tougher nut to crack, but we’re seeing utilities consider plans to tackle that sector, too.