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Will Demand Response, Distributed Energy Bring End of Traditional Utility Business Model?

In the six months since a consultant to the Edison Electric Institute wrote a paper describing “Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business,” many utility officials, analysts, investors and consultants have been mulling over how investor-owned electric utilities may have to change principally due to the growth of demand response and distributed energy, especially solar power.

At the center of the future of investor-owned utilities is this:  How will regulators decide what’s in the public’s interest if the public needs less of what electric utilities provide?  Are we looking at higher fixed charges for everybody connected to grid regardless of how much they use?

eei-disruptive-forces via google images CREDIT EEI, Energy Infrastructure Advocates

This Exhibit 3 from the Edison Electric Institute paper, Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business, illustrates the forces squeezing the traditional investor-owned utility business model. DER=distributed energy resources; DR=demand response. CREDIT: Edison Electric Institute and Energy Infrastructure Advocates / Peter Kind.

“The timing of such transformative changes is unclear,” wrote Peter Kind of Energy Infrastructure Advocates in his January 2013 paper for the Edison Electric Institute (EEI). “But with the potential for technological innovation becoming economically viable due to this confluence of forces, the industry and its stakeholders must proactively assess the impacts and alternatives available to address disruptive challenges in a timely manner.”

“While tariff restructuring can be used to mitigate lost revenues, the longer-term threat of fully exiting from the grid raises the potential for irreparable damages to revenues and growth prospects,” Kind stated. See illustration, right.

These and other questions are front-of-mind this week as the Association for Demand Response + Smart Grid convenes its 10th in a series of annual national town hall meetings in Washington DC on how demand response and the smart grid are remaking the power business.  It will be interesting to see how much — and how soon — industry leaders can help regulators adapt to these dynamics in the face of tacit, or overt, opposition from utilities preferring the status quo.

One of the more noteworthy developments since the EEI paper’s release is playing out this summer. A group of forward-thinking entrepreneurs and investor-owned utility holding companies have met at two invitation-only meetings. The first, held March 6, was hosted by MIT; the latter, June 18, was hosted by San Antonio-based CPS Energy, the largest municipally-owned electric and gas utility in the U.S, and the utility solar leader in Texas.

The meetings were under the auspices of the Advanced Energy Executive Forum, which was conceived in 2012 by venture capitalist Hemant Taneja, California hedge fund manager and clean energy activist Tom Steyer and Richard Lester of MIT’s Industrial Performance Center.  On a parallel path, MIT is studying strategies for accelerating the adoption of low-carbon power.

Together, Forum leaders hope the meetings and follow-on discussions will lead to a realistic options for reducing some of the regulatory and other obstacles inhibiting its vision for a “prosperous world that runs on secure, clean and affordable power.”

Attendees at one or both of the Forum meetings comprise a tell-tale list of organizations wanting to make its vision a reality. They include five investor-owned utilities:  NRG Energy, NextEra Energy Resources, Northeast Utilities, OGE Energy and PSEG Energy Holdings.

Other organizations participating included, also in alpha order: C3 Energy, CLEAResult, California ISO, the Electric Reliability Council of Texas (ERCOT), EnerNOC, First Solar, Green Energy Corp., Gridco Systems, Landis+Gyr, Silver Spring Networks, SustainX, Viridity Energy.

CPS energy CEO Doyle Beneby told energy analyst Chris Nelder in this excellent assessment of the Forum’s potential that it is integral know one’s customers and the regulatory regime to figure out what works in your state or region. For utilities whose business models haven’t been altered by power supply competition and thus carry a lot of influence at the regulatory commissions, they can likely stall a long time before demand response and solar power alternatives make substantive inroads.  So don’t look for real innovation from those camps anytime soon.

For consumers served by utilities with more open-minded regulators, the future holds lots of possibilities.

Beneby asserted distributed generation, demand response and even microgrids don’t necessarily have to cut into utilities’ existing revenue. But they do need to programmed and marketed a certain way, e.g. as a source of power.

Central to the challenge every regulator faces is how to allow renewables to compete more effectively while maintaining their mandate to set rules that ensure reliable and cost-effectively delivery.  THAT may be the holy grail of future utility regulation.

The CEO of Gridco Systems, Naimish Patel, observed that technology-driven solutions are becoming available to meet a variety of specific customer needs. To enable them in a regulated framework, he said, it will be necessary to “pare down certain regulations. Patel told Nelder that “well-placed and architected deregulation would help to unleash innovation.”

Which is why CPS Energy, and its municipally-owned neighbor to the north, Austin Energy, have made significant progress toward cleaner energy portfolios. The buck basically starts and stops with them.

“We need ideas and test beds,” Beneby said. “Utilities have to reach out beyond conservative, low-risk approaches and start trying things. We have to keep evolving.”

That may be easy for the head of a municipal utility to say. When an investor-owned utility, by contrast, has Wall Street analysts and shareholders to think about, the value proposition is much tougher to recast without progressive thinking at the commission and from key allies in their service territories.

How long tradition-bound utilities can rely on the status quo probably has several years to run.  The growing popularity and affordability of rooftop solar systems is beginning to have an impact. Come back later this month for a snapshot of how rooftops are becoming the new power struggle between utilities and their customers.

Jim Pierobon's picture

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John Miller's picture
John Miller on July 10, 2013

Demand response and distributed energy is not likely to bring an end to traditional utility business models for many decades or until the independent demand response is truly controllable and predictable.  With the exception of limited Commercial and Industrial facilities that are designed for ‘interruptable power’ supplies, actual ‘controllable’ demand response in the Residential sector is insignificant-to-non-existent.  Facilities designed to operate with interruptable power supplies generally have on-site backup power or have the ability to trim and shutdown operations (and normal power consumption levels) on very short notice.  This operating flexibility requires building larger production capacity and storage capabilities in order to meet production schedules or market demand.  Classic examples are water treatment plants.  If sufficient storage of waste or treated fresh water is available and additional processing capacity is installed, the facility can shutdown and store or supply water from storage as needed to met demand, and resume processing the raw feed water at much higher than average demand rates when the power is again available.

In the case of the Residential sector, customers are normally provided and expect ‘uninterruptable’ or on-demand power supply.  Very few Residential customers can or will significantly provide reduced demand response similar to interruptable customers in the Commercial and Industrial sectors.  Yes, ‘smart meters’ and household power control systems will one day allow customers to automatically prioritize the power demand of their in-house appliances, electronics and lighting, but today these capabilities are extremely developmental and limited. 

Those who currently advocate ending the traditional utility business-regulatory models often do so for personal and non-public/utility company economic advantage.  The most contentious issue today appears to be those who want free access to utility grids to supply variable wind/solar power (at peak power compensation rates) whenever available.  They are generally not concerned with (or believe they should not be charged their fair share of) overall power grid stability, reliability or associated costs.  These same folks advocate that they not be held accountable for the costs of balancing uninterruptable demand with the backup peaking/intermediate power required when the sun does not shine or the wind does not blow (or blows too hard).  Until variable wind/solar is designed to truly displace ‘baseload’ power generation (which requires substantial industrial scale power storage that currently does not exist), traditional utility business models will likely still be with us for some time.

Stephen Nielsen's picture
Stephen Nielsen on July 10, 2013

I agree that, while they will cause major disruptions, demand response and distributed energy is unikely to bring a total end to traditional utility business models – in this part of the world – for a while.  Emerging markets (that more than 20% of the world where little to no traditional business models currently  exist) are a different story. In those areas, distributed energy could very easily come to dominate.

Jim Pierobon's picture
Jim Pierobon on July 11, 2013

John:

You are correct on many of the points you make but I take issue with others.

Where electricity prices are high, where adding new generating plants has become a stiff challenge and/or where retail supply is competitive, smart meters empower residential customers to save money and balance demand on the system and thereby provide an important system-wide and public benefit. With proper engagement, many residential customers quickly ‘get it’ and actually get a kick out of saving energy, as well as, money. Check out OPOWER’s success to date.

As for those who want access to the grid, for example, to sell back excess generation from a rooftop solar system, I think we agree that as long as a home is connected to the grid, it should pay for having that backup / default connection. I trust you won’t find fault with a homeowner who might have to pay north of 30 cents per kwh for peak power when a solar array could provide most, if not all, of the power it needs on sunny days. I think it deserves to be paid for the excess at least at the utility’s wholesale purchased power cost.

From the Town Meeting on Demand Response and Smart Grid concluding today in Washington, DC, it’s illuminating how far ahead the leading utilities / service providers are (e.g. Oncor in Texas, SDG&E in California, OGE in Oklahoma) compared to the traditional utilities still behaving pretty much as they have over the past century or so (e.g. Ameren in Missouri, Dominion in Virginia).

I just called Dominion for information about their smart grid plans beyond what I could find on their web site. If I had the time, my wait would have been  . . . 28 minutes.

Interesting prediction from EEI’s David Owens at the Town Meeting yesterday: Energy utilities are girding for the next round of mergers. The biggest driver:  ‘dirty’ generators need to be offset by cleaner sources of power, which a real challenge with nuclear faltering with its comeback and aging coal plants being retired. Another driver: because demand is projected to remain flat — if not decline slightly — per account, the best way to grow will be by adding customers.

Please share more of your thoughts!

Jim Pierobon's picture
Jim Pierobon on July 11, 2013

Stephen,

See my reply above. I’m intrigued at the growing variety of business models that are evolving depending on the local price for electricity. The higher the price, the more innovation we’re seeing.

Stephen Nielsen's picture
Stephen Nielsen on July 11, 2013

Jim,

By building a variety of energy production and distribution “islands” within both emerging and impoverished markets, I believe western utilities have a unique opportunity to gain a foothold in the future markets they will wish to serve. Through relatively cheap experiments on such islands, utilities will be able to test these business models in real world conditions on a micro scale.  In doing so, utilities will be bringing power to the poor and will look like heroes, reaping public relations victories and forging international relationships to help with all future market expansions

Jim Pierobon's picture
Jim Pierobon on July 11, 2013

Stephen,

I couldn’t agree more. That said, I only wish more western utilities outside of those in California and Texas saw it the way you articulate it.

John Miller's picture
John Miller on July 11, 2013

Jim, agreed smart meters do empower Residential customers to save on electric bills.  But the savings are discretionary and require the customer to closely watch and manually adjust their power consumption.  Some devises such as HVAC, ovens, dishwashers, laundry and even EV charging stations can be programmed with timers, but the availability for average Residents may currently be somewhat limited.  How many customers will diligently monitor and manually adjust their consumption is uncertain and may not be as significant as what would be feasible through more advanced in-house controls.  If a home’s wiring were designed with relays that could be programmed based on time-of-day and/or cost (including possibly real-time power cost communications from the local utility provider), Residents could truly maximize their power use efficiency and minimize costs.  Resident electric power controls would then automatically shutdown, turndown or startup electric devices to truly optimize their power costs-usage based on how they chose to program/accomplish optimal power usage.

Those who provide useful power to the grid via excess solar generation should be given equivalent prices to the utility’s peaking power purchase costs.  However, if the non-utility solar supply creates balance issues as the level of penetration increases significantly in sub-grid, distribtion sections, this situation must also be addressed equitably between the customer-private solar supplier and the utility company.  In this case the installation of more sophisticated power grid distribution controls will likely be required; or what some call smart grids.  The more incremental a power grid operator’s ability to monitor real-time system voltages-frequencies, the more advanced their ability to control increasing valuable demand-local supply to accommodate increased levels of variable solar power supplies.

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