Disruption Becomes Evolution: Creating the Value-Based Utility

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New business models and cutting edge technologies such as distributed solar and CHP, demand response, microgrids, energy storage, electric vehicles, cyber-security, advanced wholesale markets, and new competitive retail markets are all impacting the traditional regulated utility industry. Generation, grid operations, and wholesale and retail energy sales are being transformed by innovation and competition, forcing utilities faster than ever to make critical choices about business models and technologies.

Innovations in the 20th Century drove the fastest and most disruptive transformations in economic history. Today, after more than a century of slow evolution and little system changes, a confluence of factors within the power industry now results in electric utilities now facing multiple technological and business disruptions that in many ways mirror the evolutions of the past in other industries.

The proliferation of renewable and distributed generation means that continued inaction by the utilities will lead to an increased potential for an unstable grid. The distributed energy resources (DER) ship has sailed, buoyed by social and environmental pressures. Accordingly, utilities have to accommodate rapidly increasing DER on the grid in a safe, reliable, and affordable way. Utilities should plan new and innovative architectures that integrate DER into their dispatch equation as part of their portfolio rather than treating DER as a standalone initiative.

Utilities tend to implement demand response if and only if a regulator asks them to do it, as it places them in the awkward situation of asking customers to use less product. This causes them to miss opportunities to add attractive options for their customers. Utilities should work with regulators to make demand response a part of the normal portfolio of products offered to their customers and establish a rate structure that supports it.

Microgrids today are generally designed and implemented outside the utility planning realm, thereby causing potential serious headaches for utilities long-term. Some microgrid owners expect the local utility to take care of them during emergencies and may have not designed an efficient two-way interconnection. Utilities should adopt and advance microgrids as a next generation tool to create a much needed two-way power and data flow smart grid to support the anticipated growing penetration of electric vehicles, solar PVs, energy storage, and dynamic demand response in smart homes and buildings.

Globally, growth of electric vehicles is expected to accelerate as their prices drop. Today, they show up in clusters within the distribution grid. If not managed properly, they can cause reliability issues by creating extended peak periods that further stress the utility’s assets. EVs could nicely counterbalance DER sources (e.g., wind) given their need to consume when wind is most often generating at its maximum rate in the middle of the night. Managed and coordinated properly by utilities, EV’s enhance the operation of the grid by smoothing the rate at which power is consumed, while reducing peak loads, providing power to the grid, and helping balance load levels.

Utilities and regional transmission organizations (RTOs) or Independent Systems Operators (ISOs) deliver power to their customers based on a consumption cycle that usually has one or more peaks during the day. During these peaks the use of peaking power plants at locations of congestion is very expensive since they are used only for a few hours a day. Installing energy storage devices at various points in the distribution and transmission system enables delivery of hitherto “not possible”services. Energy storage can fill the gaps during peak usage for a system originally designed for instant consumption upon generation, and reduce the need for expensive “peaker”generators. Regulators must allow energy storage to be used freely by the wires business.

Similarly, key business trends partially or wholly unrelated to technology also have the potential to disrupt the utility industry status quo:

  • Retail Choice–As states move to implement advanced metering infrastructure (AMI), the move toward retail choice is advancing in parallel, allowing new players to enter the market and contract to deliver power to traditional utility customers. A “do nothing”strategy is not viable for utilities. Delivering power to an increasingly smaller set of customers enables the profitability per customer to reach a point when the business will no longer be sustainable. Regulators play a vital role in avoiding disruption by loosening restrictions and allowing regulated utilities to embrace new business models.
  • Product Bundling–Players from the telecom, Internet, cable, and home security industries are melding into a single group of companies (e.g. Comcast, AT&T, and Verizon) that deliver services bundled to customers. Other than not owning the electric wires, these new entrants appear increasingly to customers as legitimate sources from which to purchase power. Utilities must proactively address competitive threats from bundlers by first defining their long-term strategy –wires-only, or both wires and retail customers –and taking appropriate steps based on that strategy.
  • Municipalization–Many municipalities are considering the set of steps needed to “secede”from the incumbent utility and become their own utility by owning distribution assets and purchasing transmission, energy, and other ancillary services from the wholesale market. The threat to the entrenched utility is the potential loss of a large group of customers who exit the utility and decrease its rate base. Incumbent utilities must respond by becoming more customer-centric and placing a stronger focus on leveraging new technologies and offering new services. Cities and communities wanting to own their own power company must get the right strategic business plan, technology roadmap, and advise to succeed.
  • Nationwide Wholesale Markets–The U.S. and Canada have taken a Swiss cheese approach to implementing wholesale markets across the country with markets in some areas and none in others – even though all are required to follow the tenets of FERC orders 888 and 889 related to unbundling. While the size and scale of most of these markets is quite large, disparate rules make it impossible for the participants to drive economies of scale across these markets. We believe there is a need for a nationwide wholesale market as an alternative to existing regional marketplaces. This would enable, for example, Midwest wind power to be transferred to marketplaces in the east, and initiatives like the Tres-Amigas project that can provide the perfect balancing between the eastern, western and Texas interconnection and others.
  • New Business Models–Choosing the right business model is the first step toward becoming a smarter utility, and the answer depends in large part on the current structure of the particular utility, including the level of regulation under which it operates and its management’s appetite for change and risk. It requires insight into divestments and investments, and often requires external help to rethink strategies and manage innovation as a competitive advantage. Utilities may be capable of handling one of these changes on their own, but dealing with all at the same time can quickly overwhelm a slow-moving industry. Preparing for the evolution requires each utility to chart its own course, develop sound a strategic business plan and technology roadmap to serve customers in the most effective and efficient manner, and carefully enable the right business cases and strategies based on their own unique challenges, generation sourcing, and electric network design characteristics.

http://smartgrid.ieee.org/february-2015/1226-disruption-becomes-evolution-creating-the-value-based-utility