Decarbonization goals driving the growth of renewable generation along with customer demand for distributed energy resources (DER) are reshaping what electric utilities can be.
For the emerging utility of the future, the flexibility of DER will protect reliability and lower customer costs by balancing renewables' variability, utility representatives and power system analysts said.
Flexible customer demand is moving utilities "from a world where we forecasted demand and scheduled supply to a world where we will forecast supply and schedule demand," said Mike Hogan, senior advisor to the non-partisan Regulatory Assistance Project (RAP). Utilities can learn to "forecast supply, price energy appropriately, and allow demand to respond to it."
But electricity providers must also learn to take advantage of these new dynamics and the proactive customers that are also producing electricity, also known as "prosumers", power system stakeholders agreed.
"Utilities have been providers of a commodity called electricity, and there have been few options to get it elsewhere," said Bryan Hannegan, president and CEO of Colorado electric cooperative Holy Cross Energy. But with new technologies and policies that allow generating and storing electricity at home and managing it with smart devices, "utilities must find ways to remain relevant."
Two breakthroughs — divesting generation ownership and integrating system operations — are transforming today's electricity providers while protecting reliability and affordability, utility representatives and system analysts said. But the evolution to a "utility of the future" will only be completed by how utilities respond to still-emerging technologies, changes in policy and new customer demand, they added.
Data show U.S. renewables and decarbonization goals and mandates are working by increasing the clean energy deployment that will reduce emissions.
Utility-scale renewables were over 87% of the 19 GW of new U.S. generating capacity in the first nine months of 2021, according to the Federal Energy Regulatory Commission's (FERC) September 2021 Energy Infrastructure Update.
Renewables are now over 20% of U.S. generation, according to a January 2022 Energy Information Administration report. And while the shares of natural gas, coal, and nuclear generation are forecast to decline, utility-scale renewables are expected to rise to 23% of U.S. generation this year, it showed.
Reaching economy-wide net zero emissions by 2050, associated with the Paris climate agreement, would require "doubling 2020's record-setting renewables growth" and "maintaining that pace," Ryan Wiser, Lawrence Berkeley National Laboratory (LBNL) senior scientist, recently said.
DER will also grow rapidly, according to a National Renewable Energy Laboratory (NREL) November 2021 study of changes from economy-wide electrification. In 2030, distributed solar is likely to almost double from 2022's 1.2% of total U.S. power sector generation to between 2.2% and 2.4%, according to NREL data. It will reach between 3% and 4% by 2050, and in some places significantly impact the power mix.
"Utilities will have to react to technology and policy developments, but they can't be purely reactive because reliability is non-negotiable for them."
Senior technical executive for energy systems and climate analysis, Electric Power Research Institute
Electric vehicles (EVs) could be as much as 76% of vehicle miles traveled in 2050, NREL found. Building electrification is likely to have less impact on the system, but could in some regions "shift peak demand periods" and "have significant impacts on electric utility planning, grid operations, reliability assessments, and electricity markets," the NREL data showed.
Utilities see these new resources and prosumers driving significant changes in their role as electricity providers, they reported.
In response to state policies and customer demand, at least 51 major utilities have committed to achieve net zero emissions by 2050, according to the Smart Electric Power Alliance.
With that transition in system resources to more variable generation and distribution flexibility, utilities recognize they will have to work with new dynamics.
Transportation and building electrification will drive a 60% increase in electricity demand and a 40% increase in peak load by 2045, Southern California Edison spokesperson Jeff Monford said. The utility is anticipating "major changes" in how customers use electricity, and "unprecedented demands on the grid," he added.
"Innovation in utility business models must match the accelerating pace of technology innovation."
President and CEO, Holy Cross Energy
His observations were echoed in comments to Utility Dive by Green Mountain Power President and CEO Mari McClure, San Diego Gas and Electric spokesperson Krista Van Tassel, and American Public Power Association (APPA) Director, Policy Research and Analysis, Paul Zummo.
Jurisdictions differ but there are overall trends in the expected operational changes, Zummo said. Electrification will require new rate designs with price signals to guide customer usage, and new generation will include, besides wind and solar, potential game-changers like advanced nuclear and green hydrogen, he said.
System changes will require "expansion of regional markets" to coordinate resource adequacy and transmission planning, added Portland General Electric (PGE) Director of Sustainability Strategy Kristen Sheeran.
Upstate New York investor-owned utility (IOU) Central Hudson expects "environmentally beneficial electrification to drive even greater electric use," company spokesperson Joseph Jenkins said. Utilities will need "more efficient use of electric resources and the grid itself" and will need to invest "in emerging technologies and resources."
There are many unanswered questions about how new technology adoption will affect utility revenues needed to build, maintain and operate their systems, Holy Cross's Hannegan added. The answers will evolve as consumers act and utilities adapt.
But eventually, there will be almost a complete reversal in how utilities view supply and demand, "with the utility introducing options and consumers deciding whether to take them," he said. "Innovation in utility business models must match the accelerating pace of technology innovation."
"Utilities will have to react to technology and policy developments, but they can't be purely reactive because reliability is non-negotiable for them," said Geoffrey Blanford, a senior technical executive for energy systems and climate analysis at the Electric Power Research Institute (EPRI). "That requires proactive planning."
A key innovation in planning would be moving away from utility ownership of generation, according to some power market stakeholders.
A change in generation
Utility ownership of large-scale generation is no longer the best option for utilities and their customers, stakeholders said. Giving up generation ownership can be the first step toward allowing the utility of the future to provide more affordable electric service with competitively procured lower-cost generation balanced by flexible customer-owned DER, they said.
Some utility functions, like transmission and distribution services, are "natural monopolies" because competition could lead to inadequate or over-priced service, said Grid Strategies Founder and President Rob Gramlich. "But large-scale generation has changed."
In states with traditional regulation, utility-scale generation is still treated as a natural monopoly and only utility-owned generation is considered in long-term planning, he said. But consumers can get more cost-effective generation if planning includes competitive bidding by independent power providers of natural gas, solar and wind projects, and utility-scale virtual power plants of aggregated DER.
Low-cost, contracted generation can enable the transition from fossil fuels to renewables and make utilities neutral among alternative clean energy generation sources and between distributed and large scale generation, Gramlich added.
That is not a unanimous opinion. Some say customers would benefit more from utility-owned central station renewables.
In New York state, electricity providers cannot own generation, but Consolidated Edison is seeking permission from regulators to do so, ConEd spokesperson Allan Drury recently said. "We think our demonstrated ability to run energy projects and our access to low-cost capital makes utility ownership of large-scale solar and wind farms in the interest of our customers."
In New York, when utilities contract for generation, the developers keep profits from operational efficiencies and sell excess or extra-contractual generation outside New York, Drury said. "Under a utility-ownership model, those financial benefits would accrue back to ConEd's New York customers."
Despite the lower costs for customers from competitive procurements, traditionally regulated utilities often resist them, Gramlich acknowledged. Utility owned and operated resources have a strong appeal, offering greater control for utilities and, with regulatory approval, guaranteed profits for shareholders, he and other stakeholders said.
But where regulators have approved competitive procurement of contracted generation resources, regulated utilities have obtained significantly lower cost power, according to a March 2021 Lawrence Berkeley National Laboratory (LBNL) study. As more cost-effective developer-owned large-scale generation is used, it will allow future utilities to more efficiently integrate flexible DER at the distribution level, Gramlich said.
Xcel Energy Colorado's 2016-17 competitive solicitation secured contractual bids of $0.03/kWh or lower for utility-scale solar, wind, and solar-plus-storage project, according to a February 2021 Xcel presentation. With Xcel's recent solicitation unconcluded, 2016-2017 is one of the best recent examples of the advantages of competitively contracted resources over utility ownership, stakeholders said.
More recently, competitive generation bids in the 2021 Northern Indiana Public Service Company request for proposals included 13 for utility ownership, 66 contract offers, and 103 options for either, the utility reported. Selections have not been announced but the preferred portfolio calls for up to 250 MW of solar, up to 370 MW of storage, and a natural gas peaker of up to 300 MW, the utility said.
In addition to those indicative solicitations, there has been "a lot of action" in the last year to transition to all-resource bidding, Rocky Mountain Institute Carbon-Free Electricity Practice Manager Lauren Shwisberg said. Regulatory orders in South Carolina and Michigan for competition between utility-owned assets and third-party assets will allow “selecting bids that most benefit customers, independent of the ownership structure,” she said.
Distribution system changes and DER get more attention, but most near-term utility investment will be in utility-scale generation because that is where the biggest decarbonization opportunities are, Gramlich said. Legislation requiring utilities to obtain any needed new generation through a competitive procurement during planning would be a bigger but still less controversial step than disruptive re-regulation, he said.
Customer-owned DER "can help utilities maintain reliability without spending trillions of dollars for peak demand resources."
Senior advisor, Regulatory Assistance Project
Such legislation would "quarantine the monopoly" and "open the opportunity for competition for new generation as well as for new distribution system assets and resources," Gramlich said. The process could lead to different utility business models and even threaten some utilities' financial viability, but "the utility of the future should provide what is best for customers and not protect a natural monopoly."
Utility financial viability could face an even greater threat from the other big change coming, analysts said.
Utilities are also increasingly focused on the transformation that prosumer-owned DER and smart assets are imposing and the opportunity to use them to balance supply and demand, SCE's Monford, APPA's Zummo, PGE's Sheeran, Central Hudson's Jenkins and others agreed
By 2030, up to 25% of PGE power on peak demand days could come from the still relatively small overall DER penetrations, Sheeran said. That can be dispatchable "flexible loads at scale" like virtual power plants that allow "end-to-end integration" of the utility's resources in a way that compensates DER owners and lowers other customers' costs by increasing system reliability, she added.
Demand for DER "will come both from utilities wanting it for flexibility and from customers wanting it for their own purposes," APPA's Zummo agreed. The utility of the future will emerge from today's utilities "adapting to that flexibility and learning how to use it."
The changes needed to support the utilities of the future that are already emerging with growing DER penetrations will lead to a focus on distribution system platforms, said Kay Aikin, founder and chief product officer of microgrid developer Dynamic Grid. With those platforms to manage distribution system resources, and policies driving electrification, the growth of DER, smart devices, energy efficiency and microgrid technologies will accelerate, she said.
SCE, PGE and other utilities that have begun preparing for or adapting to the growth of variable utility-scale generation and the proliferation of DER represent what the utility-of-the-future will be, she said. As the system evolves toward greater distributed and microgrid resources, many of those incumbent utilities "are positioned to implement a transition and integration plan with clear, concise steps."
Varying jurisdictions and regulatory regimes are likely to have varying answers and Holy Cross is still considering multiple business models, Hannegan said. Eventually, "distribution utilities will be distribution system operators balancing the various resources and serving their consumers like transmission utilities act as integrators in organized markets."
As distribution utilities become "automated, price-sensitive orchestrators of distribution level demand and supply," they will also manage transmission and distribution (T&D) infrastructure on two-way networks, he said.
Levels of local generation and bulk system power will vary, but it remains a multi-scale problem at the T&D levels without a specific market design or organizational architecture, Hannegan said. "Distribution utilities face the same learning curve that transmission utilities had as they moved to regional organizations."
The challenge of the utility of the future will be met by integrating the changes at the distribution system level into the dynamics of the whole power system by planning for "flexible demand," RAP's Hogan said.
It will be based on a full view and ongoing forecast of how demand from prosumers and their smart devices will use accurate real-time price and system information to make decisions about usage, he added. "This is not demand as a supply alternative, it is the utility giving customers complete price and system information and adapting its load curves to their demand patterns."
Guided by adequate information, customer-owned DER "can help utilities maintain reliability without spending trillions of dollars for peak demand resources," Hogan said.
A T&D system architecture like that is theoretically feasible, said Peter Kelly-Detwiler, co-founder and principal with power market consultant NorthBridge Energy Partners. But with multiple DER and smart devices in every home, the amount of granular information about transactional activity at the distribution level could overwhelm supply-demand balancing operations.
It will require regional integrated network operators, each operating "an automated, integrated T&D system with visibility at all system levels to balance demand and supply dynamics in real time," Hogan said. Regulated utilities would build and maintain system infrastructure and earn regulated compensation for operating "the bidirectional platform for transactions," he added, echoing Hannegan and others.
Revenue from those transactions could sustain utilities' viability as investment vehicles for shareholders, Hogan said. But benefiting from it will require "a learning curve based on an iterative process."
The specific system architecture and operations are likely to be "moving targets" for the foreseeable future as "new technologies and new business models emerge," Kelly-Detwiler said. "Decarbonizing an entire economy may be the most complex thing humans have ever tried to accomplish."
Clarification: We have updated this story to clarify remarks by Rob Gramlich regarding low-cost, contracted generation.