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Adaptable Electric Utilities: The Future Ain’t What It Used to Be!

09/09/2014


I recently attended a gathering of utility and regulatory leaders in Chicago to discuss the future of the electric utility landscape in North America. The traditional electric utility business model is being challenged by new, entrepreneurial and unregulated businesses. These new market players are emerging at the confluence of technology innovation and consumer empowerment and their capacity to compete is accelerating every day.

Across North America, declining costs and improved performance of distributed generation (DG) and grid management technologies are expanding the range of electricity supply options available to customers. With greater choice comes greater empowerment and the marketplace is demanding a continuum of possible service solutions. This continuum includes the following, as well as a number of options that fall in between:

Traditional Utilities: Various similar models where monopoly providers of electricity service prudently invest in capital assets on the customers’ behalf and secure energy from large centralized power plants. Delivery occurs in a defined service territory through bundled products that are regulated to recover system costs and provide a reasonable rate of return.
Combined Grid and Distributed Services: An emerging model offering grid-connected DG as well as grid reliability and ancillary services. The customer is both a producer and a consumer (“Prosumer”).
Enhanced Off-grid: An off-grid model in which electricity and reliability services leverage DG and micro-distributed generation. Improving storage solutions will enhance reliability.

Across the continent, accelerated deployment of distributed and smart technologies presents a number of benefits that are well-documented. Growth in the distributed energy economy also presents a myriad of challenges, particularly on the utility side of the meter. First, technical management of emerging DG, such as solar photovoltaic and wind, is a challenge due to the variable nature of the supply. Second, grid management is more complex. Systems mostly designed for one-way flow and communication must now accommodate two-way flows.

As utilities wrangle with these issues, other business-oriented challenges that are departures from the norm will begin to emerge as well. Principally, market trends suggest that as innovation drives ever-growing DG deployments, alternative and unregulated players are likely to usurp and offer more of a utility’s services. As customers choose these services and migrate toward the off-grid arrangement on the continuum, utilities and regulators begin facing an intricate web of practicable issues. Advances in DG, communication/controls technology, electric vehicles and storage applications are opening new opportunities for investment and value generation. However, they also change the operational and financial realities for distribution grid operators. Departure from the existing business model represents a changing utility position in the marketplace, where utility services become competitively procured products and management of system resources becomes more strongly predicated on operational, temporal and geographic value.

What’s disconcerting for utility companies and regulators is that, as customers are lost, the utility must spread fixed costs across a dwindling market, thereby increasing costs per customer. Inevitably, this declining customer base causes the alternative services to become more and more competitive as time passes.

Historically, utilities have had significant control over their market. They will have less and less control as the new electricity ecosystem evolves. These trends have been called the “utility death spiral” —ominous indeed. But instead, I propose that a “vortex of opportunity” exists for the adaptable utility company. Change is inevitable, though it will not be easy.

Empowered customers prefer a well-developed set of choices, and contrary to some beliefs, actually thrive in complexity. Therefore, there will be a growing need for stronger and more elegant coordination. Utilities are well-positioned to offer this coordination and better manage the investment in the deployment and functioning of the future distribution system.

Utilities have a place to compete in the DG resource marketplace and smart-grid ecosystem. To play a key role in this evolution, utilities must focus on strategic efforts over the next decade to promote regulatory structures, cost allocation methodologies for grid services and appropriate pricing signals in the market.