The future is now: Voices from the 51st State Summit

By K Kaufmann

The utilities and energy system of the future are emerging in the United States today — with changing trends in technology, business models and policy moving ahead in diverse forms and at varying speeds in different regions across the country.

This patchwork of change and some of the visions and ideas that could propel it further and faster  — as well as the challenging terrain to be negotiated along the way — were the focus of the 51st State Summit, held recently in San Diego. Sponsored by the Solar Electric Power Association (SEPA), the event drew about 80 leaders from across the energy industry — from utility executives to representatives of disruptive newcomers such as Google — for an intensive session of outside-the-box brainstorming and discussion.

Read more about SEPA’s 51st State Initiative here.

“You have to suspend where you’ve been and how you’ve thought and open your mind,” said Jim Rogers, former CEO of Duke Energy and a SEPA board member, one of a panel of energy sector thought leaders who opened the conference. “This isn’t just utilities. Name the business you’re in — storage, solar — this exercise is extremely valuable because it forces you to think about the world in a fundamentally different way. We are going to evolve from where we are to a new place; we just don’t know the path.”

SEPA launched the 51st State Initiative last year as an effort to develop multiple paths for moving U.S. energy sector transformation beyond current state-by-state debates over the integration of solar and other renewable energy resources onto the nation’s electric grid.

Clean tech entrepreneur Jigar Shah agreed that the changes now underway are irrevocable, particularly the demand from big business and consumers alike for clean energy and other advanced technology.

“I literally believe what Apple and Walmart and others are doing to say, ‘We demand access to technology,’ is fundamentally shifting the bounds of (the industry),” he said. “That macro force is occurring, and we’re going to have to deal with that proactively. To suggest that we can put part of that genie back in the bottle is very difficult.”

And the rate of change is only going to accelerate, he said. Some ideas that now seem “too far outside the box” will fail to impress in a few years, he said,

Others on the panel zeroed in on the importance of the different regional forces driving the growth of clean energy markets and the need to develop customized, local strategies.

“California is all about climate change; New York is about resiliency, and the Southern states, consumer choice and that individualistic approach,” said venture capitalist Nancy Pfund, founder of DBL Investors.

“It’s not really geography, it’s politics,” agreed Ron Binz, former Chair of the Colorado Public Utilities Commission and the newest member of SEPA board. “I think that’s realistic. You will never see some sectors in the country go where some places already are.”

Speaking just days before Tesla unveiled its new residential and utility-scale storage batteries, Pfund also cautioned that utilities are no longer the only players in the sector. A whole cluster of well-capitalized solar and clean tech companies “are very significant, and they’re not going away,” she said.

“I think the challenge for us is to understand they’re not just these anonymous upstarts that you  can push the way you want them to be pushed in this new approach,” she said.

Visions of a distributed, shared energy future

In any discussion of energy transformation, the role of traditional, regulated utilities — and the “natural monopolies” they have had for the past 100 years — tends to be a particularly sensitive topic. But, even radical ideas, such as a “sharing utility,” modeled on other sharing business platforms such as Uber and AirBnB, do not implicitly exclude an ongoing role for them, said Karl Rabago of the Pace Energy and Climate Center, who presented a paper at the conference, exploring the basic ideas behind a sharing model.

“At any given moment, there are places markets have not yet matured sufficiently to offer true competitive opportunities for customers in the choice of services and technologies, and the service is so essential we can make a decision to have it offered by a regulated monopoly,” said Rabago, who co-authored the paper with Jim Kennerly, an analyst at Sustainable Energy Advantage.

Good rate designs will also continue to be important, Rabago said, but rates won’t necessarily be based on the idea that utilities’ high fixed costs must be matched with high fixed charges.

“There’s nothing that says we have to slavishly adhere to the fact that there must be high fixed costs in your charges because there are high fixed costs in the company business plan,” he said.

Find out which utilities are leading the energy transforamtion in SEPA’s 2014 Utility Solar Market Snapshot here.

Rather, he argued, “Rates must be reflective of costs as we move into this future and the opportunities to offer customers rates and core services they find most useful, attractive and accommodating to their lifestyles and personal economic situations. We need to open ourselves up to flexibility on rate design and ultimate mechanisms for cost recovery.”

Another speaer, Michael O’Boyle of Energy Innovation and America’s Power Plan, tackled an update of traditional rate design principles — developed more than 50 years ago by James C. Bonbright and still known as Bonbright’s principles — for a new world of rapidly changing technology and increasingly distributed energy resources.

Envisioning a future grid which combines both centralized and distributed power to ensure maximum value to consumers, O’Boyle said, the new rate designs must focus “on transparency, on integrating new technology with different pilot programs.

“Experimentation is a really important part of this approach because we don’t have the answers to what the best rate structure is going to be, and it will depend largely on customer sophistication,” he said.

The invisible, intelligent energy box

Rate design and how it allocates risk and uncertainty were also concerns in the third paper presented at the summit, authored by former FERC Chairman Jon Wellinghoff and James Tong and Jenny Hu, both of Clean Power Finance. The net energy metering debate underway in many states, as more and more rooftop solar comes onto the gird, is all about who absorbs the associated risks, Tong said.

“What we see in the current world, uncertainties are shifted from the utility to the end consumer,” he said. “What we say is we need to build some institutional buffers to create more certainty.”

Tong, Wellinghoff and Hu believe the solution lies in bringing the kind of independent system operators that manage the transmission grid on regional and national levels down to the distribution level now handled primarily by utilities.

Independent distribution system operators would provide “an open, transparent platform where all entrepreneurial and innovative ideas to provide consumers with choice can in fact be put into the platform,” Wellinghoff said.

Such changes call for more dynamic, flexible rates, which could in turn better allocate risks to “those who can best handle them,” Tong said. The main vehicle for these changes include both the independent distribution system operator and a software package the team has dubbed the “energy box.”

The box would, Hu explained, essentially manage the ever-growing number of digitally connected consumer devices that affect energy use, from electric vehicle batteries and thermostats to refrigerators and home security systems.

“It sits on top of these connected devices and is able to receive real time economic signals and has the intelligence to execute and dispatch what it thinks is the optimal set of decisions to make on behalf of the user, and in a way that the user is amenable to and is sort of invisible to the consumer experience,” she said. “Think of it as a buffer between the very complicated, increasingly complex needs of the power industry and those of the consumer experience.”

The technology for this kind of invisible interface already exists, Hu said. Engineers she approached about the feasibility of developing the technology told her it would not even be a particularly interesting challenge.

The next steps

Julia Hamm, SEPA President and CEO, said the next phase of the 51st State will focus on developing a portfolio of practical roadmaps for policy makers and regulators now grappling with changing energy markets in their states. Questions raised about the papers discussed at the conference provided clear directions for that next step.

Skeptics questioned the focus on distributed resources and a distributed grid and the need for change in basic utility business models. Would the new technologies now rolling out — each with significant associated costs — provide more efficient, affordable power?

Others said more detail and information are needed, from financial data on the value of existing transmission infrastructure, which could become stranded assets, to how today’s cutting-edge technology will itself be grandfathered in as it is replaced with even more advanced technologies. Additional concerns included the need to model power flows at the distribution level and who would own the energy box technology and data it would produce.

The role of consumers was repeatedly raised — specifically, how to accommodate people’s various levels of technological sophistication and those who might not want to change from current rate structures and business models. Will social and generational change produce enough tech-savvy “prosumers” to support the new market structures?

At the same time, questions arose about whether utilities’ traditional concern for consumers is a cover for their own self-interest and what the appropriate level of concern might be.

The lag time between fast-moving technological change and often drawn-out regulatory processes was also discussed, and the resulting need for better education of both regulators and policy makers.

Responding to the concerns, Rabago noted that the U.S. consumer market is based on allowing people who want more to pay more for it. Extending that idea to the electricity market doesn’t mean “we have to solve everything for everybody at once,” he said.

“It’s important to remember that the status quo is not ideal so we should focus on change that in fact has the potential and the likelihood to improve the status quo,” he said.  “But we need to realize the difficulty and uncertainty of change is not an argument in and of itself for the status quo. It’s just an argument about the change we want to make.”

More on the 51st State

The 51st State Initiative was  a challenge to a broad spectrum energy stakeholders — from utilities and industry trade groups, academia and nonprofit and policy groups — to envision clean, affordable and sustainable energy markets from the ground up, as if for a hypothetical 51st state with no existing rules or market structures. A core given of the scenario was that these ideas include a robust market for solar-powered electricity and other distributed energy resources, such as storage and demand response strategies.

In answer to the call, SEPA received a dozen concept papers, each of which approached the challenge from slightly different but often complementary points of view, ranging from incremental changes to existing market structures to radical overhauls. Discussions at the summit focused on three of these papers — all from the more radical end of the spectrum — chosen by a five-member Innovation Review Panel of respected industry thought leaders, including Binz, Pfund, Rogers and Shah.

Susan Tierney, a former Assistant Secretary for Policy at the U.S. Department of Energy, now a Senior Advisor at the Analysis Group, was also on the panel.

K Kaufmann is the Communications Manager at SEPA. She can be reached at [email protected].