What does it take to become a "utility of the future"?
A panel of experts from around the power sector addressed that question earlier this month at Solar Power International 2015 (SPI), the industry's largest annual conference.
“What the utility of the future needs to do is replace today’s grid with the grid of the future,” said Ronald Litzinger, president of the Edison Energy Group, the holding company for Edison's competitive power developers. “That is a more networked grid with much more advanced controls that allows for two-way power flows.”
That grid offers “a good growth opportunity for the utility,” Litzinger added.
“I don’t care where you get your power," he said. "We are just here to provide a grid to facilitate the delivery of the power.”
Consumers, on the other hand, will increasingly care where they get their power, said Jon Wellinghoff, a former chairman of the Federal Energy Regulatory Commission (FERC).
“We have to look not at what the utility of the future is but at what the utility customer of the future is. That customer now has a customer-centric set of choices," Wellinghoff, now a partner at the law firm Stoel Rives, said.
Emerging efficiency and home energy management technologies have changed how customers interact with their electricity and the company that provides it. Customers can now control their loads in response to prices and/or signals from a grid operator, as well as owning their own generation or storage. And they can choose to use those products or offer them to the grid, according to Wellinghoff.
“With those abilities, the utility now has to look at those residential, commercial, and industrial customers differently and figure out how to partner with them to extract as much value as possible, both for the customer and for the grid, and to optimize the operation of the grid itself," Wellinghoff said.
Postcards from the future
Hawaii is the poster-child for the evolving utility sector, said Lorraine Akiba, a commissioner with the state's Public Utilities Commission, sending "postcards from the future" to the the other states about renewable energy, the utility transformation, disruptive technologies, customer choice and empowerment.
But Hawaii’s grid faces a double challenge, she explained. It has the highest penetration of renewables in the United States, in part due to high electricity prices, while lacking adjacent electricity markets to export over-generation or to obtain peak demand support.
But, "in all challenge lies opportunity,” Akiba said. The commission has embraced change and regulatory reform, while identifying new avenues to incentivize the evolution of utilities, noted in its landmark “Inclinations on the Future of Hawaii’s Electric Utilities” white paper.
One of the Hawaii commission's landmark rulings was to clarify energy efficiency, demand response, and energy storage as distributed energy resources, so they could be treated as generation resources for planning and cost recovery, Akiba said.
“For savvy utilities and savvy third parties, that should open up a whole new area of revenue generation, especially in the area of third party aggregators of demand response being able to partner with utilities.”
Hawaii's so-called vision of the future empowers customers, making them full participants in the state's portfolio, Akiba added.
The electricity transformation in Hawaii and elsewhere can be boiled down to a "gradually escalating spiral of technology, Tom Starrs of SunPower said.
Starrs, vice president of market strategy and policy for the solar company, added that "technology innovation is not going to drive disruptive change on its own ... We have to see a corresponding evolution in the regulatory framework.”
States like Hawaii, California, and New York are upping their game, Starrs said, because "they have policy goals that differ materially from places satisfied with the status quo.”
Even so, the drivers of change are different in those three states with more mature solar industries. In Hawaii, it's the “near crisis” of high renewables penetration. In California, it's the commitment to cut greenhouse gas emissions. In New York, it is "a deep-rooted commitment in the wake of Superstorm Sandy" to grid reliability and resilience.
“Those three different drivers share the same set of technical solutions,” Starrs said. He listed examples such as distributed solar, battery storage, energy management capabilities, and the ability to do demand response, noting that they all require the distribution system.
“We are not going to do away with the distribution system tomorrow or next year or in the next decade,” he said. The challenge is to "figure out how to allow utilities to continue doing what they have done well for a hundred years without putting obstacles in the way of deploying the technologies consumers want.”
Who runs the distribution system?
Utilities will likely overcome the hurdle of providing many new products and services in the competitive marketplace, Wellinghoff said. Even so, there must be an owner and operator of the distribution grid and "that is a monopoly service.”
Because competition to provide distribution system services is impractical, the monopoly provider must be regulated, though minimally, to prevent “unlimited rents,” Wellinghoff explained. He believes the solution is an Independent Distribution System Operator (IDSO) that operates but does not own the distribution system.
The system, owned by a utility, would only have the responsibility of ownership, invest in and maintain that asset, similar to transmission owners in ISOs and RTOs, Wellinghoff said.
Distribution system planning would integrate with FERC’s planned bulk transmission system, but would still rest under state commissions, Wellinghoff said.
“The utility owner would be guaranteed a return on whatever investments were recommended by the independent entity to the regulator," he said. "It would mean a lot less potential for stranded assets and for risk on investments in the asset.”
Though Litzinger expects there will eventually no longer be a need for a centralized distribution system, utilities now "need something to take away the excess power during the heat of the day or customers would be very disappointed at what happens to their electronics,” he said. Additionally, customers need power during night or overcast days.
Litzinger said power companies should simplify how they support the grid and used Edison's utility — Southern California Edison — as an example of using a single fixed charge to run the wires.
"Community choice aggregation is fine," Litzinger said. Everything else should be competitive, including the retail and energy services sectors.
Best bang for your bill
That leads into the next evolution: the best service for your bill.
At present, the utility bill is not transparent, Akiba said.
“People pay for the services they get over their cell phones," she said, "but they don’t know the value of what they get from the grid because it is in one service."
It will be necessary to “unbundle” the services customers get from the grid, she explained. Once customers understand the value of their electrical services, time-varying rates will be effective signals to alter behaviors.
If the value customers bring to the grid with distributed solar, battery storage and the other emerging technologies is balanced with services they obtain from the grid in a transparent exchange, they will “see value and want to be dynamic providers to the grid,” Akiba said.
Rate cases could be key to pushing that change forward, but is also an important balancing act.
Thanks to his extensive experience in rate cases, Litzinger is keenly aware of the conflicting pressures on utilities to optimize both spending and operations.
"The thing that keeps spending in check is that the overall rate has to be acceptable for regulators and consumers to buy into," Litzinger explained. “In rate cases, everybody always says they are willing to take an outage instead of the spending but I don’t know where all those people go during the storms.”
The better way to minimize costs for the grid, he said, “is to send the right price signals so the distributed resources locate where we don’t have to do much.”
But customers have shown with large investments in distributed solar, battery storage, and advanced energy management capabilities that they are indeed willing to spend for value, SunPower's Starrs asserted.
“If we send the right price signals, we are giving incentives to customers to make their own investments,” Starrs explained.
Price signals “give customers the ability to arbitrage whatever rate design they are facing and an incentive to invest in accordance with their own desires and an opportunity to invest to save money.”
The answer to overcoming the challenge of midday over-generation from solar, he continued, is a "price signal that says 'energy is cheap and abundant in the middle of the day so turn on your appliances, charge your EVs and your home battery storage in the middle of the day and sell it back to the grid during peak demand periods when the price is high.'"
"It is not complicated," Starrs said.
A combination of fixed and demand charges that reflect the actual cost of service will also help, Litzinger said, alongside real-time pricing.
But Wellinghoff wasn't so sure.
The basic cost of service rate model “is a very blunt instrument,” Wellinghoff noted. The rate base process “is not going to get investment in new technology.”
Customers will invest if they have the right signal for the value of their investment and if that value can be extracted through market-based mechanisms, he said.
“That can make it easier for [utilities] to earn money on the distribution system at lower risk and make it easier for customers to extract value for their investments on their side of the meter in an optimum and cheaper way for everybody,” the former FERC chair said.