The Grid Transformation Forum | Market Transformation Past and Futureby Peter Weigand, Greg Lander, Ross Malme, and John Brown
EET&D : What prompted you to launch Skipping Stone 20 years ago?
Weigand : I was a senior executive at a major energy company tasked with transforming the company through a combination of mergers and acquisitions and overhauling the organization from top to bottom. Through that process, I used a variety of consultants and wasn’t happy with the results for the money I was spending. Being an entrepreneur at heart, I decided there had to be a better model based on providing consulting services that used industry veterans only and on measuring projects based on client success. That model proved to be unique at the time and is still our model today.
EET&D : Over your twenty-year history what have been the biggest changes that have transformed energy markets in your view?
Weigand : When you put a number of industry veterans together, the fun part of what we do is to collaborate on market changes and develop innovative ideas and solutions for the benefit of a wide variety of clients. While I could list many areas of change, I think the most profound changes can be categorized into four (4) areas: 1 - wholesale markets, 2 - end user empowerment, 3 - renewables, and 4 - advances in technology.
EET&D : Let’s take these one at a time. Regarding wholesale markets, how has that impacted the marketplace?
Lander : There are two separate wholesale markets, natural gas and power. Each emerged during different decades and, based largely on their distinctly different business models, have taken their own paths.
On the gas side, it is entirely a bi-lateral market with contracts between two parties for everything from supply, to movement of gas, to consumption. When the wholesale gas market transformed from a pipeline-as-merchant market to its current restructured pipeline-as-transportation form, it meant that going forward all changes in pipeline configuration and services were to be effectuated only if and when there were willing parties agreeing to contract for specific services to support the change. In addition, it was determined there needed to be a workable secondary market in pipeline capacity. These two changes, and the essential bi-lateral nature of all these market structures, has drastically altered how the gas markets work. Where the wholesale gas market was simple pre-restructuring, it is now much more complex. This has driven trading, futures markets, and capacity release markets and has enabled more gas fired generation on the power side.
Turning to the wholesale electric side, with the introduction of Independent System Operators (ISOs) and Regional Transmission Operators (RTOs) that operate alongside legacy, vertically integrated electric utilities, the wholesale electric market retains its centrally operated model. This model differs from the wholesale gas model in one significant way: all system configuration changes and new services are centrally administered with costs of changes socialized across the participants and service changes propagated by rules applicable to all largely without regard to any pre-existing bilateral arrangements.
This difference in business models has been most pronounced as these two markets become ever more interdependent, and coordination issues between them have come ever more in focus to policy makers and market participants alike.
Brown : As Greg said, the wholesale power markets were forever changed with the introduction of independent system operators, who now run a variety of markets such as generating capacity markets, transmission rights markets, and ancillary markets, plus real time energy market clearing, etc. This created an explosion of trading opportunities and changed how power plants are run based on economics not just reliability. In a sense, costs associated with reliability are now priced/recovered less through rate bases and more through wholesale market dynamics.
Malme : Over the past twenty years we have experienced an explosion in the number of companies and people now participating in the market. This could not have happened without deregulation at the wholesale level by FERC.
Weigand : For utilities, the changes in the wholesale gas and power markets have added multiple layers of complexity compared to twenty years ago. While still carrying the mandate for reliability, there are now a thousand ways to slice and dice how to accomplish that, yet to a large degree at the distribution level utilities and regulators are still tied to using old style ratemaking models. We see a major disconnect between the newer wholesale market models and traditional ratemaking that puts previously unrecognized risks on utilities. This is a very serious problem currently, and crying for new and viable solutions.
EET&D : What do you foresee in wholesale markets that will drive more changes?
Lander : An area we have been deeply involved with over the past couple of years is the synchronization and coordination between the wholesale gas and power markets. Now that the power market is driven more by gas than coal, plus the emergence of significant levels of renewables, the gas market needs to change to adapt. We foresee the gas wholesale market evolving from its current daily transaction methodology into one that transacts both daily and, increasingly, along the lines of an hourly or at least sub-day transaction model.
Weigand : We are seeing more and more international markets adopt American style wholesale market models. Currently we are involved in the Japan market, where they will be implementing both a wholesale gas market and an ISO-style power market over the next few years. At the same time, Japan is taking retail deregulation much further than the U.S. has by allowing every customer nationwide to choose their commodity supplier for both electricity and gas.
Malme : The use of demand response continues to change from a pure capacity play to where we envision it playing a larger role in the ancillary markets. This has just started to happen and as technology advances, so too will demand response as a more robust wholesale market tool.
EET&D : What do you mean when you say end user empowerment?
Weigand : Twenty years ago, customers purchased power on utility tariffs and maybe utilized demand side management incentives. Today, in many markets, customers can choose their electricity supplier, participate in demand response programs, install solar or other on-site generation and large companies have proactive sustainability programs. Add to that smart meter data, smart thermostats, LEED for buildings, smart cities, etc. In short, more and more customers are engaged in the energy markets directly or through retailers, solutions companies, utilities and technology providers.
EET&D : How has the demand side of the grid evolved over the last several years?
Malme : The old legacy-regulated demand side management programs, which the regulated utility used to manage through programs like industrial customer interruptible tariff programs and residential direct load control programs, are being replaced with new programs. Some programs allow the customer, perhaps through their aggregator or retailer, to bid into wholesale markets and yet others pay customers for shedding load during peaks.
Advances in technologies such as Advanced Metering Infrastructure (AMI) and near real time demand response management software (DRMS) have dramatically increased the value and reliability of demand response, not only to wholesale markets, but also to transmission operators, energy traders, distribution companies, CSPs, retail electricity providers, and the retail customers themselves.
EET&D : Where do you see the demand side evolving to in the future?
Malme : Going forward DR is evolving into one of several market products and services and will be combined with or operate along-side distributed energy resources (DER) including rooftop solar PV, and behind-the-meter energy storage. It will now begin to complement and, yes, these individual offerings will even compete against one another at the edge of the grid. With the onset of smarter and smarter buildings and cities, we think the demand side, or end users, will drive more innovation and opportunities than the generation side over the next 10 years. This is especially true if what Peter highlighted earlier regarding old style ratemaking limits the ability for utilities to invest and participate in demand side market opportunities.
Weigand : We are seeing utilities create nonregulated business units to capture demand side opportunities as well as to expand outside their footprint. We expect that trend to grow much larger over the next 5 to 10 years. The reality is that if the traditional utility model and rate structures aren’t addressed, it doesn’t bode well for regulated utilities, and that isn’t healthy for anyone.
EET&D : Where do you envision retail choice going over the next few years?
Brown : For the past couple of years, retail choice markets have crested the maturity curve. The number of retailers has shrunk due to consolidation, and new entrants are much fewer in number. In addition, some states, notably New York, are really tightening the market rules, which will likely result in many retailers exiting those markets.
Weigand : Of course, I’m a free markets believer. Utilities without retail choice have fought against it successfully for years, which is why no new markets have opened in the last decade or longer. At the same time, those same utilities, by and large, pass through the costs of the commodity to consumers without making a margin. One wonders why do this if you can’t make any money at it? Perhaps the new model is for utilities to view themselves as a reliability and services company instead of an electricity commodity provider.
EET&D : Obviously, renewables twenty years ago weren’t significant, why are they today?
Lander : Several key factors, the most important being government intervention with tax incentives and state-level renewable portfolio mandates. Neither of these would have happened, however, without political support from voters; therefore, the public believes green and climate change need to be addressed. Renewables is an easier way to ‘support’ this than perhaps using less energy.
Weigand : Over the past couple of years there has been a shift in renewable drivers. For consumers, it became easy to finance solar with no money down, long term contracts. For the Fortune 500, the driver is achieving sustainability goals via renewables because energy efficiency can only go so far. We are now seeing utility scale projects funded on the backs of corporate customers at a faster pace than traditional utility PPA’s.
Brown : An important growth aspect of the renewable market has been participation by the finance community. Not just project finance, but trading and derivative participation with newer concepts like synthetic PPA’s, contract for difference swaps, and others that serve to justify and finance renewables.
EET&D : You mentioned advances in technology as an area of significant change, can you elaborate on this?
Brown : Technology has transformed the way we buy and sell energy, manage the gas and electric grids, interact with suppliers and customers, and more. It has given us unprecedented access to data and information, literally touching every aspect of the energy value chain. Looking at the way market participants buy and sell electricity, we have seen major changes in the systems companies use to manage their portfolios and the associated risks and we’ve seen changes in how transactions are managed. On much like hourly trading in electricity led to technology changes on the electric side, on the gas side, there will be a new round of technology changes as pricing of gas and transportation services adds hourly and sub-day transacting to its compliment of service offerings.
In the late 1990s, I was at the Continental Power Exchange. We launched an online system for trading next-hour electricity - CPEX. These were physical trades that cleared through the system. CPEX ran on a dedicated private network as most people thought the Internet didn’t offer adequate security. CPEX ultimately evolved into the Intercontinental Exchange (ICE), now the most used system for trading wholesale electricity. ICE runs over the Internet and offers physical and financial products for a host of commodities. Over this same time period we have also seen the evolution from spreadsheets to dedicated commodity trading and risk management systems that provide straight-through processing from deal entry to invoicing and risk management.
This has enabled unprecedented access to trading partners and products, as well as accelerated market expansion. Similar advances have occurred in the way people schedule and manage transmission with e-Tagging solutions and the Open Access Same- Time Information System (OASIS) network.
In our view, the gas side will see a similar evolution in transactions, risk management and tracking systems as hourly and sub-day pricing and transacting proliferates to support gas-fired generation, which is becoming ever more variable due both to the behind the meter changes stemming from DR/DERs and to the ever-increasing penetration of variable output renewable electricity generation at the wholesale level.
Malme : From the grid perspective, the past twenty years has seen the explosion of information and automation with everything from smart meters to AMI to substation automation – and many other areas. The current challenge is how to make all this big data pay off in terms of cost reductions, customer participation, profitability, etc.
Weigand : Twenty years ago you could probably count the number of technology vendors serving the energy marketplace. Today it’s nearly impossible to count all the technology companies who have some sort of solution, whether software, hardware or information related. As the twenty-first century dawned we saw many billions invested in energy technology by venture capital, with investors still pouring money into energy tech. Over the past ten years we have seen private equity pour billions in through acquisitions and roll ups. Going forward we see the money crowd getting even more involved, including expanding their horizons to international markets.
Malme : Speaking of international technology opportunities, for the past several years we have been hosting trade missions from emerging country utility and energy ministries who are coming to America to learn how our energy markets work and to buy U.S. technologies to adopt for their own smart grid initiatives. America is leveraging, through significant exports, our global leadership position in energy technologies.
EET&D : So how do you make sense out of all this?
Lander : Because we work across several sectors, such as utilities, gas and power retail and wholesale, renewables, demand response and distributed energy, we get to see a wide variety of technologies. Add to that mix our perspective gained from many years in the energy business, we are able to provide our technology clients with strategies and implementation plans based on what the market actually needs today and what the changes we see coming will mean it will need tomorrow.
Weigand : For clients who are in need of technology, we always view technology solutions from our foundational core of measuring our success based on client success. As a result, we sit on the client side and if the solutions explored don’t make business sense, then we, and they, won’t be successful. Using this basic methodology keeps our consulting advice grounded in reality and while sometimes leading edge, never bleeding edge.
EET&D : What’s next big thing on the technology horizon?
Brown : The Internet of Things (IoT) is in its infancy but already having a huge impact on the electric grid. We’ve seen great progress in grid automation and controls that improve efficiency and reduce emissions. We are making huge strides in device interconnectivity and data transparency. These advances are making things like distributed energy resources (DER) and microgrids possible. It’s enabling consumers, or consumer driven algorithms, to make more informed decisions about their energy usage, thus lowering costs and increasing convenience. I don’t think we have even touched the surface on the IoT front.
Malme : If I had to pick one area, it would be distributed energy resources. This packaging of generation assets, consumer empowerment technologies, building and home automation, batteries, renewables and market driven transactional capabilities is going to change everything. This impact will be felt here in the U.S. and even more so in emerging international markets.
Weigand : My pick is perhaps based on a more personal level. Addressing the challenge of making employees more productive and focused in the face of an overwhelming and growing stream of information and sources. Everything from smart phones to big data applications is making it ever harder for an individual to not only keep up, but sort through it all for what really matters. This challenge is going to get worse before it gets better.
Lander : For me it’s going to be critical to see if technology can somehow better address the aging workforce problem. You can automate the two grids all you want, but ultimately someone has to install and maintain the basic infrastructure, as well as transact and enter those transactions into recording and implementation systems. While technology can streamline that process to make it more efficient, to date technology can’t climb a pole, turn a wrench, or effectuate and communicate a transaction. It’s going to be a huge issue, if it isn’t already, to find skilled operations, transaction, and field labor that not only has the technical skills but also the market rules and technology skills.
EET&D : What does a utility look like ten years from now?
Weigand : I foresee a lot more consolidation. The need for economies of scale, leveraging field labor over geographic regions, and spreading investments across a larger customer base are some of the keys that will define the winners and losers.
Malme : Some won’t look that much different than they do today, especially the very slow adopters of technology.
Brown : For those utilities that are creating new businesses under their nonregulated subsidiaries, I envision that they will become the power market majors of the future.
EET&D : Last question for Peter, where do you see Skipping Stone in the future?
Weigand : The first twenty years has been an interesting and exciting journey. The daily challenge of balancing experience against staying on top of new developments and then combining the two for the benefit of our clients is what makes this job both fun and rewarding.
I never set out to make Skipping Stone into a consulting giant, rather the goal was to provide real value for clients and at the same time attract talent to our team who enjoy doing that and are good at it. By nature that model doesn’t lend itself to becoming too big as I don’t think a big consulting company can sustain our model. This is why I haven’t ever considered selling the company to one of the big consultancies. As long as clients will have us and I’m running the company, I don’t envision changing our model in the future.
EET&D : Gentlemen, we can’t thank you enough for taking the time to talk to our readers. Your take on the future of energy is at once fascinating and enlightening.