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To build the grid of the future, utilities must let go of the past

By James Tong

Editorial note: This guest blog by James Tong is the first in a periodic series of articles the Smart Electric Power Alliance (SEPA) will publish, written by participants who attended our recent 51st State Summit. The views expressed here are those of the author, not SEPA’s. In the coming weeks and months, we will be publishing articles here that present a range of views on the issues and themes raised at the summit.

Few would dispute that the emergence of distributed energy resources (DERs) is challenging fundamental assumptions of the century-old business and regulatory model of electric utilities in the United States. Otherwise, we would never be talking about death spirals or grid defection. What is disputed — often and with great passion — is how best to move forward with DERs.

James Tong _edited
James Tong was one of more than 100 attendees at SEPA’s 51st State
Summit in April in Denver.

Sponsored by the Smart Electric Power Alliance (SEPA), the 51st State Initiative offered a broad range of industry stakeholders a welcome opportunity to hash out differences constructively. Starting with a blank slate in the first phase of the initiative, SEPA challenged participants like myself to re-imagine the grid and rethink the assumptions upon which it was built and has been operated. The goal, ultimately, was to lay the groundwork for a common vision.

But, in practice, participants’ willingness to question existing assumptions depended on whether they were outsiders looking to reform or plug into the grid in new ways, or insiders wanting to incorporate new technologies while minimizing disruption to existing practices.

This tension in perspectives surfaced several times during SEPA’s recent 51st State Summit in Denver, which was focused on the practical roadmaps to industry change, which were created in the second phase of the initiative. As an outsider, I was dismayed by how quickly some insiders at the event rejected or dismissed any questioning of assumptions.

Read the 51st State Phase 1 and Phase II submissions here.

Being open to such questioning is, I believe, critical. When we accept tenuous assumptions — however long-held — as fact, we inevitably make assertions that are misguided. Here are three key examples from the summit.

If we don’t let utilities invest in DERs, the needy will be left behind. Yes, we can safely assume that left to their own, competitive markets will overlook large segments of the population deemed too risky or unprofitable. But should we then assume that the only solution is for regulated utilities to invest in DERs? Could regulators instead remove structural barriers to competitive markets — for example, by expanding virtual net metering? Or could they provide incentives or insure against risk so that competitive companies will want to serve these segments?

Net metering is deficient because it does not value solar energy at the market rate. I wholeheartedly agree. But I disagree with the underlying assumption that distributed solar energy should be priced at the wholesale rate determined by locational marginal pricing (LMP) — the standard widely used across the industry. What LMP has demonstrated is that the value of energy will vary depending on its relative scarcity at different times and locations. But, flat retail rates send a message that energy is uniformly available (or scarce) across the distribution grid at all times, when the laws of physics tell us the exact opposite.

When we set retail prices that ignore the dynamics of supply and demand, we can never establish true market prices for energy or DERs on the distribution grid. If we want to create a market price for distributed solar or all DERs — and I’m all for that — shouldn’t we try to extend the principles of LMP to the distribution grid, for example, through wider adoption of time-varying rates?

We need to create incentives for utilities to integrate more DERs into the grid. This idea also sounds reasonable until we dig into its underlying assumptions. By “incentives,” we almost invariably mean profit opportunities for shareholders. California’s recent regulatory proposal to provide utilities rate-of-return incentives for DER procurement is a case in point. But effective DER deployment depends on those who actually operate the distribution grid — the employees who plan, integrate and dispatch DERs. Shouldn’t we instead discuss how to provide them with the appropriate incentives and tools to support increased DER deployment on the distribution grid?

For the first phase of the 51st State Initiative last year, Jon Wellinghoff, Jenny Hu and I submitted a concept paper that challenged several prevailing assumptions. For instance, what is the role of markets in the evolution of the grid? Would utilities be better off investing in DERs through unregulated affiliates? What can we do to ensure an even playing field for all stakeholders?

To help stakeholders answer these question, we subsequently proposed a concept of grid neutrality, with guidelines that, we hoped, everyone could agree on and use to evaluate future grid policies and design options.

Find out how some utilities are planning for the distributed energy future, in a SEPA-Black & Veatch report here.

Our ideas are indeed debatable and perhaps unrealistic. But that was the point. We wanted to engage stakeholders on thorny but essential questions and determine the boundaries of what is acceptable.

Unfortunately, we have been largely ignored by insiders. Those willing to discuss our ideas — and the ideas proposed by the other reformers at last year’s 51st State Summit — have been fellow outsiders. Insiders — including not only utilities, but also their technology and consulting vendors, and certain regulators — have seemed more intent on keeping discussions inside the proverbial box. They only make room for outsiders who can comfortably fit into their existing models with small, incremental changes — and mostly after the insiders have staked out their space.

Groupthink or common vision?

This unwillingness to question old assumptions and entertain new ideas bodes poorly not just for the grid, but for the utilities themselves, for three critical reasons.

For one, it could foment more distrust and anger in public discourse. The regulatory process already has a reputation, whether deserved or not, of being noninclusive, opaque and sometimes “rigged” in favor of insiders. If insiders cannot engage with outsiders at forums such as the 51st State Summit — a by-invitation-only event, with participants SEPA clearly selected for their knowledge of the issues and willingness to discuss them — what are the chances that insiders can win over the public in regulatory proceedings? The possibility seems increasingly unlikely, especially as these proceedings become more adversarial and attract more boisterous and less empathetic outsiders.

Second, it could lead to groupthink and suboptimal outcomes. Finding creative solutions or the best alternatives is improbable, if not impossible, when you surround yourself with like-minded people and ignore dissenting opinions. Can utilities unlock more shareholder value by letting go of some of their monopoly privileges? Will they be better off treating the grid as a product and serving the third-party providers looking to plug into it as their customers? We can never know if we don’t ask these questions.

Finally, it could make it impossible for utilities to be innovative and customer-focused, as they are looking to do. Innovation requires a willingness to question traditions and break from precedent. Customer engagement requires listening to others and understanding what they want — though not necessarily giving it to them. Yet insiders still center discussions around “the utility of the future” ̶ a phrase that repeatedly surfaced at the summit and which many may hear as “the monopoly of the future.” It suggests neither innovation nor customer focus, but rather a reluctance to let go of the past. Shouldn’t we be talking instead about the “the customer needs of the future” or “the networked grid of the future”

Explore the customers and grid of the future at a SEPA-Nest Behind the Meter Workshop, July 11 in Washington, D.C., here.

By no means do I advocate jettisoning the electric utility model that has served the public well for over a century. Indeed, some assumptions are unquestionable. Everyone should have access to safe, reliable electricity at a reasonable cost. Utilities have played and will continue to play a critical role in ensuring that basic access and are entitled to fair compensation for investments made to meet this historical obligation to serve. The grid is a complicated machine that must be handled delicately.

But let’s not use these truths to duck reasonable questions about the role of markets and regulation. Let’s not allow the future grid to be a captive of the past.

Forums such as SEPA’s 51st State Summit have enormous value for insiders and outsiders. We will more likely achieve common ground through frank, private discussions than through contentious public regulatory proceedings. Consider the difference between the compromise on solar compensation reached by utilities and solar companies in New York versus the Nevada Public Utilities Commission’s controversial net metering decision.

Let’s take advantage of these rare opportunities to have substantive, constructive discussion. Perhaps then we can achieve a common vision of what we are trying to do and find new ways to accomplish it.

James Tong is CEO of Advanced Grid Consulting. He can be reached at [email protected].