Utilities need to adapt to a changing market with new business approaches, RMI study says
Energize Weekly, January 31, 2018
A rapidly shifting, yet slow-growing electricity market is forcing utility executives and state regulators to redefine the role of utilities—from expanding their monopoly positions to becoming open platforms for competition, according to a study by the Rocky Mountain Institute (RMI).
The question, the study by the energy consulting group said, is where to draw the boundaries and how to balance traditional utility operations against third-party vendors and open-market competition.
“There are some really gnarly decisions that have to be made,” said Rachel Gold, a manager in the institute’s electricity and buildings practice and a co-author of the report.
The forces buffeting the industry, sometimes called the “death spiral,” are well-established. The explosive growth in distributed energy generation, particularly solar, has eroded electricity sales. This has been exacerbated by energy efficiency programs, which are often state mandated, and also by industry efforts to reduce their dependence on utilities with renewable generation, microgrids and storage.
This has led to slow growth in electricity consumption. The federal Energy Information Administration forecasts that the rate of growth in electricity demand will remain “lower than historic averages.”
To cover operations, fixed and capital costs, utilities have to raise rates making distributed renewable generation, storage and energy efficiency more economically viable and appealing. The response among utility companies has been mixed, with some reluctant to tamper with their business models.
“It is a real balancing act for decision makers,” Gold said. “The risk of not doing anything can be as big or bigger than the risk of miscalculation.”
“The fundamental question confronting the industry is: What functions will utilities perform in the future, and consequently, what is the appropriate utility size and earnings?” the RMI study asked.
To answer that question, RMI created a scale from buttressing the existing regulated monopoly to transforming the utility in an open platform for competing energy services and then analyzed impacts.
“It might be appropriate for utilities to explore either of the extremes,” Gold said. Each comes with their own risks, she said. An expanded monopoly may be less inclined to innovate and an open-market platform may have issues on service quality and serving low-income customers.
“Mostly what we are seeing are hybrid models,” Gold said.
One example of a utility expanding from its monopoly base is Vermont’s Green Mountain Power, which markets, finances and facilitates the installation of customer-sited batteries, appliances and efficiency upgrades. It also manages a demand flexibility program.
Green Mountain, however, does not do this in-house. It partners with third parties, while customers maintain the ability to choose other manufacturers or service providers if they like.
Southern Company created a subsidiary to do rooftop solar installations, but its entry into the Georgia market “provides a cautionary tale for the structural risks that can be introduced if corporate interests are at odds with each other,” the RMI study said.
The company-owned rooftop solar installer could source leads from a web portal hosted by Georgia Power, one of Southern Company’s regulated subsidiaries, but after one year of operation and about 10,000 inquiries, only five customers had enrolled for Southern’s solar service. At the same time, third-party solar developers said they were reluctant to enter the market based, in part, on concerns with the utility’s role.
While the utility as a platform has been proposed in many places, there are no pure examples yet. Texas might provide the closest example, where the utilities’ role in energy supply was eliminated and utilities now serve only as distribution businesses.
“The platform model also faces a substantial challenge in undertaking the business transformation due to the tremendous inertia of the current utility business and the reality that a vast majority of utility earnings derive from rate-based assets,” the RMI study said.
Some utilities, however, are exploring hybrid solutions.
In California, under a virtual power plant partnership between smart-thermostat maker Nest and Southern California Edison, Nest will supply thermostats to 50,000 customer homes and provide demand response services—lowering home electricity use during peak periods—by aggregating the devices.
Avista, in eastern Washington state, is developing a microgrid pilot to create peer-to-peer energy transactions among buildings in Spokane’s University District.
With Avista serving as the platform, this “shared energy economy” will let commercial buildings exchange services from distributed renewable generation such as rooftop solar, battery storage and flexible demand, as well as traditional utility-scale generation, to optimize energy supply and grid services, the RMI study said.
Utility regulation will be key and will have to move beyond the traditional role of overseeing capital improvements, setting rates of return for the company and the rates charged customers, according the RMI study.
State regulators will have to explore ways to monitor markets, assure competition and look to develop rates based on performance and not simply on kilowatt-hours sold, the study said.
“Change will vary by state, and in some markets, it will be years, but it is happening right now in some,” Gold said.
Gold pointed to Hawaii where there is a proposal being considered for using third-party aggregate demand response products. Hawaiian Electric Company in its grid modernization proposal is calling for creation of grid platforms for new products, services and opportunities for distributed generation.
In 2016, Illinois adopted the Future Energy Jobs Act, which allows energy efficiency and smart grid investment to be treated as capital investments, enabling utilities to earn revenue on programs such as distributed generation and energy efficiency.
New York State is in the middle of its Reforming the Energy Vision (REV) initiative that seeks to promote renewable energy and a more competitive distribution market open to new products and services from third-party vendors. Utilities have been asked to propose new revenue sources to replace traditional cost-of-service rates and help in the transition to an open platform.
“It is really important to start with a vision,” Gold said. “Where do you want to go?” Pilot programs to test new approaches are important, but they have to fit in to an overall approach, she said.
“Experience shows that the utility business cannot be remade overnight,” the RMI study said. “But there is no excuse not to get started.”