Top Ten Resolutions for the Energy Industry in 2023 — Addressing Major Issues Impacting the Energy Industry for the Coming Year and Decade Ahead

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Top Ten Resolutions for the Energy Industry in 2023

Addressing Major Issues Impacting the Energy Industry for the Coming Year and Decade Ahead

Jason Price and Niki Shah of West Monroe

Introduction

“We are the first generation to feel the impact of climate change and the last to be able to do anything about it,” Barack Obama said during a 2014 speech at a climate change summit in New York.[1] Almost a decade later, this sentiment still holds true as the country grapples with the effects of climate change. As 2022 ends, let us all reflect on the economic and emotional tolls of record-breaking heat waves, life and property threatening fires, and destructive flooding, and other aggressive climate events.[2]

The years 2021 and 2022 brought us the resources to begin addressing the growing climate impacts in a meaningful way. Born on the heels of 2021’s Infrastructure Investment and Jobs Act (IIJA), August 2022’s Inflation Reduction Act (IRA) solidified the shift in US federal energy policy, providing funding for renewable energy and clean energy technologies.[3] Congress is also pushing forward the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act, providing roughly 280 billion dollars in new funding to boost domestic research and manufacturing of semiconductors.[4] The historic amount of investment from IRA, IJA, and the CHIPS Act nearing two trillion dollars provides the opportunity to rewrite the rulebook on energy policy and energy investment that has the potential to reshape industries, financial institutions, and communities.

Our top ten 2023 resolutions for utility executives focus on tapping into these opportunities to help build a better energy future for all. The past two years provided the plan to address climate change; 2023 will be the year that we in the United States put that plan into action.

Resolutions

1. Embrace market collaboration to accelerate DER

States are pushing for action to address climate change through aggressive greenhouse gas (“GHG”) reduction targets. The fastest way to achieve these goals is through energy efficiency (“EE”) initiatives and installing clean Distributed Energy Resource (“DER”) technologies. DERs are smaller generation units that can be located on the customer’s or utility’s side of the meter. Although utilities have a defined role in EE, the role of utilities for DERs is not as clear and should be addressed so that utilities can fully benefit from public and private investment in DERs. Utility advocacy of DER goes a long way in grid awareness, sustainability and decarbonization goals, and job training and education that are all favorable in the eyes of state regulators. DERs located closer to load centers represent a possible component of the future of energy, and it is vital to get started now. Given passage of Federal Energy Regulatory Commission (FERC) Order 2222 only last year, regulatory bodies, utilities, and third-party DER providers must define each of their roles and responsibilities to ensure a smooth roll out.[5]

2. Democratize utility data to encourage innovation

We said it last year, and we will say it again: There is untapped value in utility data that can be made available to enable market innovation and spur market-driven growth in decarbonization. Energy providers are data-rich and only through state-sponsored democratized data hubs will market innovations become real. The Green Button Initiative, which was the White House’s call-to-action to provide utility customers with easy and secure access to their energy usage information, was a first step toward democratizing the data but never achieved its goals due to its impracticality and inaccessibility.[6] Now through state utility regulatory orders, utilities can help accelerate decarbonization goals by serving as active participants in market driven grid edge innovations. Advances in artificial intelligence (AI) and machine learning (ML) technologies are evolving to allow the industry to quantify and mitigate risks and implement predictive and proactive asset management. Investing in customer-centric and easy to use data management tools will expedite the transition to more advanced technologies and in support of GHG reduction targets.

3. Build the utility of the future by investing in Automated Distribution Management Systems

As grid edge assets are added to the grid, turning one-way power flows into a two-way flow back to the grid, such complexities create hazards as well as opportunities. To maintain grid visibility and control, and given the delicate practice of load management, utilities are investing in Advanced Distribution Management Systems (ADMS) technologies. ADMS platforms are a software tools that supports distribution management and optimization. Such investments are critical as DERs continue to scale and transactive energy through FERC 2222 bringing more participants into the market. ADMS empowers grid operators to have greater oversight of grid performance and safety.

4. Prepare for the utility of future

The utility of the future will be one that operates a clean, modernized, and secure grid. It will be a utility that primarily serves load to buildings and transportation as beneficial electrification grows and the economy decarbonizes. Today, we operate a summer utility with peak load to run air conditioner to keep homes and businesses cool from the heat. The future will be to operate a winter utility to meet peak load to heat homes and buildings during cold months. The journey to transform will require collaboration and coordination of all stakeholders. Utilities know that buy-in from regulators requires a favorable relationship with their customers and investors. Without customer approval, regulators will not grant the types of utility investments being sought. Furthermore, without investor support, capital markets can constrain a utility’s ability to invest with favorable returns.?In sum, all parties (regulatory, legislative, and energy/utility providers) must collaborate to achieve important climate goals.

5. Forward looking capital asset planning to prepare for an unexpected future

Grid resiliency captures the headlines, but grid adaptation is designing the distribution grid of the future. The key distinction between resiliency and adaptation can be found in Consolidated Edison’s (Con Edison) report titled, Climate Change Resilience and Adaptation Report.[7] Given climate change, Con Edison recommends investing heavily in reinforcing systems, expecting a 75 percent probability or higher in climate severity. The oversized investments made today will mitigate the intensity of climate impacts of tomorrow. Weather events that trigger grid disruptions result in utilities enacting a disruption response plan.?These plans are focused on resiliency and on how to best bring back grid operations quickly. Rather, through an adaptation lens coupled with IIJA funding, utilities are in a position to future-proof persistent vulnerability and combat emerging grid infrastructure challenges from climate change. In Darwinian fashion, those that survive commonly exhibit a vigorous state of health as they adapt to their environment much like companies who adapt to compete for tomorrow’s customer. ?Given climate change, why should utilities or other energy service providers be any different?

6. Accelerate the commercialization of energy industry R&D

Through modernization comes innovation and this starts in the research and development lab. What role can utilities serve in areas of research and development? As the nation rallies to fight climate change, utilities play an important role and should be encouraged by state regulators to partner with local businesses and universities to develop new innovations to serve the future energy economy. As Larry Fink, CEO of BlackRock professes, the unicorns of the future will be in addition solutions in a green economy.[8] Utility leaders understand the energy customer, both residential and commercial, as well as the regulatory environment, and are best positioned to make such investments. Regulatory support for cost recovery of R&D investments would go a long way to support more R&D.

7. Grow the market in VPP by defining its value stack

Virtual Power Plants (VPP) aggregate energy assets, like a cluster of battery storage and demand response, so that utilities and third-party commodity providers can draw upon them when more energy and capacity are needed. Networked resources, as in the battery example, are then able to schedule, trade, and dispatch energy accordingly. The VPP model raises questions about its value and how this value is measured, in its value stack. Embedded in the value stack are a variety of considerations that remain undefined in most states, and, without true definition, virtual power plants will remain theoretical rather than practical. ?Considerations include how to value the real-time presence and flexibility of VPP resources, designing appropriate tariffs for dispatching, and equity implications. These and other considerations comprise the value stack and should be addressed by more regulatory bodies and commodity providers so that more investment can be made in an otherwise practical and innovative clean energy solution.

8. Prioritize energy resiliency through cyber security

As utilities move to cloud infrastructure to support growing interconnection and operational needs, the energy network becomes more vulnerable to security risks. Bringing in more points of entry to the grid, such as with DERs and electric vehicle chargers, allows for cyber threats – from service disruption to protection of sensitive data. These risks are not just information and operations technology (IT/TO) issues but business issues, with impacts including potential for financial losses and irreversible damage to company reputation. From utilities to regulatory agencies to third-party providers, all must work proactively to protect consumers and critical infrastructure. Ensure that trusted software and cloud providers are used, invest in advanced sensing technologies, develop proper protocols to share and manage data across parties, and secure the system to allow for energy delivery and data sharing.

9. Put the customer experience at the center of future investments

Customer engagement is even more important than in the past, particularly with rising inflation, energy supply concerns, and an increasing energy burden. Customers address these challenges differently which requires utilities to tailor programs and rates based on each customer. Utilities have, in the past 10 years, shifted from referring to customers as "rate-payers" to recognizing their customers as individuals and businesses. However, utilities are being pressed to improve their customers' experience as customer become accustomed to a higher level of service offered by companies such as Amazon. A retiree on fixed income has a far different relationship with its utility than a commercial operator, a regulator, a family, or young adult. Utilities are making great advancements in customer experience and are far more responsive to customer needs than in the past. Attention to the customer will only increase as the grid further modernizes and social equity and diversity integrate into planning around where to make grid investments. An example is the Justice40 initiative by the White House and built into IIJA funding which earmarks 40 percent of federal spending for disadvantaged communities.[9] Utility leaders understand and must continue to improve the customer relationship as it can be a utility’s biggest asset when it comes to regulatory approval.

10. Encourage collaboration with green banks to expand clean energy development

Utilities should consider building closer ties to its state and regional green banks. These financial institutions are driving the acceleration of residential, commercial, and industrial investments in energy efficiency, solar, geothermal, water reclamation, electric vehicle charging stations, and other various public and private modernization investments. Much of this has an important social and community equity component which is fundamental to the values of a utility service provider. Indeed, on a per-dollar basis, green banks have made an outsized contribution to help residential and commercial businesses finance distributed energy resource projects. As much as $1 of public money deployed by green banks has generated $8 in private financing, a total contribution of over seven billion dollars in such investments nationwide.[10] Now through IRA an additional $20 billion will go toward the expansion of local green banks and grow from 23 banks in 17 states to one or more banks in every state. What greater role can the utility serve in its community by partnering with its local green bank? How can such establishments better align in areas of permitting and piloting of projects? Project developers and willing parties taking on such risk may benefit from greater involvement and cooperation in the form of fast-tracking green bank-sponsored investments and other bank-sponsored activities as well as the utilities steering high-load customers to seek alternatives through low-cost financing that green banks are designed to offer.

Conclusion

With COVID in the rearview mirror and IIJA, IRA and CHIPS enabling unprecedented funding to make real change, expect 2023 to be a transformative year. With a mandate and the necessary funding, utility leaders are in a unique position to maximize the potential created with the massive changes in the United States energy landscape in support of carbon emission reductions. If we heed the words of President Obama, then we also know that we really have no choice but to act or this will be one of the most wasted opportunities known to mankind.

Authors

Jason Price is a director of client engagement in West Monroe’s Energy and Utility practice, based in New York City. He is a graduate of the NYU Clean Energy program and the host of the Power Perspectives podcast on Energy Central. Niki Shah is a consultant in West Monroe’s Energy and Utility practice, advising energy and utility clients on their climate action and regulatory strategies. The authors would like to thank Paul DeCotis for his contribution to this article. The views are those of the authors and not of West Monroe. Please contact the authors for questions and comments at japrice@westmonroe.com and nshah@westmonroe.com.

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1 Remarks by the President at U.N. Climate Change Summit. (2014, September 23). Obama White House Archives. Retrieved November 3, 2022, from https://bit.ly/3h7kd8i.

2 NASA. (2022, September 6). A Long-lasting Western Heatwave. Earth Observatory. Retrieved November 3, 2022, from https://go.nasa.gov/3hay5yN.

3 Congress.gov. "Text - H.R.3684 - 117th Congress (2021-2022): Infrastructure Investment and Jobs Act." November 15, 2021. https://bit.ly/3FGUlKJ.; Congress.gov. "Text - H.R.5376 - 117th Congress (2021-2022): Inflation Reduction Act of 2022." August 16, 2022. https://bit.ly/3FGUlKJ.

4 Congress.gov. "S.3933 - 116th Congress (2019-2020): CHIPS for America Act." June 10, 2020. https://bit.ly/3FGUlKJ.

5 FERC Order No. 2222: Fact sheet. Federal Energy Regulatory Commission. (2020, September 20). Retrieved November 3, 2022, from https://bit.ly/3h2vcQl.

6 US Department of Energy. (n.d.). Green Button. Energy.gov. Retrieved November 3, 2022, from https://bit.ly/3T3tThB.

7 Commonwealth Edison. (n.d.). Our Climate Change Resiliency Plan. Commonwealth Edison. Retrieved November 3, 2022, from https://bit.ly/3gXWes4.

8 Clifford, C. (2021, October 25). Blackrock CEO Larry Fink: The next 1,000 billion-dollar start-ups will be in climate tech. CNBC. Retrieved November 3, 2022, from https://cnb.cx/3FFUFt4.

9 The United States Government. (2022, August 30). Justice40 initiative. The White House. Retrieved November 3, 2022, from https://bit.ly/3UkbPkf.

10 American Green Bank Consortium’s Annual Industry Report. American Green Bank Consortium. (n.d.). Retrieved November 3, 2022, from https://bit.ly/3NyddNN