An Industry in Transition

Issue 12 and Volume 117.

Russell Ray   By Russell Ray, Managing Editor

In 2007, Oklahoma Gas & Electric announced a bold new strategy, bucking the longtime business traditions of investor-owned electric utilities. The Oklahoma City-based utility, serving 800,000 customers in Oklahoma and western Arkansas, said it would not build any new generation until after 2020.

Pete Delaney   “We were going to rely on demand response and other ways to ring efficiency out of our system,” said Pete Delaney, chairman and chief executive officer of OG&E.

Delaney shared his company’s story and his thoughts on the need to revamp the business model for electric utilities during the keynote session at POWER-GEN International 2013 last month in Orlando, Fla.

Load growth normally served by utilities is increasingly being met by distributed generation – power from rooftop solar panels, micro wind turbines, geothermal systems and energy storage. The shift to distributed generation is threatening the century-old business model for electric utilities, which have long made money by building power plants and collecting a guaranteed return on those investments.

But demand for new generation has slowed as more homes and businesses produce their own power and turn to more efficient appliances and services.

OG&E was one of the first utilities to respond with a major initiative to deploy smart grid technology and a demand response program that offered customers greater choice and control.

“How long will the economic business model for regulated utilities continue to work for customers and shareholders?” Delaney said before 3,000 power professionals in Orlando. “We’re clearly an industry in transition. We better be in transition.”

The utility’s decision to invest in smart grid technology and buck the conventional approach of building new generation in exchange for a guaranteed return has led to stunning results. Customer satisfaction has never been higher and shareholder returns have doubled over the last five years. What’s more, customers are saving nearly $200 a month and the efficiencies have led to a substantial reduction in the utility’s peak-load.

“Are we really about delivering and growing electricity? I don’t think that is our mission anymore,” Delaney said. “What is our strategy? We have to redefine that. Mastering technology is going to be important.”

At the time of OG&E’s announcement, many questioned the utility’s unconventional approach.

“Internally, there was quite a lot of push back because they had always been geared towards load growth and building power plants,” he said.

Jim Rogers, outgoing chairman and former CEO of Duke Energy, said the industry has seen its monopoly and generation and transmission erode over the last 25 years. Now, the industry is on the threshold of losing its monopoly on distribution.

“Our distribution monopoly is being challenged and that’s the state of play,” Rogers said during the keynote session at POWER-GEN.

As power producers face flat to declining demand for electricity, they must adjust to this new paradigm by modernizing their generation, transmission and distribution assets, Rogers said.

“As new technologies come on, I believe there will be significant productivity gains in generation, transmission and distribution,” Rogers said. “But we have to have the capital to invest in these new technologies.”

Changing the culture of an industry that has used a long-standing business model to generate returns for investors will be long and difficult, Delaney said.

“The cultural transformation is extremely important,” he said. “We’ve been at it for six or seven years. It takes a long time, but it’s critically important to success going forward.”

If you have a question or a comment, contact me at [email protected]. Follow me on Twitter @RussellRay1

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