Stephen Lacey: This is The Interchange, weekly conversations on the global energy transformation from Greentech Media. I'm GTM Editor-in-Chief Stephen Lacey in Boston with GTM senior vice president Shayle Kann in San Francisco. Hello Shayle.
Shayle Kann: Hey Stephen.
Stephen Lacey: In our last episode, you took us on a little journey through the solar industry. This week, we're taking a little journey through the utilities sector led by yours truly. Utility execs poured into Boston from across the country recently to the Edison Electric Institute's annual conference where they talk about everything from crazy national politics to wonky rate design to artificial design and the future of work.
I, of course, brought my recorder and taped a few conversations with some of the most important voices in this space. Shayle, can you guess what I heard every single time I asked if Donald Trump's policies are going to derail de-carbonization efforts?
Shayle Kann: I'm going to go ahead and guess that everybody said no.
Stephen Lacey: Yup, that's absolutely right. A resounding no. Look, everyone knows the train has left the station on the energy transition as we describe it here. While the president certainly isn't going to be a help, he's basically the only one who doesn't realize that de-carbonization is irreversible at least in the utility space. We've got a ton to explore here. First, we're bringing back the reading list. What has you turning the pages this week Shayle? I take it, you have more than one.
Shayle Kann: Yeah. I feel like I'm awash in good reading this week, so I'm...
Stephen Lacey: We're all awash and you just can't edit yourself down.
Shayle Kann: No, I know. I'm having a hard time with it. I've edited it down to six things that I want to mention because there's just a lot going on and there's like really good stuff to read about it.
Stephen Lacey: Keep it to three.
Shayle Kann: Okay, but I'm going to bucket three within one. It's a trick an analyst runs to try to figure out how to fit more content into this short thing. All right, I'll go quick. First thing I would say is we're in the lead up to the publication of this 60 day review that Secretary of Energy, Rick Perry, requested from the DOE about effectively whether baseload power is suffering as a result of regulation and policy and things like that.
We don't know what's going to come out when the paper is released later in June just yet, but I've been really impressed with the sort of pre-reaction pieces that have come out that have framed the issue. Answered this question. "Our baseload resources suffering?" Tried to sort of answer the question already of why and do we care. I'll just name three things that I found interesting to read on the baseload question and broader issues to do with power markets.
One is one that, Stephen, you found which is from R Street, there's the policy study just sort of laying out. It's a really good state of affairs for people who are not deep in power markets right now on putting baseload in context and what's causing resources to retire and so on. Learn from R Street.
Stephen Lacey: And R Street Institute is a libertarian think tank. They're looking at technology neutral subsidy-free grid policies to make the grid a platform. To not necessarily favor baseload technologies but to enable a variety of different technologies to perform the function of traditional baseload power.
Shayle Kann: Right. Even they don't blame the struggles of baseload plants on renewable subsidies for what its worth. That's one good piece. The second one was a post that was published a few weeks ago on the conversation.com that was written by a bunch of academics from UT Austin looking at what's actually happening. How the merit order dispatch system causes baseload resources to struggle and with a lot of detail on ERCOT since they're based in Texas. That one is really interesting. It's got good visuals on how dispatch actually works on the power grid.
Then the third one, the most recent one which I was reading this morning was from Rocky Mountain Institute. They just publish something on their site that was co-authored between Mark Dyson who's done a lot of their sort of demand flexibility work with Amory Lovins himself and it's called, "The grid needs a symphony, not a shouting match."
It basically lays out this case that the notion of baseload itself is outdated and instead we need flexibility and here's all the things that could provide flexibility and how we think it should play out. Just lots of good reading that is coming out ahead of this baseload review.
Stephen Lacey: I have never seen so much intellectual firepower directed at a single study in my entire life. As soon as Rick Perry announced that this study would be coming out within 60 days, everybody who's focused on these issues started putting out reports, white papers, blog posts, comprehensive lists of every grid analysis out there. I've never seen so much attention on one specific study. It goes to show you that there is a vast body of work countering what is likely the conclusion of the Rick Perry study, which is renewables are bad for baseload.
Shayle Kann: I think what's interesting about it in part is that, like you said, there's been all this intellectual firepower directed at it despite the fact the report hasn't come out yet. This is all pre-reading before we find out what the report itself says. Then presumably, there's going to be an even bigger reaction to the report itself, which is probably going to have some policy recommendations in it, so we'll see even more come out later.
The other thing I think it does highlight, one of the reasons why there's so much to say here is that despite the sort of tone that the request took when Rick Perry announced it ... He's highlighting something that is real. Baseload resources or more specifically core resources and nuclear resources are struggling. We are seeing early retirements. There's something to talk about there, but the reasons behind those early retirements aren't necessarily the ones that he's implying in his request, which is why there's just so much analysis already being done.
Number two is just this morning, this massive review, first real deep review of the ARPA-E program was released. It was published by, I don't know, 30 or 40 people wrote it over a long period of time. They did a really deep analysis of this program. Quantitative and qualitative using a variety of different methods. They released this 200 page report, 239 page report rather on how ARPA-E is performed.
It's relevant today because the president's budget wants to slash ARPA-E, so this study is timely despite the fact that it wasn't published for that reason. To look at whether this program is important and whether it's actually achieved anything. It's hard to do that for a program like ARPA-E because the program is there to invest in and support really early stage technology. It's meant to have a long-term not a short-term impact. They address that really well within this study.
The short version of the conclusions are they find the ARPA-E program to be wildly successful to the extent that you can say that about something in its early days. I'll just read you a quote from it. The findings made clear that ARPA-E is not in an extreme situation. The agency is not failing and is not in need of reform. In fact, attempts to reform the agencies such as applying pressure for ARPA-E to show short-term successes rather than focusing on its long-term mission and goals would pose a significant risk of harming its efforts in chances of achieving its mission and goals. It's a long report but it's overwhelmingly positive about ARPA-E.
Stephen Lacey: If you don't want to read that 238 page report, you can read the pop version at GTM. Literally as you were talking about it, I saw an email pop up and our intrepid grid reporter, Jeff St. John, just filed a story on the report. We're going to have something up later this afternoon and you can get the much shorter version.
Interestingly related to that topic, I believe it was the New York Times this week reported that oil super majors including Chevron and Exxon are lobbying Congress to keep funding for ARPA-E because they see that as an important enabler of a pipeline of new technologies that they can invest in. There is tons of support across the spectrum.
Shayle Kann: What a perfect segue into my third and final reading item for this week, which relates to one of the oil super majors. There's a front-page story in the Wall Street Journal today written by Russell Gold who's one my favorite energy reporters about Total, which is a big French oil and gas giant. It's called, "When Total, a global oil giant, imagines the future it's electric."
Total along with Shell are probably the two majors that have made the most serious investments in new energy or in renewables. In the case of Total, they're a majority owner of SunPower. They also bought Saft, battery manufacturer. They're taking this sort of electrification and decarbonization trend really seriously internally. There's a long piece looking at Total's strategy. How it has played out. How they think about it in relation to their core business. Their realistic expectations about how long this transition is going to take.
It's just a really interesting piece about what it looks like when an oil major takes this transition seriously as opposed to just paying it lip service. There's also a piece from Wood Mac actually that just came out this week about the oil and gas majors in general and their attitudes towards renewables. This is a topic that's front of mind.
Stephen Lacey: If you couldn't keep up with that entire list, we'll make a list for you in the show notes. We got our reading cut out for us. Should we start with our utility themed adventure this week?
Shayle Kann: Let's do it. You talked to a whole bunch of people at EEI. What did you find in general?
Stephen Lacey: I found generally that everyone is talking about the exact same themes that we talk about every week on this podcast. I guess a good place to start is with Julia Hamm and Tanuj Deora. I tracked them down in the hallway for their take on the themes of the week. Julia is the CEO of the Smart Electric Power Association. Tanuj is her colleague, the chief content officer of the organization and they occupy this unique place in the industry because they represent both distributed energy companies and utilities. They cut a lot of flack from solar companies in the past before they transitioned their name. They were just representative of solar companies.
It's positioned them well as these players, utilities and distributed energy companies increasingly start sitting at the table together. Julia started by describing how utility sector changes wrapped up in all these other economic forces changing nearly every industry. It's not unique to utilities.
Julia Hamm: The conversations that I'm hearing on engaged in are with utility executives really starting to think about how does that suite of distributed energy resources fit into an even bigger picture. What does DER look like and the role of the utility look like in a world that becomes focused on smart communities. That's a really interesting transition. Smart cities, smart community is definitely a big buzzword, buzz phrases that we're hearing a lot of, but I think it's more than just buzz.
We're hearing a lot of conversation about how do we actually begin to put the pieces together to transition from thinking just about the electric power sector piece of smart communities and making sure that it's all happening in a coordinated fashion.
Stephen Lacey: That's something that I've been struck by to in my conversations. People are talking about smart communities, building out smart cities and utility role in that. In artificial intelligence, in the future of the workforce, and these are huge macroeconomic trends that all of a sudden the utility is fitting into and distributed resources are playing an important role in the transition too.
Julia Hamm: Absolutely. It's not just the utility industry. I was at an event last week. That was an event for Association CEOs. Associations across the industries in the country. The same topics that we heard in the general session here this morning at the EEI annual meeting were the same topics that were on the agenda last week for this group of association CEOs. The topics are cyber security, the craziness of federal politics and artificial intelligence.
It's really interesting for me to see that those are the three macro issues that are bubbling to the surface regardless of what industry you're in. For the utility industry, for the DER industries and other players in electric power sector. I do think all three of those things are very important elements to watch.
The artificial intelligence piece, I have to admit I'm intrigued by it. A little frightened but really intrigued because everything ... I've now, in a matter of two weeks, heard three experts on AI in different conferences. Just hearing that we've really hit the tipping point. How does this world of machine learning and artificial intelligence play into that equation in terms of the utility workforce of the future. I don't know the answer but it's a fascinating question.
Stephen Lacey: Yeah, I don't think anybody knows the answer yet and you're the fourth person today to talk about AI at this conference, so it's on the top of everybody's mind. Tanuj, what's most interesting to you?
Tanuj Deora: If you think about a few years back, there were probably ... What's most on CEOs mines or executive's minds were thinking about what the opportunities were for the big generation assets and how to protect those big generation assets. While there's still some issues around what wholesale power markets are looking like and how they need to adapt and evolve, some of that is being driven by distributed resources, but really they make sure the conversation, the focus of the conversation, the focused of the opportunities that people are seeing is really around DER. I think that's something that's been different from years past.
Also, the tone of the conversation has been different. If you think about a few years back, I think it was a little bit dismissive about DER. If you think about two, three years ago, you have a panel of utility executives up on stage and they'd say, "That's all well and good that we're going to have renewables in DER, but they're really niche and we need to focus on the baseload system."
Then you look last year, there was a realization that, "No, it is an important area of utility focus. It is not a niche issue. It is more of a strategic issue." There are a lot of questions about fundamentally what the utility's role should be in DER deployment and integration.
Now, you're hearing the questions that come up; cyber security, AI, federal policies. On the lens of, "Should we do it? Is it important?" Not, "Well, what do we do?" Really about what are the barriers that we can overcome or that we need to work on overcoming to actually get that optimal deployment. Then what will it enable in terms of the smart cities and the smart communities and the broader picture of why utilities exist. This economic development for the country.
Shayle Kann: That's interesting. It seems like people were pretty generally focused on the workforce question and how that needs to change, is that right?
Stephen Lacey: Yeah, for sure. I came up in all my conversations. I had a chance to sit down with Pat Vincent Collawn who is the president and CEO of the New Mexican Utility Holding Company, PNM resources. The first thing she mentioned was the utility's efforts to transition the local workforce, which consists of a lot of members of the Navajo Nation working in coal mines as the utility looks to phase out coal by 2031.
It has this target to phase out coal. That's a big enough deal, but it now has this workforce transition issue to deal with. That was just one of the many topics we covered. Phasing out coal is a really big deal, but PNM is also taking a more cautious approach to renewables, so Pat described that as well.
Pat Vincent-Collawn: With the workforce, one of the things we like is time. There are a lot of folks that say, "Get out of coal immediately. Move to cleaner resources," but you need time to train those folks to help them get new skills. When we closed down two units of our power plant, we gave the Navajo Nation $1 million for job training. You can't give people new jobs and new skills overnight. If you give some time and more of a glide path, that allows us to work with those communities. Help them do training, help them support jobs, economic development and make sure those folks have a place to land.
Stephen Lacey: This is the issue of our time and the economic transition. The future of the workforce is an issue that everyone is talking about and it's particularly acute in the electricity sector. Are you learning anything in New Mexico that you think could be applied to other regions of the country? When you think about these long-term changes and building these job-training programs.
Pat Vincent-Collawn: I think so. One of the things we did is we work directly with the colleges and the tribes to make sure that they could find skills where they could stay at home. One of the issues with a lot of the displaced workers is they don't want to move. If you're a Navajo, you want to live in Navajo land. If you're in Appalachian, you've lived there forever, you don't want to move.
It's helping to find those industries like 3-D printing was one that we've train people for. Or even commercial truck driving. You're gone for a while but you get to come home. It's being very respectful of the needs of the community and not just saying, "Well, you can move to Denver and find a job because unemployment there is 4 percent." It's thinking through what their culture and what their history is.
Stephen Lacey: Tell me a little bit more about your integrated resource plan. Why get out of coal and what's going to replace coal?
Pat Vincent-Collawn: Like many, many utilities have an integrated resource plan, ours we do every three years. It's a very public process where we bring lots of people into comment. We model thousands of scenarios. At the end of the day, it's economically best for customers to get out of coal. The economics of natural gas are compelling. When you stack those economics up against the coal plants, that makes sense. You then lever onto that customer preference to get out of coal and it makes the decision easier. The reason I say easier is because, again, we need to think about those displaced workers, but it's cheaper and it's cleaner.
Stephen Lacey: We've taken a look at some of the integrated resource plans of major utilities around the country and all of a sudden many of them are just in a year or two factoring in way more solar than they otherwise would have. This is a technology in particular where the economics are changing so dramatically. All of a sudden, utilities are saying this is going to be the least cost resource through the next decade, the next 15 years.
If we're thinking only about the cost per kilowatt hour and nothing else related to the value on the grid, if it's just cost per kilowatt hour, we might procure only solar. We've been blown away by how those integrated resource plans have come together. How are you thinking about technology change? Are you also seeing that shift among utilities? They're, all of a sudden, taking a look at the long-term economics of these technologies and saying, "Wow, there's something really dramatic happening right now."
Pat Vincent-Collawn: Absolutely. On the solar side, we've had a lot of solar in our last integrated resource plan and we did the shutdown of these two units of San Juan. If you just let the models run, they pick solar. New Mexico is one of the best solar resources in the country. We just got the Facebook data center and they are powered by all solar in their first phase because the economics are so good.
We see it out there. We are including things like energy storage in a resource plan. The issue for us is regulators like certain technologies and certain costs. For example in this resource plan, we talk about energy storage pilots but not full-scale yet because the technology is not there.
The nice thing about the resource plan is we do them every three years, so we can take into account that changing technology. For us, our rates are still low, so energy storage which can work in some other places doesn't work as well for us yet.
Stephen Lacey: How does that change the way you think about resource integration? How do you balance broader grid needs with some of these new technologies that may be lower-cost?
Pat Vincent-Collawn: We do it gradually. For example, we have a solar and storage pilot that we've had for some time. We'll go out with an RFP for some storage and do it incrementally, because the biggest thing for us is the reliability of the grid. Our customers tell us that the number one thing that they want is reliability.
We do it slowly and carefully. I know sometimes our industry is criticized for being slow and careful, but we make sure that we can integrate and that we can take on that solar penetration and we learn from each other. One of the great things about this industry is we can learn from California. I can talk to Pedro and Geisha at PG&E and southern California Edison because their solar penetration is ahead of us and see what they've learned and incorporate it back into our planning.
It's a measured approach. You want to modernize your grids, but not too far ahead of your customers because you don't want your customers to pay the price before they really need it. The average electric bill in New Mexico is still about 80 bucks. Bringing in some new technology for a lot of those folks is a, "Let's wait and see."
Stephen Lacey: What are your customers specifically telling you about what they want either in terms of individual control or the grid resource mix in general?
Pat Vincent-Collawn: One of the things we're all finding is that customers aren't homogeneous anymore. In general, customers want cleaner energy. The question is how much more they're willing to pay for that and I don't think anyone has cracked that nut, but they do want cleaner energy.
There is a segment that doesn't want any more control. They want to flip the switch and pay the bill, but there is a segment that wants that control and wants to say so about where their resources come from. In general, that's younger folks but that's not all of them. They're the ones I think that are really going to continue to help us drive the change in the industry.
They're used to using using these little iPhone devices for banking, paying for pizza. Probably most of them haven't been into a bank and they see no reason why their electricity can't be done the same way. We're listening to them. We're working with the City of Albuquerque, for example, on a smart city; LED lights, electric buses. I don't know if you've gotten a chance to look at the smart city thing, but I think we're going to continue to drive towards more digital, more smart and giving those folks the control that they want while still serving the folks that just want to flip the switch and have the lights come on.
Stephen Lacey: What keeps you up at night as a utility executive? What are the decisions that you think that you have to make today or that you're going to have to make tomorrow that will truly make a material impact on the way the business operates?
Pat Vincent-Collawn: I think the decision on resources, future resources is something that every utility executive and I in particular worry about. You want to make the right decision for 40 years from now while technology is changing daily. Getting that right so that when my successor sitting on my chair 10 years from now and say, "Boy, that was a really bad resource decision." That's one.
I think the other thing is making sure that we are really good at cyber and physical security. This industry has done a great job on cyber and physical security. We work closely with the government, but the folks that are out there on the other side are bad actors and they're well-funded and they try to stay ahead of us. I would say that's the other thing that keeps me up at night.
Stephen Lacey: Does the current political situation change anything for utilities that are looking at this changing resource mix? We now have no federal policy for reducing climate carbon emissions. We were out of the Paris climate agreement. Does that change anything in terms of your decision-making process?
Pat Vincent-Collawn: No, because what's driving that move to the cleaner resource is the economics and the market forces and customer desires and those haven't changed by the decisions that have been made. Most resource decisions are made at the state level, not the federal level. I look at our state, it's still the most cost-effective for us to get out of coal. Customers like it, so we keep on listening to our customers and the market.
Stephen Lacey: What do you think is the most interesting trend in the utility sector that people may or may not be paying attention to? What do you think is going to surprise folks as they look at the evolution of the way utilities deliver power?
Pat Vincent-Collawn: I think the thing that's probably going to surprise us most is the whole digitization and artificial intelligence that we're going to be able to use some day to run our networks and to repair lines and how we're probably going to be able to solve some of our worker shortage problems. Our linemen and others are getting older and retiring by digitization NAI. I think we're not thinking about that enough yet.
Stephen Lacey: Are you thinking about that?
Pat Vincent-Collawn: Probably not as much as I should be. It's something I think as a company, as a country we're grappling with. I think in the utility space and me in particular, we do need to think more about it.
Shayle Kann: Pat seems to echo what a lot of others are saying about the fact that federal policy or whatever it may be won't necessarily change the direction of PNM's strategy or how its resource mix is going to evolve. You said that others said the same thing.
Stephen Lacey: Absolutely. I also sat down with Tom Fanning who is the CEO of Southern Company. Southern is the country's second-biggest utility. Pretty coal heavy. He said the exact same thing about the inevitability of change. Also echoing a lot of Pat's comments. There's this genuine realization that customers, both residential customers and CNI customers are demanding distributed resources. If Southern can't figure out a way to deliver them, others will. Tom described Southern's strategy around getting closer to the customer and decarbonizing its own energy mix.
Tom Fanning: It's this fascinating evolution of a 100-year-old business model. Making, moving and selling energy in the old days stopped with essentially a mechanical device, a meter. Now we see because technology is enabling it, because customers are requiring it, we have made some reasonably important investments and taking that make, move and sell model and putting it on the customer premises.
Stephen Lacey: Can you describe some of those investments and how they're playing out and how customers are responding?
Tom Fanning: I figured a plan. Great. We made small for us but important acquisition of a company called Power Secure where we're putting what we called distributed infrastructure on the customer premises. Where the strike zone for that really started with customers that had pristine reliability requirements. Think about where the digital age is going and the big server farms or military installations. Those people have unique requirements for reliability. That's where it starts.
The second kind of impetus we see is that people want to have more control over their supply where they may be in areas where they are. This is really apart from the United States, the southeast United States where they are lacking reliability or in very high price environments or don't have the kind of service that otherwise they want to have. Maybe they have a green initiative.
We've started with distributed infrastructure. That could be distributed generation in the form of a solar panel or something, but we added at the end of last year a major joint venture with Bloom Technologies, Bloom energy. Now, we're doing our own storage equipment and switching devices around the Bloom generation technology which uses essentially a fuel-cell to to create electricity. We also do micro-grids, we do charging stations. We do a whole variety of things that puts power, excuse the pun, in the hand of the customer.
Stephen Lacey: Are you doing those things because people in the industry say that utilities need to do them? Are you doing them because customers are asking for them? Is it coming from you because you believe in that new distributed infrastructure and more types of power delivery? What is the impetus for that type of evolution in the business model?
Tom Fanning: I started out as a math major in college and one of the tenants of high-level math would be chaos theory. Chaos theory, one of the things that would tell you is that the variance in nature is always bigger than what we normally measure or predict. What's fascinating is, as we see technology change, it's always coming bigger, faster than what we measure.
You can choose to play defense and try and keep the waves off the beach or you can play relentless offense and try and invent your future. Southern company remains the only company in our industry still committed to robust proprietary research and development.
what we have done now is change that R&D focus away from, say, environmental controls around coal-based generation really to thinking about customer solutions in this new business model. We have elected, as an important, kind of small today but important option for the future, distributed infrastructure as a potential business strategy. We're doing it, like I say, mostly away from the southeast United States, but we're finding that it's growing pretty fast. I think it's a pretty exciting development.
Stephen Lacey: What technology do you think will be the game changer in the utility sector?
Tom Fanning: I think the home run potential is in storage. I think we should characterize storage as kind of macro and micro. The micro devices are always pretty important like a battery, the thing running this device. You can put storage devices in a micro-sense all through this make, move and sell chain to improve reliability, improve the operating characteristics of renewables and a variety of other things. You can also think about it in a macro sense. Our industry is an industry built on scale.
Let's think about the earth as a battery. If we get negatively priced wind for example out of Texas overnight, maybe we can use that to push air in the ground and pull it out in a compressed sense and run turbines that has peaking capacity value. We call that compressed air energy storage or CAES.
Another example of that would be pumped-storage hydro. We actually have more sites in the southeast. See, as we evolve the generation fleet of America away from things like coal or it's so challenging to build new nuclear, we're doing that, that the old workhorse baseload technologies are changing. Maybe we need to think about storage on a macro sense as one of the technologies that may displace those old workhorses.
Stephen Lacey: Is there less motivation to change now that we're in a different political environment? Now that we ...
Tom Fanning: No. The answer is no. Look, our industry, our planning horizon is 20, 40, 60 years long. We don't make short-term decisions as a principle. I wrote a little book for our employees called Leadership Perspectives. We don't chase fads. We are very much a long-term focused company. Our business approach, our strategies, our models have a much long longer life than any political party or any particular administration. From administration, administration, you would see very little change in the way Southern Company does business.
Stephen Lacey: On one hand, you have these very ambitious projects like the Vogtle power plant, like the Kemper CCS plant and supporters of those plans say we need big ambitious projects to be able to develop large high-quality power to power industrialized societies. Others might say, "Let's just throw a bunch of wind and solar at the problem. Look how cheap they're getting. We have ways to manage these variable resources. They might not be perfect, but man are they cheap. Where do you come down on thinking about large projects, large difficult projects like Kemper and Vogtle and wind and solar that are just extraordinarily cheap right now?
Tom Fanning: It's not just even new large projects, it's thinking about the fleet as this exists today. It is absolutely clear to me that we need a balanced portfolio just as you would own stocks. You don't put all your investments into one or two particular stocks. From an energy delivery standpoint, you want to make sure that you have nuclear, 21st-century coal, natural gas, particularly important as a bridge fuel, renewables, energy efficiency.
What we gotta do is come up with a national plan and we've been engaged very actively in this. I would argue one of the most important voices in America. How we transition that fleet over time to being a low to no carbon by 2050 generating resource. I think we can do that. What we have to do is understand as a nation we've got to balance the notions of clean, safe, reliable and affordable energy as it transitions over this time frame. We intend to be leaders to do that.
Shayle Kann: It feels to me like there's been a pretty dramatic change of tone amongst utility executives at least in the public eye just over the past three or four years. You remember back in 2013 was when EEI released that utility disruption report that made a lot of waves. It was sort of the first thing coming out of the utility sector that described the potential death spiral that utilities my face.
At that time, it was rare to hear anybody talk about that on the utility side, but it sort of feels like now we've move past that and everyone is bought into the idea that there's a dramatic transformation underway and the question is how to do it effectively.
Stephen Lacey: Yeah. That was a really important moment in time for the utility industry, that disruption report in 2013. Think about what's happened since then. We're seeing utility scale, PPA's below four cents a kilowatt hour and those are coming in with more regularity. In places like Hawaii. Hawaii is one in five houses, has rooftop solar. We're well ahead of schedule with the duck curve in California. Some of these you existential problems that were identified in that report are happening now and they're accelerating really fast.
I interviewed David Owens who is the Executive Vice President of the business operations group at the Edison Electric Institute and he actually marshaled that report. David is retiring from EEI at the end of the month after four years representing the electric sector. He's been working on these issues for 37 years. I got him to reflect on the historical significance of that report and in particular in the trends it outlined and where it fits into the bigger picture of items that EEI is currently grappling with.
David Owens: Let me give some history on that 2013 report because the report was done under my leadership. That report begin to describe potential changes that would take place. It did have a customer focus and it had a tremendous technology focus. It also had a focus that the regulatory process had to change as well to keep pace with the new demands of the customer, with the fact too that maybe electricity demand would not be as robust in terms of growth. There had to be other pathways at the utility industry had to pursue. Yes, that report did have a big impact and it was intentional for it to have an impact to kind of change the conversation a bit and to get us better focused.
Stephen Lacey: Pull back the curtain a little bit for me in the lead up to that report. What were the conversations that you are having about those potential disruptions and how much of an impact did you think that they were going to have and how immediate did you think that those impacts were going to be? I'd love to hear about the decision-making process and the conversations you were having behind the scenes in the lead up to that report.
David Owens: I've always benefited by having a great leader in Tom Kuhn. One of the thing that Tom does is he stimulates. He creates an environment where we can be creative. Where we can be innovative. We can throw new ideas out. Even though the report seemed to suggest that was the first time we spoke about these issues, we have been talking about these issues for a number of years.
All the reports have to do was to collect all this information. We've been having these dialogues with our CEOs for many years and there comes a point though when you begin to say, "This stuff is really beginning to happen." Since that report, you can note that we've gotten very aggressive in the industry's vision. That vision is focused around cleaner energy, a smarter energy infrastructure or grid and providing customized or individualized solutions so that we can respond to our customer needs.
The report was really just a collection and an identification of challenges. Things that we knew as an industry we had to address. There's still a lot of issues that have not been addressed or identified in the report. For example, the book speaks to the need to have tremendous reform in the regulatory process. That conversation, in my view, was just beginning.
When you look at the regulatory processes, it's a different way now if we're looking at the grid as an integral part of the development of these technologies. The platform for integrating these technologies. The way that you price the grid has got to be very, very different. That conversation in my view was just beginning and I think it's going to be a very challenging conversation. I only look at what's going on in the wholesale electricity markets and say that we're going to have similar conversations at the distribution level.
Stephen Lacey: Your 2016 planning document showed that those priorities are very important. As you mentioned, cleanliness, a smart grid and cyber security and customer-centric approach are really important to EEI member company priorities going forward. That's filtered down into what utilities are doing. I do want to give you a chance to respond to distributed energy advocacy groups who say that EEI is only a political group who says publicly, "Yes, we support distributed resources."
Privately, funds, campaigns to fight against, say, rooftop solar or other distributed resources. Opponents of EEI say that you're basically waging a public relations campaign and not actually supportive of these technologies. Can you just respond to that?
David Owens: Yeah, I can because I'm someone who participates in a lot of these regulatory proceedings. Frequently, I'm in state proceedings dealing with the issue of grid mod, dealing with the issue of distributive resources. I frequently participate a legislative proceedings at the state level and federal proceedings as well. I don't agree with that.
I think that my background and my involvement in a lot of these dialogues demonstrates our firm commitment. I don't think the Institute would have an Executive Vice President participate in these proceedings under oath if we were not serious about this. We're customer driven. We believe that it's important to provide value to the customers and we are strong supporters of renewable technologies.
If you look at just wind technologies as an example, you see over 80 percent of those wind technologies, 70 percent, 80 percent of them are from our industry. Even if you look at solar technologies. You can look at a universal scale solar and two thirds of that universal scale solar are provided through partnerships or directly from utility companies.
I think our track record is pretty good. If you look at our overall power supply mix, one third of our power supply mix is zero carbon emitting. That includes nuclear and it includes renewable technologies. If you look at our carbon footprint, if you look at 2005, our carbon footprint has been reduced 25 percent from 2005.
I think the fact speak for themselves that we're firmly committed to cleaner energy. We're firmly committed to renewable technologies and we're enhancing the grid. We're making that grid smarter so that we can integrate these technologies in a way where we protect reliability, preserve resiliency and provide security.
Stephen Lacey: I want to talk about another pivotal moment in your career after super storm Sandy. When you went and oversaw the utility response efforts after that disaster. I'd love to know what kind of impact that had on you and the priorities that you set at EEI under resiliency and extreme weather preparedness.
David Owens: First, I will say that that was probably the most moving period of my career. Having the opportunity. We get choked up over it. Having an opportunity to be asked by the present of the United States, designated by Tom Kuhn to represent our industry at FEMA. That had never happened before to have the private utility industry intimately involved in the restoration efforts working with the Federal Energy Management Agency. I was very, very moved by it.
When I got there, it gave me hands-on experience even though I've had operational experience in our industry. I was able to see firsthand the substantial restoration efforts that were needed to take place to restore service to 8 to 10 million people in 26 states. We mobilized 70,000 people. I was a center of a lot of that. I say it was very chaotic.
In my view at that time, there was not the level of coordination that I would have anticipated with the various government agencies and industry. In fact that it was very disorganized. I'm one because I've had such a rich background in the industry. I'm a take charge person.
The first day was very chaotic. In fact Tom Kuhn, my boss, called me and said, "You're creating a lot of trouble, so they want you to come back." My response to him is, "Tom, who else are you going to send over here?" Tom said, "You're right. You should stay."
The second day got a little bit better, but even that day I could see a little bit of organizational structure but I still saw many gaps. We were trying to get crews from one part of the US to another part of the US. We knew that we did not have a lot of time to do that because the president wanted to make sure. Among all the areas, he is very concerned about New York and our financial community, so that was a priority.
We knew too that we had to move crews across many states. We knew that we had to work with many state jurisdictions to do that. We knew that you had to get waivers and we didn't have waivers. We knew too we didn't have staging areas for the trucks that were coming in, for the bucket trucks. We had to go and we had to talk to the Department of Defense so that we can move, have staging areas close to the areas that needed to be restored. In a long sense, we work with Department of Energy, Department of Defense, Department of Homeland Security and it finally all begin to come together. We learned a lot of lessons of what worked and what didn't work.
Stephen Lacey: For the average customer, what would be different for them after a major disaster like that? What kind of change in utility response would they see after Sandy?
David Owens: One thing that should have commented, companies that had smart meters. We were able to know very precisely what customers were out. Companies that did not have smart meters that create a little bit more of a challenge. Now, with 70 million smart meters throughout the United States, we will know in real time what customers are in and what customers are out.
What technology has done now is given us the ability to have greater visibility over customers that are out. Other technologies such as drones permit us now to survey the area that's been affected and to have a better idea of the assessments and the way that we can restore service to vital areas much more quickly. Technology has been very helpful.
Then we work closely with the government, so we share information. We have routine calls when there is an emergency, a natural disaster or whether a challenge. We are on in constant communication with the Department of Energy, Department of Homeland Security. All the emergency responders. I think that those are all significant improvements. We've used substantial use of social media so that we can interact with the customer. Make the customer aware of things that are happening. All of those are improvements that have occurred since super storm Sandy.
Stephen Lacey: I have been struck by the conversations that I had at this event and you talked to utility executives across the industry and asked them, "Have your decarbonization plans changed under the new political environment?" Many of them say, "No. This is a trend that is going to take place. Cheaper natural gas prices. Cheaper renewables. Demand-side management." All of these trends are going to continue no matter what. What do you say to those forces and can they be altered under this new political environment?
David Owens: I guess I would adopt the view that many of my CEOs have already expressed to you is that we are in the cleaner energy path and they're absolutely right. Natural gas prices are low. It's a competitive technology and our goal is to balance three particular elements for the customer; affordability, reliability and also sustainability. We want to make sure that the customer gets clean energy. That the energy is reliable and the energy is affordable.
Yes, we are on a pathway to continue to do that. We're also on a pathway to encourage the use of electric vehicles. We're a believer that we're moving to increased electrification of our society. The transportation segment is one of those vital, vital areas. We also are believer too that we need to partner with other sectors of our industry and that's what smart communities are about. Smart communities or smart cities as someone would phrase it, are really about a partnership involving the energy industry, the transportation sector, the communication sector and the water sector.
All of these are vital sectors to society to create jobs and to have a cleaner environment. We're fully committed to that. I would adopt the views that many of the CEOs, our CEOs that you've spoken to were in the cleaner energy path. We're also on a path of encouraging greater technologies which are dependent upon a smarter energy infrastructure. Smarter grid.
We believe that these evolving partnerships are essential. They create jobs. They also help promote newer technologies and they should be a part of the president's energy package with respect to infrastructure investments. We think that one key element of our president trying to create jobs and trying to build infrastructure, we think that the energy sector is as vital as those other sectors.
Stephen Lacey: You could look at this two ways. One is that the industry is facing threats related to customer-cited, distributed resources, potential revenue erosion, flat-lining growth. The other is the potential that you just outlined. Greater use of electric vehicles, smart cities and all these application layers on top of smart meters. In one sense, the industry has never had so much potential before it.
David Owens: That's right. I'm very excited. When we started this interview, you asked me why was I leaving. With all this excitement surrounding the industry and as I mentioned we're the transformative period in my view, I've never seen so many opportunities. I will also say too as well as so many challenges, because as I commented earlier, it means that the regulatory processes got to be one. Many times it won't. This got to keep lockstep with the technology changes.
We have to find a way that we can transition the regulatory climate so that the economy keeps pace with what's happening with respect to technology. That's going to be very tough, so that's a challenge that I see. We also have the the challenge, in my view, of making sure that cyber security. As we begin to have more distributive resources, there are additional pathways that you don't have to interact with the grid.
As we begin to have these operational elements that interact with the grid, and as much as we believe that these are vital to the customer and vital to giving the customer a broad array of choices, we also know that it enhances our cyber vulnerabilities. There's a whole new set of roles. Whole new set of approaches. A whole new set of technologies that will evolve that help us deal with this potential threat.
Stephen Lacey: Just a few more rapid fire questions to wrap up. Firstly, what's in your opinion the biggest game changer for the electric utility industry technologically speaking?
David Owens: I think one of the potential biggest game changers could be energy storage. There are different forms of energy storage. I'll say right now many are looking at battery technology. They're looking at lithium-ion battery. They're looking at lithium air. They're looking at flow gates.
The fundamental thing would be we have a big material science challenge. Can we, in fact, create this energy conversion in a way where we preserve power density, don't create a lot of heat and have longevity of that storage?
To me, if you achieve that, then it certainly would be transformative with respect to the grid and with respect to other technology. To me, the transformative technology potentially could be storage. It's a big chemistry issue that's got to be dealt with. A big material science issues that's got to be addressed in my view.
I think the other thing if I'm thinking outside the box is increased realization that we're going to be looking at artificial intelligence. This is the brain outside the body. This is using algorithms now, predictive algorithms to look into the future. To anticipate actions and reactions. To anticipate behavior. We're using it already when we look at autonomous vehicles. We're using already when we look at drones. I think that we're going to take leaps and bounds to move to a whole new dimension as we're looking at artificial intelligence. I think that's very, very exciting.
Stephen Lacey: What do you think will be the most important market reform or set of market reforms to usher in more distributed cleaner energy and make it fair for all?
David Owens: It's not really what I would call a market reform, I would say market fundamentals. One key market fundamental is pricing. I would just be very simplistic and say get the prices right. You have to get the prices right. In those prices, as you get them right, you have to as well have an objective function that makes sense.
The objective function that we always look at is reliability. I would expand that from just reliability. Some would say, "Well, you need to make sure too that you have resiliency and you need to make sure that you have security." I think they're absolutely right. I think as you look at the price, the price some way has to capture this whole notion of sustainability as well.
I'm not arguing for a carbon tax or anything like that ,I'm just saying that you need to be able to have the diversity of sources to serve the customer and the inducement of that is through pricing as well as an objective function that clearly understands that reliability, sustainability is very, very important. Security, resiliency are very, very important to keeping the lights on.
Stephen Lacey: Again, that was David Owens who was the executive vice president of the business operations group at the Edison Electric Institute or very soon the former Executive Vice President at EEI because he is retiring at the end of the month. You also heard from Tom Fanning, the CEO of Southern Company. Pat Vincent Collawn, the president and CEO of PNM Resources and Julia Hamm, and Tanuj Deora, the CEO and the chief content officer of the Smart Electric Power Association. Of course, the voice by my side every week is Shayle Kann who is the head of GTM Research and Greentech Media's senior vice president. Shayle, it was a pleasure. We'll catch you next week.
