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An interview with Larry Makovich

A: “Regulations have always focused on traditional electric service, which is often just measured in kilowatt-hours of energy consumed or megawatts of peak demand. When you think about the future and these expanding boundaries, regulators will have to think about regulatory structures that support efficiency gains.”

This is a long version of the interview.

DUKE ENERGY: What new technologies do you see coming into the energy space in the next five years, and what impact will they have?

LARRY MAKOVICH: Clearly, the technology that everybody is excited about is the smart grid. Duke Energy is among a number of power companies at the leading edge of this innovation.

The smart grid will reshape power demand, deliver greater efficiency and provide things like better security for homes and businesses. It will enable better predictive maintenance capabilities and improved environmental accountability. The smart grid is a near-term technology that is very promising, and it will be exciting to track it over the next five years and beyond.

As you look out 10 to 15 years, I think most people expect things like plug-in hybrid electric vehicles to establish a beachhead. I think people also expect a lot more renewables, particularly wind and solar energy. In the solar area, it is likely to be quite distributed with many applications for buildings and for new technologies such as thin-film solar, which could actually replace roofing shingles. As I look down the road, I think that the power supply side is going to get much more complicated and diverse as many new sources of supply get integrated into the mix and technology will be the driver.

DE: How does the smart grid work?

LM: Many people think the smart grid is just the application of advanced meters. It’s a lot more than that, and the biggest impact of this innovation isn’t going to come from just a single metering or measurement technology.

It’s going to be a combination of measurement devices, sensing technologies, information technology, communication technology and even things like nanotechnology and optimization software. I think that within five years a smarter grid will fundamentally change the way electric customers interact with their suppliers.

DE: We’re seeing many new and nontraditional technology companies entering this space. What impact do you see them having on the traditional electric power generation, transmission and distribution business?

LM: Using terms like “traditional power business” and “new entrants” often brings to mind the stereotype of a big bureaucratic regulated monopoly that’s going to be swept aside by new and more nimble competitors. That was the thinking 10 or 15 years ago when traditional utilities were considered dinosaurs in the new more competitive power business. However, that didn’t happen.

Rather than extinction, power companies were very capable of adapting and evolving. They remain the leaders in the power sector today. I see that continuing as these new entrants come into the business. They are having a positive effect because they’re creating a real sense of urgency on the part of everyone involved, including existing power companies to develop business plans, to take some risks, to seize the opportunities that are out there. Utility regulators are also noticing this as well.

In working with some of these new entrants some of the things that existing power companies have taken for granted quickly become obvious. You already have an organization with experienced and technically savvy people who have years of connections to customers. In fact, you own the customer relationship. You also have a deep comprehension of the complexity of this business and the challenges it faces, especially on the reliability and environmental fronts. I think that existing or traditional power companies are in a very good place to take advantage of the new opportunities that will continue to emerge as the boundaries of the power business continue to expand.

DE: More than a hundred years ago, when America was being wired for electricity, power companies were the “high-tech” companies of their day. Are you saying that could be the case in this century?

LM: The power business is a very technical business. It is a business that has seen dramatic examples of the introduction and refinement of new technologies through time, and that’s across the entire spectrum. Look at the way the transmission system has evolved with ever-increasing voltages to transmit power over greater distances. Look at how generation has changed. The introduction of nuclear energy in the 1960s and 1970s was a “game changer,” for much of the power business. Now the focus is on renewables, power storage and cleaner coal as the regulation of greenhouse gases has the potential to be the next game changer for the industry.

When you look at the people in power companies, and compare them to other businesses, you tend to have a far more technically oriented group of people—you see an engineering culture in the business. As such, I see new technologies as something that people in the power business are almost genetically inclined to go after.

DE: How can the traditional cost-of-service regulatory utility model survive? How can it be moved into the 21st century to promote the benefits of new technologies?

LM: Regulations have always focused on traditional electric service, which is often just measured in kilowatt-hours of energy consumed or megawatts of peak demand. When you think about the future and these expanding boundaries, regulators will have to think about regulatory structures that support efficiency gains. Importantly, regulations ought to evolve to provide the same kind of positive incentive to reduce power demand as they currently do to increase power supply.

For instance, regulators will have to come up with ways to deal with the economics of solar panels and other forms of distributed generation. This revolution will allow customers and the utility to rely on the grid as a virtual battery that they can put surplus power into when they’ve got it, and take energy out of when they need it. There are going to be new functions and new capabilities beyond the traditional products. Regulators will have to define and allow for cost recovery of these products and programs. This will ensure that power suppliers evolve and grow at the same pace as new technology development.

DE: We’re in a period of rising energy prices. We’re in a recession and Congress may pass climate legislation in 2009 or 2010, which will further impact energy prices. As an industry, how do we leverage technology while keeping prices affordable?

LM: It is a challenging environment. The real price of electricity has been increasing in this country for several years. There’s no one thing—whether it’s a push for more renewables, a push for more efficiency or a push to put a price on carbon—that’s going to be the straw that breaks the camel’s back. All of them are creating upward momentum for power prices. That puts a premium on the need for very intelligent federal and state rules and regulations to accomplish these goals efficiently and cost-effectively. Left uncoordinated, accumulated costs will drive up energy prices to levels that are politically intolerable.

DE: What kind of business model should a utility have to navigate this new landscape? In addition, in your view, how important is scale to promote new technologies?

LM: As business models go, one thing we’re learning is that the “shoestring startup” with venture capital behind it is something that’s created some important advances elsewhere in the technology space, but we’re seeing the weakness of that model during an economic downturn. When you think of the kinds of challenges in front of the power business today, particularly the long-run challenge of climate change, the need for substantial improvements in technology to address that single challenge in a pragmatic and cost-effective way is huge.

Therefore, when you look at the power business, size is important. Companies need the critical mass to sustain the experimentation and deployment of new technologies. They have to be big enough to partner with universities and labs to work together to do basic research and extend innovations into power applications. They need to team up with regulators to implement pilot programs to gain the experience and knowledge needed to roll out new technologies for all of their customers.

Companies that can help create clusters of basic research and development, engineering applications and regulatory support, and integrate them into their existing business, will be the ones that sustain themselves in the future. Research Triangle Park in North Carolina is a good example of one of these clusters. In addition, I know Jim Rogers and Duke Energy aspire to make the Charlotte region one of these clusters as well.

 

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BIO
Larry Makovich
Cambridge Energy Research Associates
Vice President and Senior Advisor
Cambridge, Mass.

Larry Makovich is a highly respected expert on electric power market structures, demand and supply fundamentals, wholesale and retail power markets, emerging technologies, asset valuations and strategies. He directs CERA’s research efforts in the Global Power Group and is an authority on electricity markets, regulation, economics and strategy.

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