Essential Symbiosis of the Energy Sector’s Incumbents and Insurgents

By Tanuj Deora

In late July, I was one of a group of nearly 80 energy experts — from financiers and utility  executives to policy makers, entrepreneurs and environmental advocates — who journeyed to Colorado for the Aspen Institute’s annual Clean Energy Forum. Participants spent three days immersed in intensive and spirited discussions focused on several core aspects of the fast-evolving future of renewable energy, energy efficiency and other distributed energy resources (DERs).

We all agreed with the basic premise that replacing coal-heavy power generation with more renewables, efficiency and DERs is a good thing — and has become increasingly cost-efficient. Where we differed and debated was around the definition of “success” for clean energy deployment, what future business models might look like for utilities and all power industry stakeholders, and, perhaps most interestingly, the adversarial, yet complementary roles of power sector “incumbents” and “insurgents.”

Tanuj Deora

The Aspen Institute will soon publish a report building on discussions at the forum. But the event left me thinking more deeply about incumbents and insurgents in the power sector, as even the experts in Aspen struggled to articulate a clear vision for the roles and values each represents.

Here is my take:

—Electric power system incumbents, such as utilities and regulatory bodies, have been critical to the energy system and will continue to be so in the future.

—However, these incumbents, on their own, are ill-equipped to fully respond to the changing nature of the “public good” of electricity and fully exploit the value of new technologies in the power sector.

—Insurgents — such as technical innovators, start-up entrepreneurs and advocates — provide a variety of values, but are particularly critical in filling the gaps in incumbents’ currently limited ability to experiment and instigate change.

—The resulting dynamics and synergies will naturally result in some conflicts. But when incumbents and insurgents work together cooperatively, they often forge solutions that provide benefits for a broad cross-section of stakeholders.

Incumbents: More than electricity providers

While access to energy is not quite a right, it is a public good; the societal and economic value of universal access greatly outweighs the cost of providing the service.  Incumbent utilities — whether investor-owned, public or cooperative — have historically been accountable for providing this public good for the benefit of all. Going forward — whatever changes may come — they will continue to be critical in ensuring a reliable, affordable and sustainable grid.

But as change ripples through the industry, a persistent question arises: Why should we protect – or even care about – the economic sustainability of incumbent utilities as new energy offerings enter the market?

First, incumbent utilities provide services well beyond simply delivering energy at a particular point in time. Consumers and the broader public good require not only electricity, but electricity that is dependable on time scales ranging from the next minute to the next decade. That access is all the more valuable if provided at a steady, predictable cost. The role of the utility and the electricity market is to enable this reliability and affordability of supply.

Utility sector change — is there a media double standard? Read a SEPA perspective here.

More fundamentally, because electric power is a public good — deemed essential for participating in and benefiting from the modern economy — we need a provider of last resort, or a “standard offer,” that is understood to be fair to all consumers.

Threats and potential disruptions to the profitability of utilities may seem an issue of concern primarily for utility shareholders. But stability in the sector is also vital for customers, suppliers, regulators and policy makers since profitability impacts the availability and cost of capital for utilities.  A financially stressed utility may be unable to cost effectively raise capital for important public benefit investments — for safety, reliability and the very infrastructure necessary for connecting and integrating new resources into the grid.

Another key point to consider is that incumbents are not accountable to or wholly owned by utility shareholders. In the case of public power utilities, they are accountable to and owned by taxpayers, while electric cooperatives are directly responsible to and owned by the customer-members  they serve. Even in the case of investor-owned utilities, company assets are, in fact, owned by a combination of shareholders and ratepayers.

Redefining the public good

Of course, such reasons to provide some level of protection for incumbents do not exempt these companies from the now-evident imperative to evolve and expand their power portfolios with more clean resources – efficiency, demand response, storage and renewables.  These technologies represent real value for customers and the public good, and many utilities across the country are integrating these resources into the mix.

Still, the momentum for change can seem at odds with utilities’ traditional aversion to risk, and two recent developments have made this dynamic increasingly frustrating. First, the technology and economics of new energy service options have evolved at a pace that results in shorter time frames than traditional regulatory planning processes.

More fundamentally, the premise of how utilities ensure the public good has changed.  In the past century, economic growth was strongly linked to a corresponding increase in electricity consumption; the public good priority was to ensure that lack of electricity availability never limited economic growth.  But that very premise — that economic growth requires electricity growth — may no longer be true.  We do not know for sure, but the experience of the last few years provides enough evidence for us to rethink the relationship.

The traditional incentive structure for utilities — designed with a primary focus on encouraging investment, whether through regulated monopoly franchises or competitive markets — may no longer serve the public interest.  The focus is shifting, with more emphasis on environmental sustainability and resiliency, and more responsiveness to consumer preferences.

We need new incentive structures — beyond decoupling or more complex and sophisticated “performance-based” ratemaking — to realign investor-owned utility incentives with our new understanding of the public good.  Without this fundamental change, other reforms are doomed to get caught up in a cycle of counterproductive conflict and resistance to change.

But even such restructuring will not be sufficient to overcome the risk aversion utilities see as critical to the safe, reliable, and predictable power costs upon which the economy depends.

Insurgents: Fast, unencumbered, allowed to fail

Which is where the insurgents come in.

Insurgent technologies and technology providers demonstrate what is possible with new approaches. They find the flaws and put pressure on the roadblocks in the system and, at their best, find ways to innovate around them. They also put pressure on the incumbents to change when these older companies no longer offer optimal delivery of power services in the public interest.

Insurgents can do all this simply because they are not the incumbents.  They are unencumbered by the expectations incumbents face, primarily from regulators and providers of capital. They are allowed more latitude since their potential failures are unlikely to collapse the system providing the critical public good. In today’s fast-paced market, they are also driven to apply speed and rigor to developing new solutions that may yield big profits.

Unlike in other industries, the insurgents in the power industry cannot displace the incumbents, for the reasons stated above.  What the insurgents can do is disrupt the status quo through new generation and efficiency technologies, communication devices, applications of data analytics, and alternative business models. Such innovations then enable the incumbents to develop new programs and business models that better serve the public interest.

The questions now: not why or if, but when and how

Ultimately it will be through collaboration between the two that we will deploy and integrate DERs and other innovations to the benefit of all customers and society more broadly. It is still too early to know which of the proposed business models will best deliver the benefits from new technologies for any particular market, but it is never too early to develop and evaluate visions for the future.

The Solar Electric Power Association’s (SEPA’s) 51st State Initiative was launched last year to provide a platform for an open, crowdsourced effort to articulate multiple models for utilities of the future.

Find out more about the 51st State Initiative here.

No doubt, a very robust debate will and should continue about the paths and strategies needed going forward. It is, if anything, a reason for optimism. Our efforts to deploy clean energy resources are keeping our nation — and our planet — on the right track.

The group of experts convened in Aspen and similar groups around the world — at think tanks, utilities, car companies, venture capital firms, statehouses and universities – are having exactly the right conversations about the future of the energy sector. The questions they are asking are not about why or whether, but when and how.  The solutions they are exploring are about maximizing all the benefits – consumer choice, system security, and environmental and economic sustainability – for as many stakeholders as possible, while easing the transition for those whose interests may get left behind.

And all the while, the incumbents will keep the lights on, and the insurgents will propose new ways to do it better.

Tanuj Deora is the Solar Electric Power Association’s Executive Vice President and Chief Strategy Officer. He can be reached at [email protected].