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To Keep the Lights On in the Digital Age, Regulatory Model Must Reward Innovation

More than 100 years ago and a few blocks away from where government, business and energy leaders gathered earlier this month in Manhattan for the Bloomberg Future of Energy Summit, Thomas Edison’s electric light ended darkness and transformed our world. His model of central generation has been with us ever since—but it may not be that way much longer. Artificial Intelligence will soon end it, bringing new opportunities and challenges.

AI and the digitization of the energy grid will change the Edison-era energy model in two consequential ways. First, it will improve operations. Those opportunities have already started to appear in our ability to increase the reliability of machines, leading to more energy generation from new and cleaner sources. A report Uptake released earlier this year found that eliminating avoidable breakdowns in the current wind fleet would allow the United States to produce an additional 12 terawatt hours of energy—enough to power all the homes in Chicago for a year.

The second way AI and digital technology will change the grid is more challenging: It will fundamentally alter the current business model that the present regulatory system incents. Consider that if you brought back Alexander Graham Bell and showed him an iPhone, he would have no idea what it is. But Thomas Edison could run any electric utility today; the energy industry has changed that little over the past century.

While we haven’t seen the full impact of AI, blockchain, peer-to-peer energy trading and storage, there are indicators of what is coming. The new reality is that AI and digital increasingly allow residential, commercial and industrial customers to defect from the Edison-era system, much like how consumers have cut the cord with their phone companies. Already, we are seeing this from homeowners with residential rooftop solar and in-home batteries. Solar panels capable of producing more than 10.4 gigawatts of energy sit on top of homes now, up from just 1.4 gigawatts in 2012.

Public utility commissions, elected officials and utilities need to shift to a digital-first business model. Even more importantly, we need to build a regulatory structure that encourages and rewards innovation.

What happens if the industry doesn’t adapt? We already have this answer: When fracking unlocked cheap natural gas prices a decade ago, the industry didn’t prepare. We said we couldn’t have possibly seen it coming, despite the technology improving for several years before its real breakthrough. Instead, coal and nuclear generators hoped gas prices would come back to $6 or $8 per MMBtu after market prices fell to $2.  Today, wholesale generators are seeking bankruptcy protection and subsidies because they didn’t adapt.

Earlier this month in Ohio, FirstEnergy Corp. filed for bankruptcy protection. It has also petitioned the U.S. Department of Energy to use the department’s emergency authority to require FirstEnergy’s energy generation to be used—no matter the cost. The same way that natural gas technology overtook an entire industry that didn’t adapt, with repercussions still making headlines a decade later, AI and digital technology will overtake the energy markets.  We will see the same requests over the next decade from grid operators if they don’t adapt to digital.

Defections from the grid don’t have to be massive to be disruptive. Even marginal customer base reductions will destroy the economics of the existing grid business model. In 2017, one of California’s largest utilities, PG&E, lost $180 million from customers choosing to use electricity from a provider other than PG&E.

Not surprisingly, utilities want to charge higher fees to cover the grid costs. But that won’t save them from growing disruption. Today’s regulatory system rewards massive investment in large generation and transmission assets, rather than digital innovation that makes the current system more efficient, reliable and productive. That must change.

Early on and reinforced by several Supreme Court decisions, the United States decided that electric power is a public good. And that it should be affordable, reliable and safe for everyone. It’s a public policy that the United States got right and — more importantly — achieved. You can’t say that about healthcare, education or even broadband.

For us to maintain a grid that works for everyone, we need an energy regulatory model that rewards innovation. If we don’t, the light will go out on one of America’s greatest achievements.

Photo Credit: 3.26 via Flickr

Content Discussion

Bob Meinetz's picture
Bob Meinetz on April 30, 2018

Sonny, as appealing as your Disruption Model might sound to rebellious teenagers, those with some understanding of the American regulated utility model, and its history, see trouble ahead.

Yes, today’s regulatory system rewards massive investment in large generation and transmission assets, and it does so for a reason. It turns out electrical engineers of the early twentieth century weren’t quite the morons you make them out to be. They recognized large generation and transmission assets deliver the most energy, to the most people, most efficiently – and that simplicity, not complexity, was key to keeping the price down. As we know now, it’s by far the easiest way to control emissions, rather than regulating thousands – or millions – of independent generators separately.

Your article is titled, “To Keep Lights On in the Digital Age, Regulatory Model Must Reward Innovation.” Funny, before the Digital Age, utilities had no problem keeping the lights on. So maybe the public will support a business model that makes electricity less reliable, more expensive, and more environmentally-negligent just to be “disruptive” and “digital” (whatever that means). My guess is that they won’t, but won’t find out until it’s too late.