Why can't utilities innovate like startups?
They could if regulators let them.
It seems obvious to say that utilities are not known for their innovation. But a new white paper produced by investor-owned utilities and private sector stakeholders suggests that may be because regulators are holding the industry back.
The working group that produced the paper could easily have been adversarial but there was a surprising amount of accord, the executive who helped lead the process told Utility Dive.
With end-to-end committed participation by Pacific Gas and Electric (PG&E), Southern California Edison (SCE), and a range of grid-associated businesses, the working group developed a collective vision for the California grid in 2030, said Advanced Energy Economy (AEE) Sr. VP Steve Chadima.
"A transformation of the grid is underway,” reports AEE’s Toward A 21st Century Electricity System In California. Its roles and functions have already changed. And to accommodate the change, utilities are moving to provide new services and “enable a more integrated, ‘plug-and-play’ electricity system.”
To sustain the transition and achieve that 2030 vision, the state’s policymakers and regulators must lead utilities and stakeholders in parallel pursuit of innovation in product and service delivery; system design and technology; and regulatory frameworks, incentives and revenue mechanisms.
“There is a natural tendency for regulators to be cautious because they don’t want utilities experimenting with ratepayer dollars,” Chadima said. “But that is a foreign idea to anybody in the private sector. They take risks every day.”
The regulatory process is not conducive to innovation but utilities have recently begun to think not about ratepayers, but about customers. “Customers want to have and make choices,” Chadima said.
Utilities have had, and many still do have, a lock on the relationship between the customer and the electricity, Chadima said. But the working group found that is changing in California and will soon be changing elsewhere.
The challenge is getting regulators to stop thinking about ratepayers and instead think in terms of customers, Chadima said. “Then they will start to think about customer choice.”
“There is very strong agreement that utilities need to be able to experiment more,” Chadima said. “And there should be incentives for utilities to embrace new technologies and new services.” But they need regulatory approval to do so.
“Utilities and regulators are not known to be nimble and they may not know what their customers want,” said former Xcel Energy executive and current Center for Energy and Environment Policy and Communications Director Mike Bull. “The way to find out is to be able to offer services on a pilot basis.”
To free up utilities to innovate, Bull wants regulators to establish official pilot program guidelines. It can take 18 months to get a program through the regulatory process and almost as long to discontinue an unsuccessful one, he explained. Guidelines like those he proposed for Minnesota’s cutting edge e21 Initiative could change that.
An experimental utility project would not be likely to “put ratepayer dollars at risk for fly-by-night things” if it met commission-approved standards that were pre-vetted by all stakeholders, Bull said. A pilot might then be put in place without a lengthy and costly regulatory review.
The AEE working group called for California regulators to explore two different operational models for utilities, either of which would sustain the utility’s role as the distribution system operator. One transforms it into a distribution system platform. The other makes the utility an Independent Distribution System Operator (IDSO).
The group also proposed two different, rather technical market operation and pricing models, as well as three different and equally wonky utility revenue models.
To define and prioritize the viability of these competing ideas, the working group recommended regulators identify issues that impede but could enable new business models, consider the impact of the changes on regulated markets and competitive markets, and streamline and integrate the regulatory process.
“The paper offers recommendations but some, like pricing models and revenue models, are not singular answers,” Chadima acknowledged. “There was no ‘best pricing model’ and ‘best financing model.’ Instead we offered a range of models.”
The working group brought together people who have long debated these issues in regulatory proceedings, Chadima said. Developing concrete proposals that describe points of agreement could streamline future proceedings.
“Things happen very rapidly in the marketplace but regulatory proceedings may take 18 months. By then, technology has changed and we are on to something else,” Chadima said. “At some point down the road, there will be disagreement before regulators on these things. But because of this work, the disagreement will be more on timing and intensity than on direction.”
Of the working group’s ten recommendations (see the end of the article for all ten takeaways), many participants focused on two concepts as the most important, Chadima said.
The first was creating a comprehensive framework to get a fully integrated solution. The way it is currently done, with work on separate issues in separate dockets, is like asking different people to design different parts of a car but preventing them from collaborating, explained Chadima.
“The parts might be great but they might not fit together,” he said. “The point is to find ways to encourage systemic thinking and get above the individual dockets and figure out how they fit together.”
The second key recommendation was creating new incentives to achieve the things stakeholders and policymakers decide they want. An example, Chadima said, is time-differentiated rates “to encourage people to use electricity when there is more on the grid and conserve when there is less.”
Utilities as innovators
Utilities have developed a “culture of caution” in response to limits imposed by regulators, policymakers, laws, and consumer advocates, Chadima said.
But they also see “the entire way they do business and relate to their customers and to the grid is changing and the choice is theirs to either fight it and eventually find themselves taken over or to embrace change and figure out how to be relevant in this new world.”
The working group agreed there is a role for utilities, Chadima said. “This is not about destroying the utility and getting everyone off the grid.”
The vision is for utilities to keep their role as distribution system operators. “They will be an intermediary, getting content and services from the grid and providing services to their customers, uploading as much as they are downloading, in a much more dynamic world.”
That is why there was so much agreement on recommendation 8: “Accelerate the pace of regulatory review and allow utilities to take reasonable risks to encourage innovation and entrepreneurship and accelerate commercialization of new products and services.”
“Utilities see they need to change,” Chadima explained. “That is why they need the freedom to experiment.”
When invited to innovate in the recent California Public Utilities Commission distributed resource plan (DRP) docket, all three of the state’s IOUs demonstrated aggressive entrepreneurial impulses.
The commission asked that the DRPs include demonstration projects that dovetailed with smart grid deployment plans and met minimum cost and cost-effectiveness criteria.
They also had to meet very strict technical requirements and be ready for implementation, in conjunction with identified Load Serving Entities, third-party DER providers, and DER technology vendors, within a year of regulatory approval.
SCE proposed two field pilots. One would demonstrate how an optimal location could be selected to allow the use of multiple distributed energy resources (DERs) that would meet area needs at a minimum cost. The second would demonstrate how a dedicated control system could manage five circuits at the distribution system level to optimize DER dispatch at a high penetration.
PG&E proposed a micro-grid pilot project for San Francisco’s Angel Island State Park as an alternative to the costly replacement of an undersea cable. It would include an optimal DER portfolio "running 24 × 7 and 365 days," PG&E said, and test whether the micro-grid could be more cost-effective and reliable than the cable.
“It is not about 3-year plans and giant flow charts anymore. Utilities want to take some risks and try new things,” Chadima said. “They need a regulatory framework that allows them to try things, see if customers respond, and, if they don’t, get feedback and figure out what a new approach might be.”
The regulatory debates will not end, Chadima said. As the working group participants discovered in discussing pricing and revenue models, there are decisions the commission will have to make. “There are some very strongly held beliefs about what utilities should be able to spend ratepayer money on.”
From the working group's paper:
To summarize, the Working Group offers these 10 key recommendations to help the State of California achieve a 21st Century Electricity System:
1. Develop a comprehensive framework that integrates/coordinates the existing regulatory proceedings
2. Restructure/align/create new incentives to achieve the desired outcomes while maintaining the long-term viability of the utility and recognizing the value of the grid
3. Develop new market structures that enable two-way market signals to allow customer participation
4. Encourage data exchange and circuit-level coordination of available grid and customer resources
5. Utilize standards and protocols, ideally drawing from National standards, to ensure interoperability of devices located on the utility side of the meter and on customer premises
6. Assess what is appropriate for the regulated vs. competitive market and how the two would interact as the market evolves
7. Encourage training of the workforce that will develop the skills needed for the 21st Century Electricity System
8. Accelerate the pace of regulatory review and allow utilities to take reasonable risks to encourage innovation and entrepreneurship and accelerate commercialization of new products and services
9. Examine the role of rate design in helping to achieve the long-run financial integrity of the grid as a platform
10. Examine the functionality and enabling technologies that will be integral to the distribution grid of the 21st century