Distribution Utilities at a Crossroad

Globally, distribution utilities are rapidly incorporating standards-based smart grid protection and control technologies into their asset base. But they and their regulators still face challenges in terms of marketing products and seeing them accepted by consumers. So smart grid rollouts and trials can no longer be viewed as just “business-as-usual”—new models and regulatory frameworks are required.

Smart grid trials and projects have been rolling out worldwide, with the support of government initiatives and public funding. The IEC 61850 standards-based protection and control migration pathway has been implemented by many distribution utilities, enabling them to defer network reinforcements—instead of building new lines, cables or substations in response to load growth—while still ensuring service quality and acceptable reliability.

At the same time, distributed generation and home appliance automation are becoming more attractive options, as economies of scale are exploited in solar panels, battery storage and smart grid equipment.

Although technical capabilities and cost-efficiency are improving, distributors and their government regulators are still exploring how alternative revenue streams could help bring smart grid benefits to customers and ensure that smart grid businesses stay financially viable in the long run. For countries like New Zealand, which has chosen not to commit any sort of long-term public funding for smart grids, utility businesses have to rely on market models and customer engagement.

Industry deregulation during the last decade of the twentieth century brought market competition to electricity generation and transmission. But expectations differ as to the extent the market mechanism can be extended to distribution businesses, especially in a smart grid context. Distribution utilities are traditionally regulated as monopolies, using rate of return, price cap or revenue cap methodologies, closely coordinated with service quality monitoring. In New Zealand, utilities and regulators prefer to base pricing of distributed resources and smart grid technologies on network investment deferral value; alternative business cases for demand management or voltage control depend on how much distribution and transmission network investment can be saved.

Although substation automation and primary network reconfiguration can improve distribution network performance and reliability, distribution utilities in many situations still find smart grid investments for load management unfavorable compared to the traditional business case for building more lines or transformers. In a regulation environment where payback on investment depends on estimation of avoided alternative costs, the danger of higher prices for new technology inhibits utilities from embarking upon and maintaining smart grid investment.

Here in New Zealand, unless there is some major change in the regulatory framework, many distribution utilities are expected to stick with a ‘wait-and-watch’ attitude toward large-scale smart grid investment in the short and medium terms.

What is more, when more smart grid protection, control and end-use technologies are tried out and implemented, the proactive distribution utilities may find themselves competing with other providers’ products and offerings. Customers might obtain distributed generation or storage units from their distribution utilities, which are technically capable of developing and selling them (unless expressly prohibited from doing so), rather than obtain them on their own or from energy retailers.

When providing and operating controllable home appliances such as domestic hot water cylinders or heat pumps, distribution utilities compete not only with retailers, but also with upstream transmission operators. This is because controllable loads can smooth wholesale price volatility and aid optimal system operation. For such market segments, distribution business activity should be treated differently than the supply of public goods like transmission lines and transformers is handled. Public goods are regulated and earn a fixed rate of return, but the revenue from “innovation” businesses should be allowed to reward investment at market rates, especially in the balance sheets of publicly listed energy distributors.

Taxes, subsidies or public funding for smart grid projects and renewable generation do not always deliver the desired sustained benefits because they can distort markets and create inefficiencies. Where market competition shows promise, mechanisms should be adopted to drive the transition to sustainable smart grids.

For example, products and services for home appliance automation can be designed to target different market segments. It may not be enough to pitch the same home automation devices the same way to all demand response participating consumers—programmable thermostats, say—as some customers will be mainly looking to reduce bills while others may be on the lookout for what is edgy, fashionable and intelligent. The latter may be more interested in automation products for dryers, washing machines, dish washers or even electric vehicles.

Availability of information is an important aspect of market mechanisms. It is well-known that different roof-tops have different solar attributes. Evaluating and disseminating information on the roof-top solar potential of individual house properties can be provided as a public service, either through the electricity regulator or city council planner.

The electricity regulator has an important role to monitor and correct distorting market behaviors. Service quality monitoring is not new to distribution regulators, but adopting more end-use smart grid technologies requires more granular assessment of reliability indices. Innovative pricing methodologies can be explored, so as to differentiate customers’ reliability preferences. Contractual arrangements made by market participants should also be monitored against fraud and unfair trading, so that the long term perspective of smart grid business becomes sustainable.

In summary, we feel that smart distribution businesses will need to continue deploying automated protection and control schemes to operate their upstream assets, with more market elements introduced for business innovation at the consumer interface. Distribution utilities with increasing market penetration of smart grid technologies face unprecedented investment and operational quandaries that call for new distribution business models and regulatory frameworks.