The delivery of electricity from central power plants to customers changed the world and now the world is changing again because customers can make and manage their own electricity with distributed energy resources (DER).
Flattened or falling electricity sales, partly due to DER, initially inspired visions of a “death spiral” for the utility businesses that deliver power. But two-thirds of customer electricity needs will likely continue to come from utilities for the foreseeable future, visionary DER provider Elon Musk recently acknowledged.
The question utilities face is not when they will die but how they will live, according to the just-released “Reimagining the Utility” from the Rocky Mountain Institute (RMI).
Utilities like Green Mountain Power are moving ahead with DER in a way that benefits both the utility's system and its customers. Others, like Commonwealth Edison, are building platforms on which customers and DER providers can interact directly to the benefit of customers and the system.
The crucial insight forward-looking utilities are reaching is that there are ways utilities, DER providers and customers can benefit from new business models.
The poles of utility identity
The driver of change is competition from third party DER providers in the unregulated marketplace, RMI Electricity Practice Manager Rachel Gold told Utility Dive.
Such providers are using two approaches to re-imagining their business models, she said. They may partner with utilities that need their expertise with a product or service like cloud computing or electric vehicle chargers.
Third parties may also take advantage of enabling economic conditions or enabling policies to compete directly with utilities, as they have with rooftop solar and home battery storage, Gold added.
To recapture diminishing revenue streams, the electric utility of the future must therefore accommodate those providers of behind-the-meter products and services demanded by customers who want to generate and manage their electricity, she said.
Different business models
One business model through which the utility of the future may work is an altered version of the present vertically integrated regulated utility business. It would offer “expanded monopoly services with utility ownership or financing of all new assets and services (including DERs),” the paper reports. In this model, third party providers are partners with the utility.
This works well where utilities “can leverage economies of scale, a low cost of capital, existing customer relationships, and familiarity with system needs to compete," Gold said. The downside is that competition-driven innovation can be limited if the monopoly utility is unwilling to finance research and development.
The alternative is a business model in which the utility of the future is a “transformed platform operator” and “serves as a neutral asset integrator and host for market activity,” the paper reports. In this model, third party providers would compete for customers via that platform.
These utilities would own no generation and would only do distribution system planning and operations, Gold said. “Third parties, or maybe even the customers themselves, would perform many of the system functions and their need for infrastructure could create value for the platform providers.” The risk is that profit-oriented third parties would not guarantee universal service, she added.
New York’s Reforming the Energy Vision proceeding is developing this model, Gold said. The state public service commission has addressed the risk by allowing utilities to compete in underserved markets.
The paper identifies six variables that define these business models. After considering how utilities and regulators are dealing with asset ownership, asset control, customer relationships, revenue streams, utility earnings and risk sharing, it is clear that it is neither the expanded monopoly nor the platform approach, but “hybrid business models" that are most common,” Gold said. “Most utilities both procure services and share the market with competitors.”
The utility business will not be “remade overnight,” the paper acknowledges. But industry leaders must not remain dependent on a business and regulatory model designed for “infrastructure investments and operating structures” that do not serve today’s needs, it adds.
Pricing, data and interconnection
Three key changes are needed to remake the utility business model, Gold said. The first is rate designs that send more transparent and accurate pricing signals to consumers.
The smartest designs, which often use time-varying rates, should make the value of private sector DER offerings clear to customers, according to the paper. It should also give them a price incentive to use the offerings when they most benefit the system.
The second key is more accurate data on customer energy usage that can be available to private sector DER providers without compromising customer privacy. The third is procedures that enable cost-effective DER interconnection.
Interstate Renewable Energy Council Policy Director Sara Baldwin Auck said the last two are linked.
“Interconnection standards are a foundational component of a strong DER market, primarily because they impact access, which impacts the cost and viability of projects,” Auck said.
There is a wide range of components to effective interconnection standards, but the biggest is the transparency that makes system data accessible to DER providers, she added. That information makes it possible for DER to be "part of a modern distribution system" instead of "something forced on the utility" because it allows DER providers and utilities to work together to meet customer demand and system need.
RMI’s Gold said there are two reasons utility CEOs should be thinking about price, data and interconnection as they optimize the role of DER on their distribution systems. “One is the revenue loss if customers use third party-marketed DER,” she said. The other is that in re-imagined business models, "utilities can add revenue streams."
The changes that utilities face are being driven by private sector providers who are giving customers what they want, Gold said. “But the utility may have a competitive advantage anywhere the competitive market is not meeting customer needs.”
Spokesperson Marcus L. Beal said Pepco has streamlined its interconnection processes to meet its customers' needs and to meet its commitment to DER. “DER can have beneficial or negative effects,” he emailed Utility Dive. A “streamlined and effective interconnection process” allows Pepco to harness the benefits and protect against potential negative impacts.”
Some utilities are going beyond interconnection as they invent new ways to re-imagine their business models.
New, newer and newest utilities
Green Mountain Power
Gold said several Green Mountain Power (GMP) programs show what the utility of the future can be. The utility has partnered with private sector providers to lease utility-owned battery energy storage systems and electric water heater control devices to customers. GMP manages and optimizes both to lower customer costs and strengthen its distribution system.
President and CEO Mary Powell said GMP is “very bullish” on solar and battery energy storage.“It allows us to move from an economically inefficient grid to a more home-, business- and community-oriented way of delivering electricity,” she recently told Utility Dive.
Instead of just seeing storage deployed to benefit individual customers, GMP wants to use the full stack of storage values. “We are working on ways to flatten peak demand and reduce the cost to meet it,” Powell said.
New GMP programs will invite the participation of customer-owned DER, she added. “That is about creating a platform that others can plug into and get compensated for providing value to the rest of our grid-connected customers.”
The utility and its customers are both part of “a consumer-led revolution to a very different energy environment,” Powell said.
Commonwealth Edison Engineering and Smart Grid Vice President Joe Svachula said ComEd is working to develop a four-layered business model. The first layer is a foundational platform that “enables more and more transactions.”
The second layer is planning and operational changes “to integrate more of the DER customers are asking for and will increasingly ask for,” he told Utility Dive.
The third layer is a just-emerging “transactive marketplace” in which the utility platform allows transactions between customer-sited DER and prosumer demand for new services.
“The fourth layer, and the one that makes the most sense to people, is the different services that emerge that the utility or others use the platform for,” Svachula said.
ComEd is working on real-world applications of this new business model.
ComEd’s advanced metering infrastructure rollout, part of a comprehensive smart grid program, is now producing data on four million customers “in near real time,” he said. “What used to be millions of data points per month are now billions of data points a day, which will allow the utility the visibility to manage an unprecedented proliferation of DER.”
Its recent pilot LED streetlights program is about to turn into 130,000 ComEd-supplied LED streetlights and potential revenue-generating service agreements with Illinois municipal utilities, Svachula said. ComEd is also running a smart water meter pilot and planning a microgrid pilot.
The utility has avoided friction with private sector new technology providers by partnering with them and by getting supportive policy in place before proposing its programs, he added. “Everybody knows the rules, so when we hit the go button we are working together.”
ComEd’s new business model does more than satisfy customer demand for DER, Svachula said. “There is no secret that electricity usage is down, and this has the potential for new revenue streams. The grid is not going away anytime soon, but finding new ways to transact and add value can benefit both customers and utilities.”
Twenty First Century Utilities
The leaders of Twenty First Century Utilities have long been reimagining the utility business model, according to Managing Partner Larry Kellerman. They expect to close negotiations and begin operating “a modern, customer-facing utility” that will fully meet customer demand for DER "by or around the end of Q1 of this year,” he said.
The regulated utility was conceived over a century ago “to deploy large volumes of societal capital as cost effectively and constructively as possible,” Kellerman said. Because of it, utilities are now unable to deploy DER, though they have become “the most cost-effective investments” and “some of the most societally beneficial products and services.”
Twenty First Century Utilities will be able to do so because its “million rate base” business model solves the problem of how to support customer investments in DER without shifting the cost to non-participant customers, he said.
Customers would choose products and services from a utility-curated set of offerings and the utility would finance their purchase, Kellerman said. The customer who owns and benefits from that set of DER would pay for them through on-bill payments. Their cost, and the utilities’ return for financing them, would be determined through traditional cost of service regulation.
No investment would be made until pilots demonstrate to regulators’ and stakeholders’ satisfaction the reliability, safety and cost-effectiveness of the products and services, Kellerman added.
Cheryl Roberto, manager of utility transformation and regulation for Twenty First Century Utilities, said the RMI paper is right to describe the company's business model as an effort “to unify the regulated utility and platform concepts.” Utilities will continue “to do reliability and critical infrastructure protection because the utility needs to be there when it is needed,” she told Utility Dive. “But it needs to do two other things.”
One is operate a distribution system platform “that integrates and optimizes all resources, whether owned by the utility or not, and whether on the traditional grid or behind the meter,” she said.
The utility is in a unique position to “animate and drive” the use of this platform, Roberto added. Well-designed price signals can help customers get the best value for them while sharing of information and data can help vendors develop products and services that benefit customers and the distribution system.
The other thing utilities need to do is “provide capital for the up-front costs of the products and services customers want and recover their investments through the customer’s bill and no one else’s,” she said.
In this way, the two biggest objections of utilities and regulators to DER are eliminated because “the costs don’t shift and competition is not suppressed but enhanced,” Roberto said. “We will help vendors do business in a cost-effective way and they will help us bring to scale the products and services that work best on a twenty-first century grid.”