Why US utilities should invest in innovation
There have been glimmers of hope that the gigantesque and complex U.S. energy utility sector is finally coming around to embracing innovation. But are utilities doing all they can to embrace innovation?
There are two main types of electric utilities in the United States—publicly-owned utilities (POUs) and investor—owned utilities (IOUs). IOU’s serve 65% of electric and power customers in the country, and most were established with a certain mindset: provide stable, reliable and affordable energy with long-term, fixed-price contracts, and this would guarantee a steady stream of customers and a steady return for shareholders.
The utilities did not necessarily anticipate that one day, a customer would request that their energy be low-carbon. Or that that there would be better options for energy efficiency. Or that customers would be able to choose from a variety of distributed energy sources, like a photovoltaic roof panel. A recent study shows that 80% of U.S. consumers care about the use of renewable energy. It’s not just households—demand for clean energy among retailers and technology companies is expected to more than quadruple by 2025, with some companies like Facebook putting forward 100% renewable energy goals.
Innovation within the utility industry has been, by and large, slow and limited. The research and development (R&D) budgets of U.S. electric utilities – both POUs and IOUs – tend to be slim, and in many cases near zero. Historically, the maximum that an electric utility in the United States would spend on R&D is 1% of its revenue—but the reality is that most investor-owned utilities spend 0%, as reported by their annual financial reports and 10K Forms.
Utilities carve out some expenditure each year for R&D, like the R&D managed by the Electric Power Research Institute (EPRI), California Energy Commission and Gas Research Institute (GRI). But by and large, U.S. utilities are not investing in innovation to address changing customer preferences.
This is not sustainable. A number of trends—including distributed energy generation and storage, demand-side management, smart appliances, smart cities, and big data—are changing the game, and if utilities fail to respond properly, they risk losing their customer base to new alternatives.
But electric utilities can’t do it alone. That is where startups can help. There are thousands of early-stage companies in the United States working on everything from micro combined heat and power appliances to modular hydroelectric solutions. These are the innovations that customers demand, and that will sustain utilities in a changing landscape. Utilities would be wise to recognize this and invest in supporting the clean(er) energy startup ecosystem in the U.S. Although utility companies in North America and Europe have invested over $2.9 billion in 130 individual distributed energy companies since 2010, only two of the seven most active utility investors are headquartered in the U.S.
Investing in innovation today
Utilities today are investing in startups to varying degrees. On the most basic level, some are investing directly in venture capital firms. American Electric Power invests as a limited partner in Braemer Energy Ventures, which makes investments between $1 million and $10 million. Other IOUs, such as National Grid, Southern Company, and Xcel Energy, have partnered with VC firm Energy Impact Partners to exchange information, perform joint due diligence, and co-invest in promising ventures.
Going one level deeper, some utilities have formed venture capital arms, with mixed results. In 2010, Exelon, one of the largest investor-owned utilities in the US, created Constellation Technology Ventures (CTV) to invest in companies “representing innovative energy technologies and business models.” CTV has invested in companies like Aquion Energy, a sustainable saltwater battery solution, and Proterra, which creates the technology for a zero-emission, electric city bus.
These startups help Exelon keep up to date with clean technologies and sometimes, in the case of the electric bus, create entirely new customers. Meanwhile, Exelon helps its portfolio companies grow by providing equity capital, management expertise and connections to the Exelon network.
Not all corporate venture arms last. In 2011, a venture capital firm called Energy Technology Ventures was formed as a joint effort by General Electric Co., NRG Energy and ConocoPhillips, and charged to invest $300 million in clean-technology startups. It shut down three years later.
A More Hands-On Approach: Direct Entrepreneur Support
The most sustainable strategy that utilities can take involves a more hands-on approach: running programs that directly support entrepreneurs—an incubator, accelerator or other venture development program.