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Under pressure: Getting to the customer-centric utility of the future

On Dec. 17, I flipped off the lights in my office on the top floor of 1220 19th Street, NW, for the last time, reflecting on an incredible four years as Chief Strategy Officer at the Smart Electric Power Alliance (SEPA).

Technically, that’s not quite correct. For the first 15 months after my arrival, SEPA stood for the Solar Electric Power Association, until our official relaunch in 2016 with a new mission and new name. As I shook hands and received hugs on my way out the door, I thought about the difference between the organization I had originally joined and the one I was now leaving. Yes, we had come through two mergers, a doubling of staff, a major reorganization, a new name and new mission, but we remained aligned to an essential vision: facilitating the industry’s smart transition to a clean, modern grid delivering safe, affordable and reliable power to customers.

The changes at SEPA have mirrored the many, significant changes in the broader power industry, as utility leadership and regulators now nearly universally understand the need to address concerns on climate change and the need to more proactively engage with customers. The electric power utility is in the midst of a monumental – perhaps, existential – transformation. Industry leaders and critics have been debating, discussing and dissecting this rapidly shifting landscape for several years, but utilities still seem lost on how to respond to and take control of these changes.

When faced with this level of disruption, many industries have seen their leading brands fail to survive. For the electric industry, the situation is exacerbated by the fact that several disruptive forces and technologies have converged at the same time, impacting an industry that has (very understandably) valued stability and reliability over all else for over a century.

It is becoming increasingly clear that some utilities – whether investor-owned, municipal or cooperative – will not be able to avoid bankruptcy. What is less clear is which of the disruptions the industry now faces will be most profound, and what strategies will be needed for utilities to survive, and thrive, through the transformation.

When navigating these changes we must optimize a broad range of criteria (see figure below.) Some of these criteria, like safety, reliability, and affordability tend to be very well understood.  Others are more implicit — social equity — or even misunderstood and ignored, such as approaches to managing risk factors.

Design criteria for the ongoing evolution of the grid and of utility business models

Throughout 2017 and 2018, the industry buzzword “resilience” has extended the traditional concept of reliability. First, we saw misguided efforts to tie reliability and resilience to the maintenance of struggling coal and nuclear plants. We were then presented a more accurate and visceral sense of the criticality of resilience through the pace of the ongoing restoration efforts in Puerto Rico after Hurricane Maria.

While the falling costs of renewables and persistence of cheap natural gas have been a boon to consumers, utilities have been wrestling with the second-order consequences of these trends. Potentially stranded assets — such as closed power plants — drag down the financial viability of their owners, while plans to shut down nuclear plants could increase the greenhouse gas emissions of the power sector after a decade of declines.  Meanwhile, the price of renewables is dropping so quickly that some customers are leaving utility provision of wholesale power to escape the higher prices of legacy power purchase agreements, and are replacing them with new ones — at half or less the cost.

As big as these challenges are, the most daunting, transformative and confounding of the changes the power sector is on the is not directly associated with a single tragedy or event: the change in consumer expectations.

For the first time, a critical mass of utility consumers are interested in more than safe, reliable and cheap electricity. Technology has now advanced to offer these consumers an increasing array of choices and opportunities to control their energy use. While new technology companies, from rooftop solar installers to smart thermostat providers have invested heavily in developing brands that resonate and build direct relationships with consumers, many utilities have been slow to change how they engage with consumers.

The (best) future is not wires-only

The result has been a popular story that utilities are doomed for bankruptcy or, if able to avoid that fate, to a significantly diminished role, as they cede the opportunity to deliver new value to consumers to these new entrants. That potential future leaves utilities retreating to a “wires-only” business model, confined to building, owning and operating distribution and transmission assets, and ceding generation, consumer engagement, data services and market management to other parties.

However, I don’t believe a wires-only future for regulated utilities is either desireable or inevitable. I see opportunity — and three compelling factors —  for utilities to move deeper into consumer engagement and the prospects for new business development.

First, as the electricity provider of last resort, the regulated monopoly utility has long fulfilled societal expectations of social responsibility (providing grid access to all) and consumer protection in the power sector. (One might argue deregulation has been a major driver of rising economic inequality, and the solar industry, while acknowledging issues, has yet to fully address them.)  That societal expectation needs to be acknowledged and addressed, and no other entity has stepped up to be willing to credibly address this need.

Second, the profound economies of scale and scope of transmission and distribution that justify the creation and continuation of regulated monopoly utilities extend to customer insights, acquisition and engagement. Data gathered from an advanced metering system can be analyzed and used to develop insights that result in the creation of more effective demand side management programs, or in better outreach for transitions to and optimization of time varying rates. Consumer data on power usage and payment history are key inputs for modelling the potential performance of non-wires alternatives (NWAs) and virtual power plants, to bring more cost-efficient, reliable and resilient service to all consumers.

Third, distributed technologies — and the advanced management systems they use — are opening the possibility of changing the fundamental relationship of supply and demand in power generation. This realignment is actually less about distributed generation per se (though such technologies contribute to this shift) than about the possibility of upending two historic givens of wholesale energy markets: that generation follows load and that energy supply dynamics set price.

Distribution utilities can — and should — leverage both customer-sited (behind the meter) resources, and assets located on the distribution system to provide true demand-side flexibility. The result would be significant value for wholesale power operations — for grid operators and vertically integrated utilities — by using demand to balance inflexible generation (nuclear, seasonal hydro, some co-generation gas plants, and coal) and variable resources (large-scale solar and wind).  Consumers would benefit by receiving compensation for a share of the value their demand-side resources can provide, and local communities would benefit by keeping investment dollars local instead of sending them to often out-of-state power markets.

Challenges become opportunities

Many respected industry experts have raised challenges to the idea of the utility stepping up into an expanded consumer engagement role. First, utilities have a limited record of success in developing business-to-customer programs. Past efforts to extend their capabilities — such as home appliance sales and service, or building full energy services companies — have been generally seen as distractions at best and outright failures at worst. The “customer-centric utility” has become another industry buzzword, and we are seeing increasing examples of utilities engaging consumers, building their capabilities as energy advisors, deploying DERs, and developing NWAs. Utility interest in working with new tools and utility-focused solutions providers are indications the conventional wisdom is outdated.

A second concern is the willingness and ability of regulated utilities to bring innovative technologies to market. Stories abound about how utilities are where innovation goes to die — sometimes through endless pilot programs — prompting former employees to grow impatient and start their own companies. Certainly, utilities have room to improve in this regard, but again, we have examples of historical and recent innovation, and significant utility investment in innovation. We should also examine how utilities might be better partners with third-party solutions providers, as we’ve seen with smart thermostat companies.

Finally, the need to change — and accelerate — regulatory processes is an issue that has been raised at countless gatherings of utilities and solution providers. Regulators will need to be educated and engaged to figure out how to best promote both utilities’ homegrown innovation and better partnerships with third party innovators. They will also need to rethink financial incentives and business models if ongoing, proactive consumer engagement is to be utilities’ central strategic imperative. While opportunities for new revenue streams better aligned to promote innovation and engagement do exist, we have yet to find a model as broadly accepted as the traditional cost-of-service, return-on-capital-deployed model has been.

If we are not to limit investment in energy sector transformation, all three of these challenges must be addressed in parallel, Just as the challenge is substantial, so must be the investment, momentum, and resolve make this strategic shift.  And solutions must be developed that take into account the impact to, and aligning the interests of, all three important stakeholder groups – utilities, individual consumers and society.

A more consumer-centric utility will not only increase value to individual customers, the grid and society, it will deliver returns across all the key design criteria, from securing our power systems and a clean environment. But collaborative efforts will be key to developing new business models that support both internal and third-party innovation.

The alternative — the wires-only utility focused solely building and maintaining poles and wires — simply leaves too much value on the table, and will actually slow the transition as key stakeholders resist the change. Enabling this collective transformation of the utility, the power system and consumers will by no means be easy, but nothing worth doing ever is.

Essential reading

SEPA’s research has tracked, analyzed, and reported on the importance of distributed energy resources and the new customer-grid dynamic throughout the past four years through the following research initiatives:

  • The Utility Market Snapshot series has expanded from solar to include demand response and energy storage. The series identifies deployments of these technologies, key policies and market trends, as reported by utilities.
  • The Beyond the Meter series has put focus on understanding the value of DERs, integrating consumer insights, and rewiring utility business processes. The series includes reports that showcase innovations in distribution grid planning and DER valuation methodologies.
  • The 51st State Initiative convened hundreds of industry experts to discuss and debate the visions, roadmaps, and first steps to creating a DER optimized utility business model. The initiative developed a set of consensus principles for utility transformation and frameworks for evaluating potential business models.