A Good Offense Is the Best Defense
- Dec 11, 2012 3:45 am GMT
- 333 views
In my past posts I discussed examples of the transformation of the grid through a revolution in technology that will in turn provide extraordinary benefits for utilities, their customers and society. But, as has been the case in the telecommunications utility business, it will enable disruptive forces that will erode incumbent utilities’ market share and financial performance unless they develop new strategies and business models.
Since the inception of the electric utility business in the late 1800s, economies of scale, cost-plus monopoly franchises and a nearly inelastic demand for ever more electricity allowed utilities to pursue a straightforward strategy: build enough capacity and redundancy to ensure reliability and recover the costs plus a reasonable margin. Consumption grew, reliability increased and rates actually declined in real dollars for a century. The circumstances favored building big iron, ever-larger central station generation plants serving distant load centers through bulk transmission corridors. Beginning in the 1970s, however, circumstances began to change profoundly. Risk began to swamp economies of scale. Customers proved resistant to the resulting increases in cost-plus rates. The public increasingly opposed the environmental impacts of fossil-fueled generation. Non-utility energy producers revolutionized generation and transmission markets.
Adding insult to injury, it became increasingly apparent that an aging grid would be inadequate to deal with new realities in the 21st century, including declining grid reliability, increasing costs, unacceptable environmental impacts and declining customer satisfaction. The U.S. Department of Energy’s Electric Advisory Committee stated in its 2009 report, “Keeping the Lights on in a New World” that
“. . . the current electric power delivery system infrastructure . . . will be unable to ensure a reliable, cost-effective, secure, and environmentally sustainable supply of electricity for the next two decades . . . Much of the electricity supply and delivery infrastructure is nearing the end of its useful life.”
The challenge is exacerbated by big changes at the edge of the grid including distributed generation, storage and energy management solutions. There is increasing deployment of non-dispatchable wind generation on the bulk power grid. Planning, operating and maintaining the grid, which for more than a century involved monitoring and control of only tens of thousands of centralized, fully-dispatchable generation assets and transmission system elements will involve the monitoring and control of hundreds of millions of customer loads, generators and storage on the distribution system. The U.S. DOE’s Electric Advisory Committee stated in its 2008 report, “Smart Grid: Enabler of the New Energy Economy,” that their investigation “substantiates the benefits of moving to a more intelligent grid, not only for utilities and grid operators, but also for consumers and society as a whole.”
What’s an electric utility to do? Continue to defend and pursue their longstanding strategies and business models? Accept only gradual, evolutionary change through slow adoption of new technology? Become “just” monopoly poles and wires companies and leave all these complexities to someone else? Or, perhaps they could and should take the offense and accelerate the benefits of the technology revolution for their customers just as they did with electricity in the first place?
Even utilities that decide to be “just” poles-and-wires companies will require advanced monitoring and control technology in order to cope with the new, dynamic landscape. So will operating an existing centralized generation-and-transmission system in a way that’s adequately reliable with sufficient power quality. Consider, for example, the challenges of incorporating into the grid power from the 15,000-megawatt, non-dispatchable wind farm out in West Texas. Or accommodating an increasing penetration of plug-in hybrid electric vehicles and electric vehicles that are like residential HVAC (heating, ventilation and air conditioning) loads wandering around the system.
To date, utilities have mostly focused on new metering and communications technologies to get customers to voluntarily change their behavior via price signals (i.e., demand response) so that the traditional, centralized utility strategy will continue to work. While progress has been made, it is clear that this alone will not suffice. Utilities are going to have to embrace and employ new technologies if they are to survive. And most of these technologies will be at the edge of the power grid, not at the center. And, increasingly, they will involve new players in the electric utility market.
Will the new players just be vendors of technology and applications for utilities? No, they will include entities that provide electric power and energy as well as demand and energy management directly to customers. They already do it in the ERCOT market where REPs deal directly with the retail customer. In markets across the country solar photovoltaic systems are providing power and energy directly to customers on their side of the meter. Next will be companies who will aggregate customer demand control and conservation for participation in organized energy markets. These new players have been branded as disintermediaries by utilities that are used to owning the customer and their data as a monopoly.
Let’s get used to it: “disintermediaries” may be a threat to utilities, but they have generally been a boon to consumers. Also, they bring valuable new DNA that will be necessary for a new grid. They have no vested interest in longstanding electric utility strategies, are aggressive in their adoption of new technologies and business models and willing to take considerable market and business risk. Utilities can determine to fight them with their inflexible Maginot Line of fixed assets, or they can incorporate them into a “New Grid” for a “New Energy Economy.”
This is an extraordinary time to be in the electric utility business. Not only will new technologies and disintermediaries allow utilities to do what they need and want to do, they can enable utilities to do altogether new things for consumers and society that they never even thought of. If you can’t fight them, join them. The customers will.
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