A Renewed Sense of Optimism

A changing trend of environmentally friendly attitudes is becoming a global phenomenon. Duke Energy already has a seat at the table of forward-thinking utilities. As SVP of strategy and planning, Doug Esamann is the man responsible for assigning those attitudes and determining risks, and as the rest of the world carefully watches the US energy industry set an example and attempt to take a leadership role, this is no easy task.

“We’ve been in a long period of time where rates have been stable to actually declining on a real basis, and so we need to reinvest in our system”
-Doug Esamann, Duke Energy

Obama’s pledge to become a world leader in climate change is certainly not anything new – Asia is already ahead of the US in its SUV and PHUV manufacturing, France has a huge nuclear fleet and nationwide smart metering is being formulated in the UK – and as each country begins to up the ante in energy efficiency, the US president is certainly adding extra challenges to his already extensive list.

Strategizing in the fast-paced, ever-changing energy industry requires vast amounts of meticulous planning and a small amount of risk taking. Obama’s plans are not new; energy institutes have been researching the growing risk of CO2 levels for many years, and as both private and public awareness has been steadily increasing, 2009 is the year for implementation. But as targets continue to be set, both at a state and federal level, formulating company strategy is critical to ensure survival in the coming decades.

The thoughts and processes of Duke Energy have been formulated into a five-year plan, and Esamann is the man responsible for that planning. “I have all the web forecasting and forward-looking projections of customer demand, as well as commodity price forecasting and coordinating the effort at the company of developing the strategic business plan, ” he explains.

The ‘fifth fuel’
Energy efficiency is the flagship of Duke Energy, who has named it their ‘fifth fuel’ concept. Increasing renewables is a major part of the company’s strategy, but as Esamann explains, the greatest strategy for saving energy isn’t in building renewable plants, but by wisely using the energy that is already being produced.

“The fifth fuel concept, is energy efficiency being a much more significant part of the resource mix. In the past, we consider the other four fuels being generated through burning coal, nuclear or gas power, or renewable energy. These are the four ways in which you can actually generate electricity from those fuels.

“What we refer to as the fifth fuel is energy efficiency and what we’re trying to do through that is to change the paradigm that exists with energy efficiency in our industry. We get return on investment from investing in power plants and that’s a good thing, but in the past, our returns on our energy efficiency programs are really not calculated in the same way. We get our money back, we get our cost back, and as a result many utility companies aren’t really positioned well from a return standpoint to invest in energy efficiency.”

Energy efficiency has been coined the ‘fifth fuel’ – placing it on a level playing field with all other sources at Duke. The initiative, ‘Save a watt’, is an attempt to change the structure at the regulatory commissions so as to change the way in which energy is perceived.

“That has been a banner we’ve carried into the regulatory commissions at the various states and it’s very different than the way it’s been in the past, so it’s been a challenge to change that. The issues we’re dealing with today are in trying to change the regulatory paradigm that exists around energy efficiency,” he says.

Attitudes and trends towards energy efficiency are changing. Esamann notes the growing consciousness from Duke’s consumers regarding their environmental footprint, as well as a general understanding that energy prices are almost certain to rise.

“We’ve been in a long period of time where rates have been stable to actually declining on a real basis, and so we need to reinvest in our system,” he explains. “This will have an impact of potentially raising the cost of our product to customers and so that will drive a real desire, in addition to the environmental desires for customers to become more efficient, and we’re well positioned to do that.”

Wind generation
However, to ensure every watt is saved and efficiency maximized, Duke is also concentrating its efforts on renewable energy and is currently developing a number of wind power generation projects to add to those already operating. The wind generation business is commercial, rather than regulated, and the company are developing wind fields and selling the output of wind farms to various utility operators and suppliers, due to the increase in renewable standards upon all utilities.

“There are 30 states or so that have renewable portfolio standards already in place, and so many utilities are looking for the most economic alternatives to meet those standards, and wind has been a very strong player in those marketplaces. The challenge for that wind business is that like many renewables, it’s very geography dependent, so most of the development tends to be in the areas where the wind is mapped out as the strongest, which tends to be Texas and the upper Midwest – where the best wind fields are.

So for us here in our regions, either in the Carolinas or in our Midwestern states, our wind footprints aren’t nearly as strong, but we saw an opportunity to get into the renewables business in a large way through a couple of acquisitions and that created that pipeline of development for us that exists, and we’re excited as we see more pressure to develop more renewables for the United States,” says Esamann.

Hydroelectric
There is also a huge hydro capacity focus. Duke Energy is the second largest investor-owned hydroelectric operator in the US and uses its capabilities for the management of water resources. The company operates a dam in both North and South Carolina, which is used to create cooling lakes for its nuclear plants, as well as its coal plant. Energy generation such as this is worthless in times of drought, such as in 2007, and can change the way in which water is used.

“We’ve used the hydro a lot more as a way to ensure that we have correct lake levels and water levels for use of those lakes by the community, as well as for our own operations. So we haven’t put a premium on getting power from the hydro piece as much as we have in using it to manage the water resources that we have control of. At this point our expansion of that is really in very small chunks if at all, and so we really don’t see a significant opportunity to expand the hydro fleet that we have today.”

Esamann’s reason for limiting the importance of hydro within the five-year strategy is based upon his prediction that hydro is unlikely to have a large growth trajectory. He explains the challenges for hydro activity within the Pacific Northwest, such as fish and wildlife impacts; “I would expect it to be used more like how we’re using it, which is a way to help manage the water resources that are available to us in the communities that we’re in.”

Geographic challenges
He remains realistic about the implementation of renewables and those federal targets of increasing renewable usage are unattainable, again pointing to the challenges of geographic dependency. “One of the issues we’ve always had as a company is that the regions we serve aren’t really that rich in renewable energy opportunities,” he says.

“The wind studies rate the quality of the wind area by geography, and if you look at the Southeast and the Midwestern United States where we serve our customers, it’s not a very rich environment for wind; likewise solar. You see much solar patterns in the Southwest and, to some extent, the far Southeast, so solar is a reasonable opportunity for us in the Southeast but not as good economically in the Midwestern region for us.

“We are subject to state mandates right now of renewable standards. In North Carolina, we have to get to a three percent renewable standard by 2012. We don’t get to 12 percent in North Carolina from a required standpoint until 2018. And in Ohio, we have a standard that requires us to be at least one percent by 2012, and again we don’t get to a 12 percent requirement in Ohio until the 2020 timeframe and beyond. So that’s reflective more of how states are different in terms of their access to renewables.

Business strategy
Esamann’s strategy to reach such standards is the reason why he is focusing on energy efficiency from a primarily business perspective, focusing on ROI. He hopes a fourth of the target can be met through energy efficiency initiatives – the acquisition of renewable energy certificates from places that are not delivery specific to Duke’s territory, with the other half from sources within the company’s own service territory – reiterating the challenge of geographic dependency.

He notes the limited access to renewable energy sources and the affects of this for Ohio.
“The governors recognize that when they passed the legislation here, they basically said, ‘Well, you can get some of it from elsewhere and just show us that you’ve bought the certificates and that you’re helping support renewable energy.’ Ohio is a little different. Ohio is really focused much more on ‘We want renewable energy in Ohio.’ And they have a fairly aggressive target long term which creates challenges in and of itself.”

Esamann notes this as being the expense associated with renewables, as a pose to other alternatives, due to the circumstance of tax credits creating competition and increasing price, especially in particular areas where there is a lack of renewables, such as Ohio.

“For example, wind in Ohio is not a very highly rated environment for wind generation but you get less efficiency from the energy you get out for the investments that you make, and that makes it more expensive,” he noted. “So those things couple together to make it very challenging to try and meet some of the standards, and we work a lot on this. We work with lots of people. We put bids out in the marketplace to try to get developers to come in and it’s a pretty expensive proposition to implement all this as we sit here today and look at it.”

As the US continues its push towards a more self-sufficient state, with the advancement of technology, will it ever be possible for states to be completely independent of imports, or will those challenges be too great? Esamann thinks it’s possible, providing that the energy is sourced from the West Rockies and Texas.

Transmission
Of course, there is the issue of transmission that underlines the geographic dependency challenges. Using solar and wind sources from the West is doable; it’s the transmission of it to the East that is the biggest challenge. Rather than bringing all that energy across land, Esamann predicts that more than likely the energy will remain in its current market, and instead renewable energy will be produced in the East that is geographically available.

“Our approach is in engaging our customers and essentially using distributed generation on customer premises as a way to distribute these resources throughout our system, and we think that makes a lot of sense. You have to get the right relationship and economic terms negotiated with your customers and in certain cases, most cases, you have to get regulatory commissions to allow you to do that and because it’s more expensive, some regulatory commissions aren’t always happy to approve those kinds of plans,” says Esamann.

Smart grid
In order to make efficient Duke’s own transmission infrastructure, the company has begun deployment of its smart grid project, using technology to capably deal with their customers more closely and respond to the real time information on the system. David Mohler, Chief Technology Officer at Duke, has been configuring what is technologically feasible for the last few years, and ran a number of pilot tests before compiling a business plan with which to begin rolling out a large-scale deployment.

“We really started to get excited about the possibilities that the smart grid brings. It’s not automated metering – that’s only a part of it; the real value of it is the ability to get access to a lot more information. We don’t necessarily want to handle a lot of information but we want to be able to use it to better manage our system, to be more proactive about seeing failures in the system and reacting to them before the failure actually happens.

“We want to get consumer usage information so that we can work with consumers and allow them to, you know, get access to different value-added services that help them manage their energy cost and usage. We’re all about selling more energy, selling more kilowatt-hours – we’re a volume business. But we see an opportunity in the future through smart grid to actually become much more active, working with customers in trying to manage their energy costs and their energy usage in a much more efficient way.”

Duke currently has approval in the state of Ohio and is moving ahead with full deployment in the state, a plan consisting of three to four years, and resulting in full smart grid implementation. In Indiana, deployment is in hearing stages, and following lengthy discussions, the outcome looks set to be more than positive. North and South Carolina is continuing forward but at a much slower pace, due to some of the technology previously placed in North Carolina. Esamann notes the automated meter reading that was initially installed as a cause for slowing up the development, and as a result is now working closely to deploy the project.

“We really feel that this is a great way to improve reliability, to give opportunities for customers to be more engaged with us in terms of managing their energy and as prices go up, as environmental consciousness and awareness continues with customers, they will be seeking out our help on these things,” he says.

The future certainly looks promising for Duke Energy. Esamann explains that the next two to three years is heavily focused on tackling those environmental issues currently dominating utility targets and the world’s press. “We really want to keep the priority on getting energy efficiency – getting the regulatory regimes right, pushing out new programs to our customers.”

“We see a huge demand on the part of our customers for new products and so we want to keep working that issue and finding success in rolling out those products. We’ve got a couple of states where we’re scaling full deployment with smart grid, and with the technology we now have, this is enabled with a lot more energy efficiency So those are real focal points for us,” he adds.

Making renewable energy a reality is the underlining of Esamann’s strategy, although this is no easy task. The work of renewable suppliers is challenged by the promise of tax equity investors to fund the projects partnered with utility companies. The current global recession adds to this difficulty of financing their products, and so Duke is embracing the opportunity to form new partnerships and support those suppliers in the renewable sphere.

“We also want to move forward with the carbon strategy,” says Esamann. “We’ve done a lot of analysis on carbon and the implications for us, and how we want to manage carbon, and we’re certainly making efforts today to put us on a trajectory to reduce our carbon footprint. But we want to keep working on a more robust strategy and part of that will be dependent upon seeing legislation and what gets included in there, as well as what things will count towards things like offsets and that type of stuff.

“We’ve also been working a lot on nuclear and bringing it closer to fruition is really important for us. We have a site and have been working through the nuclear process here at the NRC and trying to get our permits. We need to go through the regulatory process in our states. But two to three years from now, we’d like to be in construction mode on a nuclear plant, but we need to keep working and clearing hurdles to make that happen.

“If you lay on top of that we still want to educate customers and other folks about their energy usage and what they can do. Transparency is always helpful to enabling those things to happen,” Esamann concludes.

Save a watt
Duke Energy’s approach reflects a new way of thinking about energy efficiency. It recognizes energy efficiency as the ‘fifth fuel’ – complementing coal, nuclear, natural gas and renewable energy. These are all part of the overall portfolio for meeting customers' growing need for electricity. The fifth fuel will help customers meet their energy needs with less electricity, lower cost and reduced environmental impact.

Five programs are proposed for residential customers and three are proposed for the large industrial and commercial segment. Additionally, Duke is recommending five pilot programs before expanding to more customers:

1. Residential energy assessments – including mail-in and online analysis and onsite energy audits
2. Smart $aver – including incentives to install compact fluorescent light bulbs and high-efficiency home heating and cooling systems
3. Low income services – assistance in purchasing energy efficient equipment and home weatherization
4. Energy efficiency education program for schools – including incentives for students performing online energy audit of their home
5. Power manager – monthly credits in exchange for Duke to cycle home’s air conditioning during peak demand

“We’ve done a lot of analysis on carbon and the implications for us, and how we want to manage carbon, and we’re certainly making efforts today to put us on a trajectory to reduce our carbon footprint”
-Doug Esamann, Duke Energy