“Steven Chu told me this joke,” Ron Binz tells Jim Rogers, former CEO of Duke Energy, and Mike Chesser, former CEO of Great Plains Energy and Kansas City Power & Light.
Binz is the former chairman of the Colorado Public Utilities Commission and, more famously, President Obama’s failed nominee to lead the Federal Energy Regulatory Commission. Steven Chu was the Secretary of Energy from 2009 to 2013.
Binz is having an at-length, in-depth discussion with Rogers and Chesser about the future of U.S. electric utilities at the Brookings Institution in Washington, D.C. But right now, he’s telling a joke.
“There’s these three utility executives, and they’re wringing their hands over their future,” Binz quips. “They decide they’d better end it all.”
“So, they decide to jump in front of a fast moving object,” he laughs. “They jump in front of a glacier — that’s their estimate of a what fast moving object is.”
Not everyone in the audience laughs, and Charles Ebinger — moderator of the discussion — tries to make a rejoinder: “God, I was lovin’ everything you said until the last part.”
Binz chuckles, “Somebody added to my joke the last time I told it — ‘And the glacier killed them.’”
The joke is that electric utilities are famously slow-moving, risk-averse organizations. And rightly so — they built out the nation’s power grid and reliably provided electricity for the last 100 or so years, feats that are the platform upon which American industry was built. Jim Rogers calls it “the single greatest engineering achievement” of the 20th century.
But today the electric utility business is at a crossroads. Disruptive new technologies — rooftop solar, energy storage, and demand-side management to name but a few — and paradigm shifts in policy and regulation are wreaking cataclysmic change on the traditional utility business model. As a result, the future of electric utilities is highly uncertain.
Binz, Rogers and Chesser sat down at the Brookings Institution to give their prescriptions for the utility of the future and how to get there. The full discussion is below, and the transcript can be found here.
But since we know you may not have an hour-and-a-half to spare, Utility Dive has cherry-picked the juicy quotes and synthesized Binz, Rogers and Chesser's views for you. Here's what you need to know.
As the former CEO of what is now the biggest electric utility in the U.S., Jim Rogers knows all too well the challenges that utilities face going forward.
For one, “if you look at demand for electricity in the United States today, it is essentially flat across the country,” Rogers said. “But when you look at the technologies, there’s a huge productivity gain in the production, in the delivery and in the use of electricity.”
“There’s been a decoupling of the growth and demand for electricity from growth in GDP for the first time in our history.” Rogers said. “And it’s going to have profound implications for the way forward.”
The second big challenge Rogers highlighted is power supply.
“By 2050, virtually every power plant in this country, with the exception of our hydro plants -- assuming they don’t extend the license for nuclear from 60 years to 80 years -- are going to be retired and replaced,” Rogers said. “It’s almost a virtual blank sheet of paper in terms of how do we design the generation next going forward.”
Finally, Rogers believes “the Internet of everything will transform the use of electricity in the United States.”
“The simple fact that Google acquired Nest tells you where it’s going,” Rogers said. “Because at the end of the day, what Nest is going to do is write the software for every device within the home, and that’s going to lead to an optimization of the use of electricity within every home and — I suspect — every business.”
These challenges are navigable to some degree, Rogers suggested, but the greatest obstacle in the future of electric utilities is how they are regulated.
Back in the 1920’s, “regulation was first established to attract capital to provide universal access [to electricity] to our country,” Rogers said. But “today we are a battery. We have tens of millions of customers making random decisions every second — turning lights on, turning on their TV, and turning on radios. We're always there. We’ll instantaneously respond to the random decisions of millions.”
Utilities have not yet developed the capability to manage thousands of mini-generators because, until now, “we’ve had a central station approach,” Rogers noted.
“Today, regulations allow us to optimize from the generation to the meter,” Rogers said. “To get maximum efficiency out of the grid tomorrow, we need to have the capability to optimize from the generation — whether it’s a central station or distributed generation — all the way to the device. It’s in that optimization that there will be even greater productivity gains, more downward pressure on demand going forward, and that’s going to require for us to make these billions of dollars of investment to go from analog to digital, to replace the existing generation — although it will be a different mix. We're going to have to raise a significant amount of capital to do that. And we need to do it at the lowest cost, because it translates into lower prices for our customers.”
Rogers believes utilities can do all that, “but we have to have a regulatory model. Not the one that was built in the ‘20s to provide universal access, but one built today that incents us to really accelerate our role as the battery, to accelerate our role as the optimizer. That to me is the model. I call it decoupling on steroids."
When Ron Binz thinks about the utility of the future, he thinks first about “what the grid of the future is going to look like.”
There are two key features that stand out to Binz: first, the power grid will be low-carbon; second, it will be connected “in much the same way that the Internet is today.”
“The application of IP technology to the electric grid will transform electric consumption in a parallel, but different way than the way the Internet has remade news gathering, entertainment, purchasing, and banking — just about anything we do,” Binz said. “A similar transformation will happen to electricity.”
But “you can't justify an overhaul to the grid from the ability of being able to change your thermostat in your car,” Binz noted. The transition to a low-carbon grid means the grid must be able to absorb the inputs of intermittent renewable generation — “that will be a grid with significant amounts of storage, but also price-responsive demand.”
Binz imagines a grid where every device in the network — “every refrigerator, every hot water heater, every generating plant, every steel mill” — communicates with every other device, and is operated by a central orchestrator (i.e., the electric utility) “who makes all of this work together.”
The grid of the future is “effectively a very giant battery,” according to Binz, from which “you can put in power or take out power” as needed.
“Today’s utilities are a long way from that reality,” Binz acknowledges. The problem is that “today’s regulation gives very little incentive to utilities to evolve in the way society needs for them to evolve.”
Binz emphasized that utilities shift their business models according to regulatory incentives.
Back when he was the chairman of the Colorado PUC, Binz asked a utility’s general counsel if the proposed regulatory changes would actually work. “He said, ‘You throw money at us; we're going to respond to it,’” Binz recounted. “That was a crude way of saying regulation can provide the incentives — both positive and negative — for utilities to move quickly on these things.”
“Society needs to regulate utilities with an eye towards motivating them to do the things that society wants out of them,” Binz said. “That’s a pretty obvious concept, but a very novel one when it comes to utility regulation.”
Despite the challenges, Mike Chesser is “very optimistic about the potential for utilities to not only thrive, but to also evolve into a more exciting kind of a company.”
One challenge that utilities face today is the imminent and ongoing retirement of its aging workforce. But Chesser believes that it’s never been easier to attract “the best and the brightest” precisely because of the power grid’s ongoing transformation “from a one-way system to a two-way integrated network.”
The other challenge is that ongoing transformation. Chesser noted that utilities are "going to have to change the way they approach the marketplace. They're going to have to recognize focusing on the customer, that there are people out there that have better value propositions to offer than utilities do — distributed generators, energy service companies, those type of services."
But Chesser thinks utilities are well-suited to provide these services. "There are customers that really want to get their services from their local utility," he said. "They trust the brand. They trust their reliability."
For example, utilities are "uniquely positioned" to help advance energy efficiency, Chesser said.
"If you look at all of the avoided costs, the environmental benefits and so forth, energy efficiency should really be our first fuel of choice," Chesser said. "There's huge untapped potential for improving the efficiency of our buildings."
Utilities can raise capital in the public markets to fund energy efficiency and earn a return on it. "If you're a building owner, if you were to retrofit your building to high efficiency standards, it would take you about seven years to get a payback," Chesser said.
With "the capital we raise, we will invest in you as a contribution, and that will take your payback down to two to three years. Now, the deal is we have to get a return on that capital just as if we were building a power plant," Chesser suggested. "It’s called a negawatt that we're building instead of a megawatt. But that model is there, and if it were adopted more aggressively across the country, we would cut back on a lot of the natural gas for our generation we're having to build."
Another example that utilities can lead on, Chesser said, is solar.
"Right now, there’s a lot of people putting solars on the roof, and they're incurring the cost of installing it, the maintenance, all of that," he said. But "there’s another way to approach that where a utility would find a spot on their system that needed to be reinforced — an expanded substation, new feeders and so forth — and instead, install an array of photovoltaic cells, maybe 50 megawatts. There is technology available today where the utility could carve out a specific cell and have that be attributed to an individual residential customer and basically lease that cell to them, credit their bill for every kilowatt that’s generated by that cell at 70% of the cost and all of the avoided headaches of rooftop solar. That’s just an example of some of the ways that utilities being innovative can participate going forward."
Chesser ultimately thinks that the utilities that "succeed over the long-term have a sense of a higher purpose. They're not just looking at earnings next quarter or earnings next year, but they're thinking, how can we make the world better?”
"Bottom line — the big question is, in this kind of a world, how are utilities going to make money? What’s going to be the financial health of utilities as we go to this kind of a transition?" Chesser asked. "I believe if we're true to that higher purpose of focusing on what’s best for our customers and what’s best for the community, and we're seen as doing that, then in the end, we’ll be treated fairly."