In the Media

New and future consultants who wonder what it takes to thrive in the energy sector received a crash course during the presidential campaign. Incentives for alternative generation technologies, market mechanisms for controlling carbon and other emissions, the challenges of long-term nuclear waste disposal to support of new nuclear generation, offshore oil and gas exploration and energy security were hotly contested topics in the campaign, points out Mike Rutowski, service group leader, financial and strategic advisory in Navigant Consulting's energy practice.

These topics aren't going away any time soon, judging from the state of oil and gas (and coal) reserves, jittery commodity prices, an accelerating nuclear energy renaissance, increasingly powerful national oil companies abroad, a steady supply of new state and federal regulations, the industry's declining supply of seasoned workers and leadership talent and the ever-growing demand for more climate-friendly energy production and consumption.

What this means for consulting firms and practices that serve the energy sector is not only more work, but different work. Energy practices must address more complex and increasingly global issues while adopting a more "integrated perspective," to borrow a term from Robert Zabors, a partner with Bridge Strategy Group, which was sold to India-based technology company Satyam earlier this year, in large part, to continue to broaden the consulting firm's global reach.

David Fornari, national managing director of Deloitte Consulting's energy and resources practice in the U.S., says that his practice has "evolved in a fundamental way" in the past two years. He and his team now examine the entire "subject of energy" when examining client issues; doing so requires a broader perspective than evaluating issues as contained to the industry. "When we think about the subject of energy, it naturally begins to take us to the interplay of other sectors [within the energy industry] and other industries."

If, for example, an energy client wants Deloitte's help in evaluating the production of an ethanol refinery in Ohio, Fornari says his team would work with agribusiness experts in the firm's consumer and industrial products practice and with public-sector colleagues intimately familiar with the state's politics and its balanced growth campaign.

The integrative nature of the challenges facing energy-industry clients was driven home in late August when New York State Attorney General Andrew Cuomo and Minneapolis-based Xcel Energy reached an agreement in which Xcel will detail in its SEC filings the potential financial impact of current and future legislation (related to climate change) as well as material financial risks to the company related to global warming. Billed as a "first of its kind" agreement, the new disclosure may soon be adopted by other energy companies.

A consultant working with Xcel on the matter would have needed to possess a sharp understanding of several technical subjects, including energy production, financial reporting, climate change, numerous current and potential regulations affecting Xcel, and the Martin Act — a 1921 law that gives New York attorney generals the unique ability to, among other things, extract concessions from companies that do business in New York.

"The industry is much more complex and global now," notes Filsinger. "For example, you can't look at commodity pricing in the United States only. You have to look at global commodity pricing."

Challenges Are Opportunities

Fornari also asserts that many of the industry's challenges are opportunities. At the most recent Corporate Eco Forum, a number of intriguing start-up companies drove this point home. "I came across a company that takes the carbon dioxide produced from power plants and uses it to make cement," Fornari recalls. "You have greenhouse gasses to deal with. One view is capture and sequester. However, there may be other opportunities to incorporate [the captured gasses] into another industry's supply chain."

Tossing and Turning?

What's keeping executives at the country's publicly traded electrical utility companies awake at night? They're worried about aging workers and equipment, climate change, new regulations and the reliability of the grid, according to the management consulting division of Black & Veatch Corporation, which conducted a recent survey identifying the following as the most important issues among large utilities:

• Aging Work Force
• Reliability
• Environment
• Aging Infrastructure
• Regulation

Other energy industry issues pose the similar sort of risk-reward dynamic that helps fuel the need for consulting services. Coal represents the country's largest energy reserve, yet its traditional means of production creates greenhouse gasses. Alternative or renewable energy sources, such as wind, promise opportunities for certain companies and geographies, yet transporting the wind power from its source (e.g., remote West Texas) to its area of need (e.g., the Houston metro area hundreds of miles east) poses significant challenges.

"Many states are looking at alternative renewable energy in part because they see economic development opportunities," Fornari reports. "These governments want to create green-collar jobs, whether it involves the manufacture of equipment and material for alternative renewable energy or the deployment of alternative renewable energy [production] in their states."

The primary issues confronting the energy industry can be loosely categorized into two areas: uncertainty (about supply and demand, and pending regulation and policy changes) and reliability (of the country's current and future energy infrastructure and the workforce as baby boomers retire in large numbers). Each of these issues affects commodity prices, which in turn affect public perception, political reaction and regulatory changes (which often, in turn affect commodity prices).

Rutowski identifies the top concern among Navigant Consulting's customers in the electric power and natural gas sectors as "uncertainty over fuel costs and regulatory effects such as future carbon and other environmental regulations, and their resulting impact on energy markets and generation assets." PA Consulting's Filsinger also points to the volatile commodity price environment as one of the top two concerns among PA Consulting's energy customers. Zabors, too, lists increasing costs as a top challenge among Bridge Strategy's energy customers. He points out that while rising costs are currently driven by fuel and commodities, electric and natural gas utilities will soon face costs associated with grid modernization, emissions control and renewable supply.

Interrelated Issues

Aside from an ongoing procession of new rules and regulations, the specific challenges/opportunities that leaders of energy consulting firms and practices say consume the most attention from clients in the oil and gas, power and utilities and mining (primarily coal) sectors include the following:

Energy Supply and Security

As the early phase of the presidential campaign demonstrated, the country faces a whopping question: Where is the future supply of oil and gas coming from? The emergence of new national oil companies and the growing strength of existing national oil companies pose new challenges, particularly to the "super-major" oil companies in the U.S. who have felt their leverage with these entities decrease due to growing competition for oil from China and elsewhere. "The dynamic with the national oil companies is becoming more important," Fornari notes. "The interplay [with these entities] from business and exploration and production standpoints represents huge challenges." The growing need for energy security, along with environmental drivers, has helped spark a nuclear renaissance at home and abroad. "Nuclear generation is critical to the future of energy independence," notes Filsinger. There are currently 104 nuclear reactors in the U.S., with 12 planned for construction and another 20 proposed. Russia currently has proposals for 25 more nuclear power plants while China has proposals for 76 new plants.

Environmental Issues

"Environmentally based issues are probably the number one challenge facing the overall energy industry right now," says Filsinger. "Carbon dioxide issues and greenhouse gas emissions are affecting everyone, from oil and gas producers and electricity producers to energy consumers. And we're seeing a huge impact in customer behavior." The demand for alternative, more climate-friendly fuels and energy sources is soaring. Oil and gas companies (along with agricultural businesses and even some bio-technology companies) are exploring, and hoping to exploit, bio-mass, corn-based ethanol and cellulosic ethanol among other alternatives to gasoline. Wind has emerged as a promising alternative to coal and natural gas, despite serious challenges in harnessing and transmitting wind power. 

Energy Efficiency

Hailed by many utility executives as the fifth fuel, energy efficiency enjoys widespread popularity because of its ability to lower consumer bills, limit capital expenditures and reduce greenhouse gasses. The demand for greater energy efficiency has been driving major smart-grid and "utility of the future" initiatives in the utility sector for several years. A prime objective of these efforts is to give businesses and consumers more control, through access to real-time pricing and usage information, about their energy spend. Bridge Strategy Group is "very encouraged by the rapid adoption and deep commitment of utilities to energy efficiency and smart-grid implementation," says Zabors. "We're doing work in all aspects of this — corporate strategy, initiative alignment, program development and implementation, [as well as] community and regulatory strategy." Zabors also believes that the success of current energy efficiency programs will create a future need for utility companies to deal with decreases in top-line revenue.

Energy Infrastructure

There are troubling questions about "the ability of the existing electric grid to handle a changing demand profile and new intermittent generation production technologies," reports Rutowski. Fornari agrees, noting that the energy infrastructure in power and utilities "is probably one of the greatest challenges we have." Like the workforce that maintains it, the power grid is aging and in need of rejuvenation. The grid also needs to be adapted to meet the needs of transporting electricity as additional renewable sources of power generation come online. "Many of these issues are interrelated," Fornari says. "It's hard to file them specifically under one category of challenge or opportunity. They all tend to intersect."

Policy Pressure

There is one area where most of these interrelated issues tend to coalesce — though not always judiciously: public policy. "We have a lot of policies that may restrict or dis-incent companies from addressing these issues," Fornari states. "I think we need to have more encouraging or 'incenting' policies." For example, at press time, the renewable energy tax incentive was due to expire at the end of this year. "The mere fact that it may expire restricts companies willing to invest," Fornari continues. "I think we need to have a little more of a predictive policy on some of these topics so we can focus and we can encourage the investment in the areas that we think are important for the industry, the country and the planet."

Federal and state legislators and regulators are not the only ones to blame for a lack of foresight. A September BusinessWeek article complained that American voters "have the attention span of a hummingbird" because a sudden drop in oil prices had immediately reduced the importance of energy policy as a campaign issue. For their part, each campaign seemed reluctant to ask too much in the way of deep thinking from citizens.

The campaign rhetoric illustrated "the lack of coherent and comprehensive policy the nation has experienced for decades," says Zabors. "It seems like the two themes should be simple: reduce exposure to petroleum, and reduce [greenhouse gasses] while getting more out of every fossil fuel through higher efficiency." Instead the candidates rarely probed beneath the slogan-friendly surface of a patchwork of positions. Until a comprehensive energy policy is put forth, energy companies will be left to contend with a growing patchwork of regulations related to emissions, energy efficiency and renewable energy. In the utility sector, a growing number of oversight jurisdictions require them to greatly increase the portion of renewable sources in the power portfolios over the next several years.

First Impact

The growing supply of challenges, opportunities and uncertainty has helped consulting firms. Navigant Consulting's energy practice is rapidly growing, particularly in the areas of renewables, energy efficiency, markets, transmission and clean technology, for example. "The focus on these issues has created an increased demand for consultants who have depth in these issues rather than general business consultants who are part-time participants with these key issues," says Rutkowski, who also notes that the practice has been recruiting aggressively in the past year.

Navigant and other firms say they look to hire energy consultants who posses global expertise (or, at a minimum, a global perspective) and an ability to work across sectors and industries. "If the U.S. practice or the European practice serves clients globally, you need people who have the ability and willingness to deal with the cultural and language issues that may emerge in serving the industry," says Fornari.

He also points to a change in how energy consultants work within Deloitte. "In the past we might have said our people in the utility sector only work in the utility sector," he explains. "Now, we are seeing that our people are able to cross sector lines because this is about the subject of energy vs. knowing everything you need to know about power utilities, oil and gas or coal. I think that changes our recruiting model and it changes the types of people we believe can be successful in our practices. This is becoming a very complex global business."

Filsinger and Zabors agree. "Understanding carbon and how it flows through the entire economy is a special skill set that has become much more critical in the marketplace," Filsinger notes. He says energy consultants also need to understand the regulatory process, in terms of the rate-change process on the utility side as well as the timing and details of carbon legislation coming down the pike in the next five years.

Zabors notes that today's energy consultants need to know "how everything fits together in situations such as energy efficiency, rate cases, forecasting" while genuinely partnering with clients "as they struggle with this complex environment" and "not just doing a project based on a specific area of expertise."

In other words, a crash course alone may not suffice for consultants eager to make their mark helping customers in an increasingly complex and global energy industry.