The electric power industry in the United States is now in the midst of utility deregulation, and many companies are reviewing and refocusing their research and development efforts. In the past, R&D has proved critical for keeping U.S. electric rates among the lowest in the world and maintaining the high reliability of the U.S. electric grid, as well as fostering improved system efficiency, safety, and cost-effective environmental control. In the regulated market, public utility commissions preapproved R&D funding for inclusion in the electric rates charged to customers.

Although deregulation plans vary from state to state, a common thread for most of them is that highly regulated power companies will be restructured into more loosely connected businesses, partially unregulated to allow for competition. For the most part, conventional generation will operate in a competitive, deregulated environment, emphasizing least-cost production and wholesale marketing of electric power as a commodity. Transmission and distribution (T&D) companies, however, will remain largely under the governance of utility commissions. Deregulation also paves the way for a growing energy-services segment of the business, with unregulated businesses providing value-added services to meet specific customer needs—such as reducing energy costs through the application of advanced electrotechnologies and building controls.

In preparation for impending restructuring, electricity enterprises have pared budgets to ensure that they will be low-cost providers. This situation extends to R&D, where most new projects have a near-term focus, aiming for benefits within two to five years.

Fortunately, deregulation opens up many new opportunities for utility R&D, which becomes even more important in a competitive market. Companies that plan to be leaders in the years ahead will need to increase their R&D and technology-demonstration investments to levels more in line with other competitive, technology-intensive industries. Over time, this will require an increase in R&D investment from less than 1 percent of revenues to perhaps more than 2 or 3 percent.

For example, new technologies are being developed and applied to help customers implement cost-saving electrotechnologies and energy management systems. One example is the development of real-time-pricing (RTP) control systems, which allow large commercial and industrial customers to modify the control of their electrical loads automatically in response to changes in their provider's electricity prices. The New York-based Empire State Electric Energy Research Corp. (ESEERCO), an electric-energy R&D consortium established by New York State's electric utilities, collaborated on such a project with Honeywell in Minneapolis; the New York electric utility Consolidated Edison; the Electric Power Research Institute (EPRI) in Palo Alto, Calif.; and the New York State Energy Research and Development Authority in Albany.

This coalition demonstrated an RTP system at New York's Marriott Marquis Hotel as part of a two-way communications and control system that automatically sheds and shifts electrical-equipment use in response to real-time prices. The system receives RTP rates from Consolidated Edison and operates the hotel's ventilation and lighting systems in the most cost-efficient manner. Overall, the hotel estimates a savings of about $1 million since the system was installed. (The project recently received an R&D 100 award for innovation from R&D Magazine.)

Increased competition also means increased stress on the transmission system, as power transactions become more complex due to open access and increased "wheeling" of power across former service territories. R&D is already being geared up to solve problems in this area. For example, a three-member team—ESEERCO; the New York Power Pool (NYPP) in Guilderland; and ABB Power T&D Co. in Cary, N.C.—developed an operations and planning software package that helps system operators and planners make faster and more-accurate grid-management decisions, such as the optimal, safe dispatch of power from an increasingly diverse set of generation resources (including nonutility facilities). The NYPP is testing a beta version of this software, and estimates the tool will save $20 million annually. A more complete commercial version is expected by June 1998.

Competition also means that power plants will need to operate under much more demanding conditions. For example, many facilities designed to operate under base-load conditions will have to be cycled as they bid to sell power into transmission grids operated by independent system operators. A project under way at Central Hudson Gas & Electric Co.'s 600-megawatt gas- and oil-fired Roseton Unit 2 in Roseton, N.Y., is of great interest. At this facility, Central Hudson, ESEERCO, and EPRI are demonstrating very-low-load operation (well below 25 percent of the unit's full-load rating), with an associated combustion airflow below the normal minimum level of 25 percent of full-load airflow.

R&D is helping to tackle challenges associated with cycling and low-load operation at Central Hudson Gas & Electric's Roseton Unit 2 in Roseton, N.Y.

Establishing procedures to demonstrate safe, low-airflow operation is a key aspect of the project, as is verification of the increased efficiency and lower nitrogen oxide emissions associated with low-airflow operation. This may sound like a straightforward endeavor, but it is being approached cautiously with advanced analytical tools that include video monitoring of flame conditions, internal probing of furnace gases, and advanced computer modeling to estimate the expected effects on furnace conditions. An important objective is to provide both the insurance carrier and the National Fire Protection Association enough test data to demonstrate that extended operation at low-load, low-airflow conditions can be done safely.

A close look at the emerging funding mechanisms for utility R&D reveals several trends. Certain types of projects, such as those focusing on T&D system improvements, will most likely continue to be funded in the traditional manner: as part of utility-commission-approved expenditures that are built into the rates charged by functionally separate T&D companies remaining under regulatory overview.

Technology development and demonstration investments in the areas of fossil-fuel and renewable power generation as well as customer-oriented technologies, however, will be made at the discretion of managers within these newly deregulated sectors of the industry. As in any competitive industry, such funds will come out of earnings; they will not be built into guaranteed customer rates as in the past. For a number of companies going through restructuring, their functionally separate generating companies will likely have full control over power-plant R&D investments in the near future—possibly within one to three years. History shows that most plant R&D investments target practical improvements, such as the development of lower-cost environmental-compliance options and improved methods for early crack detection. Because more than 80 percent of U.S. utility fossil-fuel plants are more than 20 years old, such investments will remain critical for maintaining the continued viability of many facilities and preventing the creation of new "stranded assets."

Many electric utilities are grappling with how to restructure their R&D function as deregulation progresses. One approach is to allow the centralized R&D staff to continue to support the regulated sides of the business (such as the T&D system) in a conventional fashion using rate-based R&D budgeting and planning. This staff may also support the unregulated business units on a contract basis. Once again, the challenge will be in selling the value of R&D services to the unregulated operating companies. A number of utilities have opted to position their R&D function within newly formed business-development divisions that seek out new business opportunities—many of which involve equity ownership of new technologies, processes, or services for the power industry.

The benefits of collaborative R&D programs are well documented, including the prevention of duplicate efforts, reduced risks to individual project partners, and greater ability to undertake large projects that solve industrywide problems. Organizations such as ESEERCO and EPRI have been responding to the changing needs of their utility clients. In 1995, for example, EPRI began offering its members the ability to direct their dues into any of a wide array of target areas, rather than buying into large program areas at a predetermined level. For 1998, its members can choose from more than 100 separate technical targets. In addition, the organization has greatly reduced the minimum levels at which companies can buy into its R&D program, and is establishing for-profit subsidiaries to provide new services and to enable groups of members to invest in proprietary, competitive technologies.

ESEERCO has also increased members' ability to choose from its technology portfolio to best match their strategic objectives. Since 1996, ESEERCO's members have been able to target their member dues to individual projects, selecting the best opportunities as they emerge. ESEERCO's new approach also enables subsets of its members to use the organization to undertake proprietary projects. Both ESEERCO and EPRI have opened their memberships to the many different players that will emerge in the deregulated marketplace.

In the belief that deregulation will cause a funding downturn in programs considered to have public benefits, state public utility commissions have begun implementing plans for charges that cannot be passed on to customers; such fees will be used, at least during a transitional period, to fund public-benefit-related programs, including those dealing with support for low-income customers, end-use energy efficiency, renewable-technology support, and environmental programs.

In September 1996, deregulation legislation in California established a plan to collect more than $1.6 billion through California's electricity rates over the next few years to support various public-benefit programs. This total includes approximately $872 million for energy-efficiency and conservation programs; $250 million for research, development, and demonstration "not adequately provided by competitive and regulated markets"; and $540 million for "operation and development of existing, new, and emerging renewable resource technologies."

The program, now being managed by the California Energy Commission (CEC) in Sacramento, will collect these funds from ratepayers from 1998 to 2001 via a "nonbypassable charge" built into customers' electric bills collected by the wires companies (i.e., utilities controlling the transmission and distribution of electricity). The CEC program will provide funding to selected ongoing utility efforts that might be threatened as a result of the transition to competition. Subsequent steps to be taken by the CEC include seeking assistance in developing a more detailed R&D program plan, issuing two general project solicitations (one in late 1997, the other in mid-1998), establishing and identifying centers of excellence that target solutions to specific industry sectors (such as developing more-efficient refrigeration systems), and issuing a targeted project solicitation in late 1998.

Public utility commissions in New York, Massachusetts, Rhode Island, Michigan, and elsewhere also have been grappling with implementing public-benefit programs. To date, California's plan appears to be the most aggressive in terms of program funding per megawatt-hour of power delivered. New York's Public Service Commission has proposed a "system benefits charge" to be capped at 1 million kilowatt-hours starting in 1998. The charge will likely vary depending on the service territory. What percentage of this charge would be allocated for public-benefit R&D programs is not yet clear. (At press time, a decision was about to be made concerning this charge.)

Nationwide, exactly how planned public-benefit R&D programs will be implemented and administered remains unclear as well. However, there appears to be strong support for an integrated approach, whereby industry stakeholders and the public will have the opportunity to provide input about what types of programs and projects should receive funding.

Recent years have seen a turnaround in overall U.S. R&D spending, according to joint forecasts by R&D and Battelle Laboratories in Columbus, Ohio. The Battelle report projects overall R&D investments for all industries—which have been on the rise over the last few years—to increase again in 1997 by 4.2 percent, as part of a trend that will probably last into the next century. In part, this reflects the fact that, as the limits of restructuring and downsizing are reached, continued growth in productivity and profits can only be achieved through further targeted investments in R&D and new technology.

In this setting, collaboration represents a cooperative strategy for competing more effectively. Individual companies will compete fiercely in the marketplace to determine how markets are divided, but collaborative R&D increases the size of the pie for everyone by creating new opportunities.

Paul J. Torpey, a past president of ASME, is the executive director and Edward A. Torrero and Steven Collins are senior research associates at the Empire State Electric Energy Research Corp. in New York.


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