As a partner in Bain & Company’s utilities and alternative energy practice, Matt Abbott has taken a deep dive into the guts of the modern day energy industry and come back with a few kernels of wisdom about what makes it tick—and what will make it both environmentally friendly and profitable, in the future. In his consulting work with utilities and other energy related service providers, both in the US and abroad, he says there is one perennial challenge: “It’s really, really hard to quantify the value of an electron.”
It may seem like a silly existential question, but it has very real world applications in terms of sustainability, says Abbott. “How valuable is it to you that your TV is on, that your toaster is on, that your microwave is on, etc.? It’s pretty valuable, but hard to quantify exactly.” Quantifying that value, in its innumerable facets and subtle dimensions, is a big part of Abbott’s role at Bain & Company, however, all in an effort to more quickly and deftly leverage the market toward more widespread adoption of renewable energy. Given the broad social mandate to reduce fossil fuel conception, new concepts of energy valuation are emerging, sparking a shift by utilities from selling energy to selling efficiency as their product.
Along with that shift comes a much greater emphasis on communication between energy providers and consumers, which is one of Bain’s areas of expertise. He says that utilities are going to great lengths to get people to improve their energy consumption habits, “almost pulling on different heartstrings if you will.”
Part 1: ENGINEERING THE BUSINESS ENVIRONMENT
gb&d: You have rare combination of expertise: a degree in mechanical engineering and an MBA. How did that come about?
Abbott: I’m from Michigan, and I grew up absolutely loving cars. So I studied engineering at the University of Michigan and had every intention of going into the auto industry in Detroit. I recall from one of my first interviews with a senior engineer at one of the automotive companies telling him that, ‘while the business side is sort of interesting, there is no way that I will ever leave the technical side.’ I didn’t mean that to be a lie, but it didn’t end up coming true.
gb&d: What sparked the switch?
Abbott: I had a strong desire to be involved with bigger decisions and broader influence, which planted the seed early on that I should complement my engineering background with strong business acumen. I also realized that I just didn’t believe in the direction that the automakers were heading in Detroit at that time—this was in the mid-1990s. From an environmental perspective, I didn’t believe in the perspective of zero sum game as it pertains to sales growth of more vehicles versus fuel efficiency. I felt that the auto industry wasn’t making the right trade-offs, and here we are 20 years later, and it’s just amazing how that has changed.
gb&d: Were there particular mentors who influenced your thinking at that time?
Abbott: After pulling the ripcord on engineering, I moved to California to pursue my MBA from the Anderson School at UCLA and was lucky enough to have a fantastic professor who taught a course on business and the environment. He was really, really passionate, and so that kind of kept the fire burning. I’ve always had a desire to strike the right balance between smart economic decisions and smart environmental decisions, which I didn’t find the first time I went into the workforce.
gb&d: You’ve been at Bain for more than 8 years now, so I take it that the passion for connecting economics with concern for the environment is something you did find among your colleagues there?
Abbott: That’s absolutely true. Admittedly when I ended up at Bain, I didn’t know that within the company, there was already a burgeoning set of experts who were super smart, hard working, and with whom I shared a lot of common beliefs. The nice thing is that they are located around the world, working in very different economic environments and different regulatory regimes. We get to learn a lot from each other, which has been invaluable.
PART 2: NEW NORMS IN THE BUSINESS OF ENERGY
gb&d: I imagine that it’s very gratifying to work as a consultant to so many different companies, because you get to contribute to so many different aspects of green technology and infrastructure. What are the areas of greatest emphasis for your clients currently?
Abbott: You’re right, there is a tremendous breadth in the work that Bain does, working across the value chain with a number of different players. With the traditional utility companies in the US, for example, the firm is helping them rethink their generation portfolio as the winds change and shift more towards renewables. We help them think about the investments that they need to make very far into the future around their generation portfolio. Moving closer to the end customer, we help utilities think through how to modernize the distribution grid in a cost effective manner.
gb&d: What are the forces driving the shift toward renewable energy?
Abbott: In addition to strong regulatory support in certain geographies, the biggest trend we see at Bain is that the costs of both wind and solar are rapidly coming down the experience curve. As more investment is placed into these technologies, more units are produced, and the big manufacturers are learning how to bring their costs down. Five or 10 years ago, most folks in the industry would have said that the only way that these renewable technologies are cost competitive is because of subsidies. And that would’ve been true. Now we’re getting to the point where, at least in certain geographies, they are getting very close to cost competitive on their own compared with traditional fossil fuel energy.
gb&d: Besides cost competitiveness, what else needs to happen to make renewable energy generation more widespread?
Abbott: As you can imagine, now that power is being produced in different places and in different ways than it used to be, new transmission lines, or certainly upgraded transmission lines, are required to bring central station renewable energy into population centers. In addition, distributed energy resources (e.g., distributed solar, storage) are being integrated into distribution grids. In the past, electricity flow was one directional—from smokestacks through transmission lines to commercial buildings, industrial facilities and homes. Now that generation sources are being located throughout the grid, as they are with rooftop solar, there are a number of modernization investments that need to be made, as well as changes to utility operational tempos.
gb&d: What geographic factors come into play with renewables?
Abbott: Utility scale solar makes a heck of a lot more sense along the West Coast and in the desert Southwest, where there’s quite a bit of high-quality sunlight. Wind makes a lot more sense in the Midwest, even into Texas and Oklahoma, which have very high quality wind resources. So you have to make sure that you’re making investments in the right technology in the right locations that fit with the natural resources of those areas.
gb&d: That makes sense—it seems like that is another big challenge to scaling up renewable energy.
Abbott: European countries, which invested heavily and early in utility scale renewables, are a good case study for that. There is a tremendous amount of sunlight in Spain, in southern France and Italy, and there is a lot of wind in northern Europe. However, because decisions were made on a country-by-country basis under different regulatory regimes, the investment in solar and wind turned out to be much different than you would expect. There is a lot more solar in Germany, for example, than perhaps is optimal; there is more wind in southern Europe than perhaps is optimal.
gb&d: What is Bain doing to help its clients avoid pitfalls like that?
Abbott: At Bain, we’ve been doing a lot of work with the World Economic Forum (WEF) to help participants think about the criteria to make the electricity sector much more investable. Billions and billions of dollars need to be spent to change how we generate and consume energy, so we have to think very carefully about how to optimize the investment. Our joint Bain-WEF study of Europe indicated that savings of a total of $140 billion could have been had if the investment in renewables was optimized across the EU. Those are real dollars, and if we think about how much money needs to continue to be invested, those learnings from the recent past are critical for getting it right in the future.
Part 3: TOWARD A SMARTER GRID
gb&d: Since we can’t turn on the wind or turn up the sun when we want to, how will energy infrastructure have to change in the future to deal with variable supply from renewables?
Abbott: According to Bain’s research and analysis of the industry, we think storage, essentially in the form of batteries, is going to be a massive change for the grid for multiple reasons. We need cost-effective storage options so the excess energy created by the solar panels during the day can be saved and used at night. It’s the same with wind—when it’s really blowing hard and you are generating more than you need, it’s a huge advantage to be able to save that energy. There are some pilots in place right now that are pretty exciting, but the technology is still expensive.
gb&d: There is a big push for better batteries for electric vehicles, too. Does this connect with the push for better grid storage options?
Abbott: Absolutely; I follow these trends pretty religiously from both an energy perspective and an auto perspective. We’re seeing some fascinating developments with the likes of Tesla and other companies that are investing heavily in battery technology and continue to achieve cost savings on a per unit basis, which will eventually allow grid storage to become much more cost-effective.
gb&d: So your stint in the automotive industry may be coming full circle! How do you see the link between the automotive industry and the electricity business developing into the future?
Abbott: The two industries are coming together more and more. There have already been a couple instances where we’ve helped utilities forecast what the uptake of electric vehicles might be in their service territories. And with things like Tesla’s Powerwall, there are already some early adopters who are interested in having batteries at their homes or businesses. We need to think about storing excess energy at the neighborhood level—I can imagine a future state where storage is much more widespread and really helps to capture all of the renewable energy we are generating so we can use it when we need it.
gb&d: That certainly seems like a massive shift in the business of energy supply. What are the implications?
Abbott: It takes so much energy to charge some of these electric vehicles, that it’s almost like putting another house out on the circuit. At the neighborhood level, the grid was designed to accommodate a certain number of houses, so if we all of a sudden get a significant adoption of electric vehicles all in one place, that puts a tremendous strain on the local grid. Utilities need to figure out how deal with that, both from an infrastructure investment standpoint and to make the grid more durable. There is also an element of customer behavior involved, such as how to incentivize customers to charge their vehicles at different points in time, so we’re not maxing out the load on that circuit.
gb&d: It seems like engaging consumers around energy usage in general will have to become more effective in order to reduce energy reduction goals. Do you also work with the customer experience side of the equation?
Abbott: Bain already works extensively with utilities on how they interact with customers. Historically, the products were pretty standard, and communications with customers were very limited. However, customers now have many more choices, especially around green options, and there’s a lot more interaction with customers on their energy usage. Providing data to customers, whether through an online presence or even through apps, is helping them become more informed and make decisions about their energy usage in a way that they couldn’t in the past. Some utilities are doing some really interesting things with games and competitions, for example, where you can look at an app that shows you how much energy you consumed last month compared to the same month the year before, along with the average energy consumption for residential customers in your area that have similar profiles. Are you doing a better job than they are to reduce your energy envelope? Or are they beating you?
gb&d: It sounds like creativity and psychology have as much of a role to play as technology and economics.
Abbott: Certainly. There are many interesting and technology-enabled ways to interact with customers to help achieve what most of us are striving for, which is lower cost and lower environmental impact. There are many different experiments out there that are becoming more mainstream, and I think you’re going to see more of that.
