Disruptive Technologies

With the collapse of energy trading and the slowing of retail deregulation, energy
and utility companies are going back to the basics. They are focusing on taking
additional costs out of the business, increasing asset productivity, and shoring
up the balance sheet by selling non-core assets and exiting non-core businesses,
such as energy marketing and trading.

Meanwhile, the stock prices of energy companies are slowly recovering, having
lost more than $300 billion in market capitalization. The current focus by most
energy and utility management teams comes as no surprise. All of these actions
are necessary to position their companies for the next wave of growth through
acquisitions or ventures into unregulated activities.

The traditional focus in the regulated environment was on asset-intensive businesses
involving exploration and production, generation, transmission, pipeline, and
electric distribution. However, two disruptive technologies are gaining momentum
and acceptance: nanotechnology and the hydrogen economy.

These technologies are being promoted and explored primarily by non-utility-industry
giants and, when fully deployed, will significantly alter the energy and utilities
business as we know it. While the full impact of these technologies will not
be realized for seven to 15 years, the impact needs to be assessed and acknowledged
today to facilitate long-term decision-making.

Nanotechnology is the science of building previously unfathomably small things.
It is taking pervasive computing to the atomic or subatomic level. Think of
invisible-to-the-naked-eye special-purpose sensors in everything, wirelessly
sending their status and the health of whatever they are watching to a remote
monitoring system.

This monitoring system, using artificial intelligence, watches for trends and
patterns that alert other systems and operators to the onset of problems much
more quickly than previous systems could have detected the beginning of a system
or component failure.

The hydrogen economy involves replacing our dependence on hydrocarbon-based
fuels with technologies that run off pure hydrogen. Hydrogen is an extremely
abundant renewable energy source easily separable from water, which covers 70
percent of the earth. Replacing hydrocarbon fuels with hydrogen is less harmful
to the atmosphere (no air pollution), supports energy independence, and proliferates
the equivalent of the personal computer revolution in the generation of electricity.

In the remainder of this paper, we look at these technologies in more detail,
including who the market-makers are, when these technologies will begin to significantly
impact the energy and utilities industry, and what some of those impacts will
be.

Nanotechnology

Every day, nanotechnology advances are shrinking the size of motors, machines,
and sensors. Startup companies are commercializing these technologies, discovered
in research laboratories, by building the infrastructure to construct the tools
necessary to assemble these miniscule machines.

Traditional instrumentation and control vendors are pioneering the all-digital
sensor. This sensor is self-calibrating, automatically compensates for set-point
drift, and is self-diagnosing, meaning that it will place a trouble call to
a technician whenever problems are predicted or encountered. Original equipment
manufacturers are finding innovative ways to embed these miniature sensors in
such devices as pumps, motors, transformers, valves, circuit breakers, and compressors.

Think of the applications for this technology in the energy and utility industry:

• New instrumentation that is all-digital, self-calibrating, and set-point
compensating could send its output signal to a digital communications bus. This
will be the end of the 4-20 milliamp and 0-10 volt DC analog control circuits
that have dominated the process control business for the past century. Deployment
of this new generation of instrumentation and control will increase efficiency
by deploying technicians to more valuable activities.

• Instrumentation small enough and specifically designed to fit inside
equipment to monitor the health of the equipment itself or of specific aspects
of the materials used in a piece of equipment, such as metal, bearings, seals,
fouling, insulation, and oil. The dream of self-diagnosing equipment capable
of “calling home” when it is in need of repair can now be realized. This technology
enables the often-elusive, condition-based maintenance model that the industry
has been pursuing for years. Hitachi has been pioneering these capabilities
in its substation of the future since 1997.

• Miniature sensors deployed throughout an entire transmission, pipeline,
or distribution network. Utilities will have access to data and information
previously unavailable to them. Operations decision-making will move into a
realm previously thought unattainable. Real-time status on the integrity of
a pipeline system will be available, making compliance with the recently promulgated
“high consequence area” pipeline integrity rules significantly easier. Real-time
energized status of distribution feeders will virtually eliminate the need for
customers to report outages to the call center and will speed outage restoration.
Further, phase-balancing and loss is easier to manage and helps improves overall
operation of the distribution feeder network.

When you extend this to the utility’s customers, machine-to-machine decision-making
becomes a reality. Imagine a world where you program your preferences into the
machine, (e.g., a dishwasher or washing machine) and it looks for the least
expensive time to run while satisfying your preferences. The implications for
the industry as we know it today are considerable:

• Every portion of the value chain (generation, transmission, distribution,
energy marketing and trading) must be capable of sending real-time pricing signals
to end-use machines.
• Sub-metering at the machine level may obviate the need and usefulness
of automatic meter reading of the premises meter.
• Set-top boxes or gateways must be revamped to include point-of-sale register
information so that each set of transactions for the device can be captured
by an independent arbitrator.
• A new-generation customer-information system must be developed to handle
the billing and customer-care aspects of machine-to-machine decision-making.
For example, imagine a call to a customer service representative where the customer
says he did not request that the dishwasher run on-peak. As a result, he wants
credit for the difference between on- and off-peak run rates on washing dishes.

The Hydrogen Economy

Major automobile manufacturers have endorsed hydrogen-based fuel cells for
the propulsion system of electric cars. Several major oil companies have committed
to replacing their heavy reliance on oil with hydrogen. According to “The Futurist,”
fuel cells will be generating 90 gigawatts of power by 2007.

In his recently written book, The Hydrogen Economy, Jeremy Rifkin presents
the thesis that hydrogen has the potential to end the world’s reliance on oil
and will stop global warming by dramatically reducing carbon dioxide emissions.
Rifkin further asserts that because hydrogen is so plentiful and exists everywhere
on earth, every human being could be “empowered,” leading the first truly democratic
energy regime in history.

Iceland has made a commitment to be the first country totally powered by hydrogen
and free of dependence on fossil fuels. Everything from cars, trucks, buses,
power plants, and fishing fleets will use hydrogen as the primary fuel. Already,
automakers and oil giants are steaming toward Iceland’s shore to participate
in making this vision a reality.

EPRI has a vision of a continental SuperGrid that delivers electricity and
hydrogen in an integrated energy pipeline. The SuperGrid would use a high-capacity,
superconducting power-transmission cable cooled with liquid hydrogen produced
by advanced nuclear plants, with some hydrogen ultimately used in fuel cell
vehicles and generators.

More recently, the Department of Energy issued the National Hydrogen Energy
Roadmap, the path toward an enhanced and cleaner energy future for America,
in November 2002.

The combination of these trends could make significant contributions to the
gross national product and our lifestyles by 2010. For example, consider the
old utility view of the electric vehicle as contrasted to the new.

In the old model, the owner of a battery-powered car plugged the car into a
battery charger that represented a fairly large residential load. In the new
model, the owner of a fuel cell-powered car plugs the car into the home circuitry.
The car then becomes the non-polluting electricity source for the entire home.

The impacts from this are widespread. Transmission and distribution utilities
may become necessary only for standby and backup service instead of primary
service, resulting in significant changes to current utility business models,
including:

• The creation of stranded costs as the existing infrastructure is bypassed.
• Reliability takes on a different meaning.
• A company’s basis for recovering costs shifts from meter-based to more
of a fixed charge, like local phone companies.
• Performance-based rates are rethought.

The hydrogen economy is poised to do to the energy and utility business what
the personal computer did to the mainframe computing industry 20 years ago.
We should look to the IT industry for lessons learned for this important industry
trend, and executives should ask themselves what role their company will take
in deploying distributed generation and responding to the challenges it presents.

The Future

The technologies discussed have been around for several years. What is different
today is that major players external to major industry suppliers and participants
are taking significant economic stakes and betting their futures on the successful
and early deployment of these technologies. Nanotechnology and the hydrogen
economy are in a dead-heat race at this time. Each will disrupt the energy and
utility industry in its own right.

Consequently, the questions that you and your company should be asking are
not, “Will this affect our company?” but rather, “How will it affect us? When
will we be impacted? And what role do we want to play?”