What’s an electric utility? Better yet, what will it become?
Those questions nag utilities — and their competitors — as technology disrupts the century-old power industry. Microgrids, electric vehicles, distributed energy resources (DERs), energy storage, the prosumer, blockchain will either upend utilities — or bring them new opportunity — depending on how you look at it.
Which way it goes, who benefits, and what the transformation means to society, depends on action taken now by state regulators, according to a new report by the Rocky Mountain Institute (RMI).
“Reimagining the Utility: Evolving the Functions and Business Model of Utilities to Achieve a Low-Carbon Grid” explores what regulators need to consider in balancing the monopoly franchise and the competitive market, as the new electric era emerges. This includes whether or not utilities should be allowed to own microgrids and distributed energy resources (DERs).
RMI points out that a threshold issue is how utilities and their competitors will make money in the evolving power industry.
The stakes are high. Annual revenue for investor-owned electric utility is about $355 billion, according to a 2016 Edison Electric Institute report. Moreover, that pot could grow, as it did when disruptive technology rearranged the telecommunications industry. Telecom saw revenue rise from about $160 billion in 1992 to $750 billion over 30 years as wireless communication took hold, according to RMI.
“While important differences between electricity and telecommunications exist, there remains promising potential for greater value creation and market growth in the provision of electricity services,” RMI says.
So who gets what part of that pie? What goes to utilities and what goes to the competitive market?
Vision not mandates
In settling these issues, RMI cautions regulators to avoid steadfast rules. Instead, the Colorado-based organization urges that they create a guiding vision, and look at each circumstance in light of that vision.
California offers a good example of how to do this in its handling of electric vehicle charging, according to RMI. The state public utilities commission refrained from creating a blanket rule about utilities investing in charging stations. Instead, the commission reviews each utility petition using guiding principles and a balancing test to weigh the benefits of utility ownership against the limitations the investment places on competition.
“Regulators and utilities have an important strategic choice to make at the outset: whether to pick off decisions one by one and see over time where they end up, or to set a vision in advance then let decisions follow from that. Clearly, the latter is the better approach,” says the report.
Defining the utility of the future also might mean allowing utilities a broader public purpose. Regulators might consider societal goals and not just fiscal prudence when determining if a utility should be granted cost recovery for an investment.
“To build the utility of the future, the historical focus on cost-of-service ratemaking for narrowly interpreted ‘used and useful’ investments must evolve to a new focus on balancing the needs and opportunities for a larger role from third-party service providers, with a utility role to support a marketplace that delivers societal and environmental goals,” says the report.
RMI, a clean energy advocate, focuses in particular on the utility role in reducing greenhouse gases. But the same focus on societal goals could be applied to electric resiliency, a key benefit of microgrids that has yet to monetized, yet protects the health and safety of the public during prolonged power outages.
Ultimately, what’s clear is that regulators need to answer fundamental question about the appropriate scope for utility functions (and associated earnings opportunities) versus those that should be provided by a competitive marketplace, says the report.
At one end of the spectrum utilities may have little involvement with distributed energy except to act as a platform, a kind of Amazon.com, where competitive players offer microgrids, solar, and other resources. Or at the other end, the utility of the future may look more like the utility of today. The utility may own distributed energy as it now owns transmission and distribution infrastructure.
“Both models have merit, and hybrid approaches are available,” says the report.
Whatever the case, “the role of regulation remains critical, including in competitive market structures, and is needed to evaluate decisions large and small to ensure they are consistent with objectives to build a clean and customer-oriented business environment,” says the report.
So, while much may change in terms of technology, one thing remains true. Electricity markets are driven by regulation, which is handled largely on the state level in the U.S. Fifty state commissions will decide the transformation, meaning we can expect multiple answers to the question: What will the electric utility become?
Explore the microgrid and utility relationship at Microgrid 2018, May 7-9 in Chicago.