Utilities & Transit Poorly Positioned For Low-Carbon Transformation – Part 3

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Originally published on Medium.

This is the third in a series of articles detailing the challenges facing rapid transformation to substantial decarbonization by 2030. It was triggered by a scheduled conversation with a wandering marketing guru, Elisha Israel, who had just stepped off a high-speed train in Northern Africa.

He was seeking to understand the barriers facing sustainability entrepreneurs and transformation consultants, hence the reason he was talking with me. The conversation ranged over four major factors I saw as hindrances to rapid transformation.

• Inverted political power with cities at the bottom of governance structures
• Patchwork regulation
• Utilities and transit poorly positioned for transformation
• China being the only scaled manufacturer of many necessary technologies

The first article deals with the challenge that a majority of people, wealth generation, and climate solution requirements are within urban areas, yet urban areas were an afterthought in constitutions. They have limited ability to generate revenue themselves and are subject to interference from two to three levels of government and governance above them as they attempt to achieve carbon neutrality. Short and long term solutions such as declaring climate emergencies, unifying regional power and budgets for fixing problems, and the potential for urban cryptocurrencies were discussed.

The second article deals with the multiplicity of regulatory processes, requirements, incentives and fines at the federal, sub-national and municipal level that any initiative has to navigate rapidly. Short and long term solutions included approaches for corporations to create intellectual capital from places that are further ahead on the curve and bring it to places moving up the curve, creating an open-source repository of regulations between the US and Canada to optimize for many organizations and standardization of regulations between larger cities regardless of what city or state they exist in.

This article deals with a specific challenge within major organizations which will be seeing substantial change over the next 20 years, and organizations which are expected to drive those changes.

Let’s start with electrical utilities. In most jurisdictions, electrical utilities were granted natural monopolies, allowing them to effectively deliver required services to the citizens in the city or region with regulated quality and with little need for competition. They were considered an essential service with typically high startup costs and significant infrastructure requirements where competition would have led to negative outcomes.

This was and is the right choice for basic utilities, but it does lead to some challenges which will be front and center over the next 20 years. First off, as heavily regulated monopolies, they strongly tend to the bureaucratic and slower moving end of the spectrum. They have to balance a broad variety of priorities, deliver impeccable service, keep costs low and maintain the infrastructure necessary for keeping our lights on without us having to think about it.

But that means that rapid changes are slowed by organizational inertia. They are not optimized for rapid substantial transformation, they are optimized for a steady turnover of minor changes and have the ability to deal with emergencies.

There are two aspects to this. The first is that balancing priorities is a slow process, not a rapid process. Multiple reports are typically required, regulatory hearings are required and multiple levels of approval are required for transformative activities. Regulatory hearings are scheduled, so if a change misses one scheduled event, discussion and approval is often delayed until the next scheduled event, a standard occurrence in governance. This is fine for business-as-usual efforts. Utilities plan very large changes a decade or more in advance, with deployment times that run into years as well.

If a major change is brought forward today, it could be 15 years from now before it’s implemented and working well, under the usual timeframe utilities operate within.

But two types of transformation are hitting electrical utilities simultaneously and the requirement for change is much greater than usual. The first type is transformation of supply, shifting the characteristics of electricity provided so that new management approaches are required. While there is nothing about wind, solar, and water-supplied electricity that is difficult to manage, it is different to manage. Evidence from regions as diverse as Denmark and Texas make it clear that reliable supply of electricity is not challenged by renewables, but utilities need to balance supply and demand differently. This requires change, which isn’t quick in this context.

The second type of transformation is on the demand side. As we electrify everything, total societal energy demand will diminish as there will be less rejected energy, but electrical demand will increase substantially. Replacing gas furnaces with heat pumps is eminently sensible, eliminating burning methane to create CO2 and heat to shift to renewably supplied electricity. Replacing gas and diesel cars, trucks and buses with electric vehicles is eminently sensible, eliminating burning petroleum products which create heat, waste energy and create air pollution to shift to renewably supplied electricity. Both of those changes create a substantial increase in electrical demand which has multiple implications.

First, the end of the distribution grid must often be improved to allow higher voltage and amperage for the increased load. And the distribution grid has a lot of end points, so there’s a lot of work there, much more than is typically projected to be required in business-as-usual scenarios. Secondly, the demand points are often much higher with higher peaks, especially with the large loads of larger electric vehicles. While electric cars can be easily demand-managed by smart charging systems that balance charging across low demand periods overnight, that’s not true of electric buses or freight trucks necessarily. Third, there are multiple stakeholders competing for attention. Transit organizations (more on them later) are competing for attention for depot and en route MW-capacity charge points with neighborhoods experiencing increased penetration of home charging with public charging networks such as Chargepoint with businesses putting in charge points for their employees. Balancing relative priority across this space when staffed for business-as-usual moves adds and changes is challenging.

We can see this play out in Vancouver right now. At a sustainability conference recently, one of the panels was discussing electrification of transportation. The lead for electrification of buses from BC Translink, Dom Repta, was on the panel, as was the regional rep for Chargepoint. They talked about the challenges of gaining prioritized service from BC Hydro, which has the monopoly for Metro Vancouver, Translink’s coverage area.

Which gets to the second challenge for utilities. As regulated monopolies, quasi-governmental organizations, they are subject to political interference. Customers have remarkably high expectations of quality of service for incredibly low costs, and those customers are voters. The history of utilities is one of political interference in rates, sometimes due to placating voters around elections, and often for commercial competitiveness as well. This has led to a strong history of deferred maintenance, less robust than optimal distribution grids and equipment maintained long past its expected retirement data. When utilities gain political support to transform, they can raise rates to cover the cost of transformation, but this often leads to downstream political consequences for the party that gave them the support. We can see this in jurisdictions like Ontario, where a sensible government started the grid transformation in the early 2000s, electricity rates rose reasonably to the medium for North America, and in 2018 a populist party used that as a lever against the sensible party to invoke anger about the necessary rate changes.

The net result is that utilities are expected over the next 20 years to do three potentially mutually exclusive things: maintain impeccable service, keep costs incredibly low, and transform substantially in both how they manage supply and how they deliver to demand.

Some jurisdictions are better able to manage this than others. Germany has among the lowest wholesale electricity rates in Europe, in part because wind, solar, and hydro are typically cheaper alternatives. But it has maintained among the highest retail rates, in order to incentivize efficiency of use. This has enabled it to pay for the transformation and drive very useful behaviors among its customers. Thankfully, they’ve avoided the political whipsawing that Canadian and US utilities have.

The history of nuclear programs provides some insight. Currently, Ontario has about $20 billion of nuclear debt still on its books, despite the last reactor having gone live 26 years ago in 1993. The same government which amalgamated Toronto shifted the debt off of Ontario Hydro (at the time) onto general governmental debt as part of its focus on keeping rates low and competitive for business. The government that followed them in brought the debt back into the utility and started paying it down with a rate line that included transformation costs, ensuring that the utility paid its own way. They were, of course, punished for their sensible and conservative management of the utility in the election in 2018. The professionally-staffed utility able to deal with transformation is being dismantled by political interference again for populist gains. This is a two-steps forward, one-step back situation that will occur more and more across jurisdictions.

Similarly, the history of solar in North Carolina provides some insights to the challenges. Duke Energy has the monopoly there and runs a lot of gas plants, some nuclear, and a bit of solar. So naturally, when it wanted regulatory relief for one of its gas plants, the company pointed at solar as the problem. Duke has chosen to ignore wind energy entirely despite good offshore resources, and its 15-year plan has new gas plants coming on line out through 2033. This is not a utility interested in changing how it does things.

Solutions for utilities almost entirely hinge upon favorable governments supporting them with transformational funding and regulatory relief, as well as forcing them to transform to low carbon technologies. North Carolina is a special case, as the state is a conservative one, and fossil fuel lobbyists, Republican politicians, and energy regulators have a revolving door between positions. This is where federal renewable portfolio standards with teeth and incentives are required to shift many utilities off of legacy generation technologies and onto renewables.

Utilities are a hard challenge for transformation. Many of them want to transform, but are significantly inhibited by budgetary, regulatory, and staff issues. Others don’t want to transform as their stakeholders are quite happily making money under the legacy approaches.

But it’s the staff issues I’d like to draw out next. In this case, I’ll look at transit agencies, another natural monopoly. I’m consulting with one now, Translink in BC, working to help my client understand the major strategic risks and to identify paths forward. The agency is, as many others are, transforming its buses to electric drive trains and batteries. Understandably, given the urgency of the 2030 UN IPCC 1.5 degree deadline, it is attempting to achieve very high levels of transition by 2030, with remaining transition of its fleet through 2035.

The agency is running directly into the challenges of dealing with a strained electrical utility in terms of getting enough MWh of electricity to the right places for its bus fleets for the transition. There are regulatory requirements on it which prevent it from projecting technological progress in its cost case.

But the greater challenge is that it is excellent at what it does, which is to provide high-quality, day-in-day-out, year-round transit service with little transformation. Its last transformative effort ended a decade ago with the completion of the Canada line. That transformational buildout was done under a public-private partnership with the first plans in 1990 and is still operated independently of Translink under contract. That’s the kind of big, singular initiative that is relatively easy to address.

But Translink doesn’t have that option with its bus fleet transformation. The drivers are unionized, the buses aren’t automated, and there are hundreds of them to replace covering the 2.6 million people in Metro Vancouver. It can’t turn that over to a third party, but must address it in order to achieve its carbon emissions reduction targets.

It is an operational organization. It is staffed for operations. Its CEO is an operations-focused transit professional. It doesn’t have significant transformation staff or expertise in the organization. Yet these staff are being asked to plan and manage an accelerated schedule major transformation, one which affects every aspect of the organization, from routes, to scheduling, to driver training, to capital acquisitions, to fuel and electricity operational purchasing.

Transit staff are rightly proud of already providing effective, efficient, low-carbon per passenger mile transportation. And now they are being asked to radically alter their efforts in an accelerated timeframe to make emissions plummet further. There is a very understandable tension between these conditions.

The organization and its leaders are still getting their heads around the scale of the challenge. Without transformation expertise, they don’t even know what all of the risks and barriers to transformation are, never mind having patterned experience of leading practices to deal with them.

This is part of a challenge in transformation writ large. Typically, chief sustainability officers (CSOs) in corporations and organizations were tasked with or enabled to deliver relatively minor efforts, often related to replacing lighting with high-efficiency lighting, increasing insulation, or tweaking zone-based heating and cooling for cost savings and energy efficiency. But in many cases, these CSOs are now expected to be leading major transformative initiatives as the urgency of the problem becomes apparent.

In many organizations, transit among them, there is a mismatch between the people who have the necessary organizational knowledge and focus on sustainability, and the magnitude of transformation expected from them. They need support, assistance, and help. Budgets need to be increased.

This is a place where many consultancies are well-positioned to assist. Over the past two decades, for example, I’ve run multiple technology transformation initiatives in the fast-paced computer technology space with governmental and private sector clients. I’m not alone in this. Consultancies such as IBM, PWC, and KPMG provide these types of transformation services. But they aren’t well aligned with the new need for urgent transformation of transit businesses, in part because the transit businesses are in many cases unaware of how much help they require over the next decade or two. There’s a communication and opportunity gap in the market place right now.

And transformation consulting services are expensive. People who know how to drive change are rewarded at a higher premium than people who operate efficiently day-in and day-out. Transit budgets aren’t well aligned to the cost structures of consultancies like PWC and IBM. Once again, regulatory relief, budgetary relief, and the like are required from governments at multiple levels. Like the rate of electricity, raising transit rates substantially is problematic politically as socially at many levels.

Utilities and transit are expected to transform at accelerated rates over the next 10 and 20 years to achieve the carbon-emission reduction goals necessary for minimizing global impacts of climate change. But they will need substantial political and professional assistance to do so. They need to be supported and rewarded for both their operational excellence today and their transformation over the coming years.