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The end of power utilities? Maybe not just yet…

By Dave Elliott

Local generation is challenging the power utilities in the US and elsewhere. Some of the implications of that trend are reviewed in a useful series of studies by the US Lawrence Berkeley National Labs on Future Electric Utility Regulation which look at Regulation in a High Distributed Energy Resources Future i.e. in the context of a potential future with a high reliance on energy efficiency, peak load management, distributed generation and storage.

One of  Berkeley Lab’s  studies (No.1 in the series) focuses on regulation of Distributed Energy Resources in terms of  advantages and disadvantages from the perspectives of utilities and customers and the potential role (if any) of the big power utilities in the future. The report says that the emergence of distributed energy resources (DERs) that can generate, manage and store energy on the customer side of the electric meter is widely recognized as a transformative force in the power sector’. It suggests that, as DERs become competitive in price and performance for many customers, ‘utilities will face reduced sales volume, more elastic customer demand, and greater opportunities to substitute DER optimization for traditional utility assets and services. It expects that ‘dramatic reductions in the cost of regulated distribution networks will be sought by all stakeholders’, and, although that could be good for all concerned, it raises the question of whether utilities will or should bother trying to enter DER markets, given what might be diminishing returns.

Certainly it says that it is not a straightforward decision, quoting Gregory Aliff, Beyond the math: Preparing for disruption and innovation in the US electric power industry, (Deloitte 2013): ‘A decision to transition to a higher overall risk profile will likely involve significant internal debate and high probability of negative reactions from the financial markets and shareholders. This barrier may ultimately be deemed insurmountable – and as a consequence, new business alternatives may be severely constrained.’

That has evidently already been judged to be the case in Germany, where companies like RWE and E.ON have in effect lost monopoly control of the consumer electricity market as prosumer self-generation  and local energy co-ops have spread, with PV solar especially challenging the utilities’ gas-fired plants in the lucrative peak demand market. The big utilities have had to retreat to servicing this new decentralised market (which accounts for around 40% of Germany’s renewable capacity) and managing the grid. The Berkeley report seems to suggest something similar may happen in the US – but with the added issue of trying to ensure that consumers stay on the grid. There’s evidently concern about ‘grid defection’. That would make managing the system (e.g. balancing variable renewables and variable demand) much harder, potentially undermining the role of DERs and making life hard for the utilities.

Instead, the Berkeley Lab report says that ‘by facilitating DERs, utilities can both lower their costs and increase the benefits they can offer customers who deploy DERs, providing an incentive to remain connected to the distribution system rather than defect from it’.  It adds ‘the fundamental role of the utility will evolve to support this lower cost, higher value service that can be provided when customer-facing DERs are coordinated to not only provide customer services, but to create value for the distribution utility and grid as well. However, that evolution may occur in different directions. One points towards a major utility presence in sourcing, financing and optimizing DERs for customers. The other points towards a major role for competitive firms in not only providing DERs through competitive channels, but also in competing to tailor DERs’ performance and optimize the total value they can create in this emerging, three-sided market comprised of customers, distribution utilities and the grid itself.’

The report also suggests that, in the US context, regulators may in any case not let utilities enter DER markets, quoting a comment in a recent New York Public Service Commission Order: ‘Markets will thrive best where there is both the perception and the reality of a level  playing field, and that is best accomplished by restricting the ability of utilities to participate’. Before the New York Public Service Commission, Order Adopting Regulatory Policy Framework and Implementation Plan, Case 14-M-101, Proceeding on Motion of the Commission in Regard to Reforming the Energy Vision, Feb. 26, 2015, p. 67.

The Berkeley Lab report seeks to steer in between rival views. One says that, having lost their market monopoly, the utilities will fade away, the other that their supply system will always be cheaper than DERs, or if not, that utilities would be best suited to deploying DERs. Instead, the report says that the utilities will not disappear, but they will have to change their role, from monopoly suppliers to energy service companies and new decentral market enablers, with only limited involvement in generation themselves, as opposed to supporting local distributed generation by others.

Maybe so. They do after all have the expertise, even if they may have lost the trust of consumers. And their traditional markets. Though the exact balance between the various possible elements of the new role that utilities might play is unclear, with the report suggesting that in one, utilities successfully evolve to play the major role in using DERs to provide services to customers, while in the other, ‘these functions are increasingly performed by competitive firms using advanced and largely decentralized digital technologies, and the utility “sticks to its knitting” in terms of providing and maintaining infrastructure needed to deliver basic energy and capacity services, while depending on DERs to entice its customers to remain connected to the system and help the utility maintain sustainable cost levels’.

 Either way, though, their role will be very different from now – and that’s a conclusion that has emerged after just an initial wave of successfully grass-roots decentralized power initiatives. Who knows what may come next, with, for example, pressure for municipal-level energy projects beginning to emerge and some US prosumers banding together in local shared ‘community solar’ micro-grid schemes and peer-to-pear trading: www.renewableenergyworld.com/articles/2016/05/municipal-solar-and-microgrids-a-pv-market-outlook.html  and www.smartgridtoday.com/public/Solar-CEO-sees-clout-growing-for-energy-prosumers.cfm. It does seem that we are moving away from centralised monopoly power. Though against some opposition, as this report from the US indicates: https://ecowatch.com/2016/01/29/rooftop-solar-wars/

Battles over net metering, with utilities trying to limit their losses, may lead more consumers to consider going off-grid. A recent Wired article claimed that, with domestic self-generation, smart meters and local storage  ‘the national grid itself may become less important’, in that ‘we could be living in a world where consumers have super-efficient homes and are mainly generating on site’. http://www.wired.co.uk/news/archive/2016-01/25/smart-grids-empower-users  Certainly some say off-grid systems can be viable in some locations: www.academia.edu/25363058/Emerging_Economic_Viability_of_Grid_Defection_in_a_Northern_Climate_Using_Solar_Hybrid_Systems.

That may happen to some degree in some countries and locations but, overall, the reality seems to be that grids, linking to larger geographically-spread generation projects, will remain vital for balancing local variations in supply and demand, although utilities will have to adapt to a new pattern of energy generation and use.

*The Berkeley Lab reports: Report No 1: Corneli/Kihm, Electric Industry Structure and Regulatory Responses in a High Distributed Energy Resources Future.’ Report No 2 in this ongoing series looks at market design and distribution issues, including local peer-to-peer exchanges between projects and consumers.

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2 comments

  1. Ron

    This may not be true as new research shows that grid defection could be likely with a combination of solar, batteries and cogen units — even in the north. The reason being it will be less expensive for consumers to simply have their own systems and unplug. https://www.academia.edu/25363058/Emerging_Economic_Viability_of_Grid_Defection_in_a_Northern_Climate_Using_Solar_Hybrid_Systems

  2. Interesting. It may be some could go off grid, if equipment prices fall, but it’s unclear if all residential consumers across the country could do that, or if the overall power system, cities and industry, could function as well if they did: grids provide a way to balance local variations in supply and demand- and the off grid approach proposed still relies on the use of natural gas.

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