In the first blog post in this series, we observed that rapid power sector transformation presents challenges but also opportunities for utilities. As older, inflexible resources are retired, cleaner, more distributed resources are being deployed by companies and customers who are consuming, saving, and producing energy in new ways.

We also discussed a major opportunity at the center of this transformation, “environmentally beneficial electrification,” the practice of powering with electricity appliances and machines that have traditionally run on fossil fuels. Electrifying transportation, water heating, and space heating can produce multiple benefits, such as cost savings and air pollution reductions, as electric grids continue to lower their emissions intensity. It can also improve management of the electricity grid, as considered in our second blog post. But that’s not all. As beneficial electrification claims a larger slice of the overall energy pie for electricity, utilities should find that it creates new business opportunities.

The Death of the “Death Spiral”

Not long ago, many considered power sector transformation to be more of a threat to utilities than an opportunity. Many early reactions were quite negative, like the alarming “death spiral” characterization.  The Edison Electric Institute (EEI) applied this term in Disruptive Challenges, a 2013 analysis forecasting that utilities could expect to face rising costs, revenue erosion, reduced profits, and slumping creditworthiness.

Such gloomy forecasts faded, however, as new opportunities for utilities began to surface, and the recognition that regulators charged with protecting the public interest would be unlikely to allow real “death spiral” risks to go unchecked. More positive views of power sector transformation rapidly emerged, often characterizing utility prospects as “new business models” and “growth opportunities.” We touch on three of them below.

New Opportunity – Electric Vehicles (EVs)

EEI’s 2014 paper Transportation Electrification – Utility Fleets Leading the Charge opened with an optimistic assessment, “Against the backdrop of slowing growth in the electric power industry, bringing electricity to the transportation sector is a huge, albeit long-term opportunity for load growth.” It goes on to recognize that, “Electrifying the transportation sector is a proactive, positive strategy: it enables significant economic and environmental benefits and new opportunities for consumer engagement.”

EEI also articulated a key metric by which the electric industry can gauge the electric vehicle opportunity: the market share of transportation fuel currently held by the oil industry. “[T]he transportation sector is the second largest consumer of energy in the U.S. (behind electric power generation), and yet 93% of the energy consumed in transportation today comes from petroleum.”

Piling on in early 2016 with Here’s How Electric Cars Will Cause the Next Oil Crisis, Bloomberg New Energy Finance concluded that, with electric car sales growing 60 percent worldwide in 2015 (and likely to maintain a similarly high growth rate for some time), electric vehicles could account for 35 percent of global new car sales by 2040. Bloomberg suggested that growth in this market could displace two million barrels of crude oil per day as early as 2023, and as many as 13 million barrels a day by 2040.

As these assessments and others show, electrification of the transportation sector represents an opportunity for utilities to seize market share. In addition, early movers will enjoy advantages in determining electric vehicle charging infrastructure models and fashioning rate designs for smart charging that improve load shape and customer engagement. Electrification promises to transform the current transportation market, enabling utilities to capture revenues currently spent on fossil fuels, enhance their ability to manage the grid and integrate renewable resources, improve environmental outcomes, and provide their consumers with new products and services.

New Opportunity – Space Heating

Electrification of space heating represents a similar business opportunity for utilities. Analyses by the American Council for an Energy-Efficiency Economy in 2016 and by the Electric Power Research Institute and the Natural Resources Defense Council in 2015 demonstrate that heat pumps, like electric vehicles, are far more efficient than their fossil-fueled alternatives.

No surprise then, that a 2014 Energy Futures Group meta study of 40 analyses and industry interviews found that the market for ductless heat pumps is growing 10 to 30 percent annually. Heat pump technology is often thought to be suitable only for moderate climates, but heat pumps now function well in temperatures below 0°F. So they can provide significant energy and cost savings to homeowners, even those with access to natural gas for space heating.

Rapid adoption of space heating technologies has load growth and grid management implications for utilities. The electricity grid needs to prepare for this additional load, particularly where policies target electrification of residential space and water heating to reduce emissions. Cultivating partnerships with companies that offer flexible loads (such as electric thermal storage) may also be worthwhile for utilities.

New Opportunity – Water Heating

Electric water heating­—for which there is a plethora of third-party businesses providing and managing loads—offers ready partnership opportunities. Companies like Sequentric, Mosaic, and Armada provide, condition, and aggregate grid-interactive water heating technologies. Power Over Time offers grid-interactive electric water heating controls alongside air conditioning controls and electric vehicle charging. Such companies recognize that appliances like electric water heaters have grid service values that can surpass their nominal purpose as a source of domestic hot water. For example, the Community Storage Initiative shows how water heaters can effectively serve as batteries—charging when power prices are low and saving customers money—until peak periods, when they can provide demand response and ancillary service capabilities to the grid.

Conclusion

Beneficial electrification of vehicles, water heating, and space heating facilitates cost-effective grid-management services and can provide significant emissions benefits. It also constitutes an emerging source of business opportunity for utilities, not only because it represents a chance to attain greater energy market share—it also enables greater customer engagement. Utilities stand to reap new appreciation and loyalty from customers by educating them about new electrification opportunities, and helping them with the purchase, installation, and servicing of these technologies. As it proceeds, beneficial electrification may implicate concerns associated with monopoly service versus competitive service, treatment of revenues, and other issues; such topics will be the subject of a later blog post in this series.