At the Smart Gird Interoperability Panel 2016 Grid Modernization Summit in Washington DC the elephant in the room was whether utilities should be excluded from owning renewable power generation. It seemed the topic was so controversial that it was avoided to maintain harmony in the sessions.
In the U.S. electricity regulation is the responsibility of the states and there is a wide variation in regulation of the emerging electric power markets. It is apparent to virtually all state regulators that under the impetus of distributed energy the utility industry is having to change its business model. Because there are many different business models with which the 3,500 or so utilities are trying to meet the challenge of distributed energy, many state regulators are finding it a challenge to create a new regulatory framework for this new energy world.
In the 1990s and early 2000s a number of states decided to deregulate their electric power markets to encourage competition. Typically this meant requiring incumbent utilities to divest their generation facilities and become regulated transmission and distribution entities. Deregulation encouraged independent power retailers to enter the energy market. It was hoped that deregulation would reduce costs and provide consumer choice. In restructured states utilities are barred from owning power plants so that a competitive energy market could emerge. Private energy providers have argued that the same rules should apply to distributed energy, so that utilities do not use their market power to dominate the renewable energy market.
According to the Edison Electric Institute in 1995 generation accounted for about two-thirds of the price of electricity. Today, the cost of generation is less than half of the price of electricity. In many parts of the country the wholesale price of electricity has dropped significantly while the retail price has increased - in other words, electricity is cheap, the grid is expensive. This has resulted in disintermediation where large industrial and commercial customers in states with high regulated rates have shifted their power purchases to lower-cost energy providers or have decided to self-generate.
There is a lot of diversity among the alternative business models and regulation that are being adopted by the 3,500 utilities in the U.S. At the SGIP conference, California, New York, and Texas were the states that were most often mentioned.
Utility-owned photovoltaic installations account for 52 percent of the solar capacity installed in the United States, according to the Solar Energy Industries Association. In California Southern California Edison (SCE) and PG&E have invested in utility-scale solar power plants, but they buy most of their renewable power from plants owned by private investors. For example, the Ivanpah solar plant is owned by private investors including Google, and both PG&E and Southern Cal Edison have long term commitments to buy the plant's power. California also encourages consumer rooftop solar through a net metering program that pays retail rates for solar PV power generated by consumers.
Sacramento Municipal Utilities District (SMUD) is one of the most forward-looking utilities in North America. It was the first California utility to reach 20% renewable power and the first to commit to 33% renewables. SMUD is moving from a centralized utility with a business model based on selling electricity to a distributed utility providing localized grid services. SMUD is getting out of the business of selling electricity, and into the business of selling grid services.
One of the most interesting innovations at SMUD is in the area of rate structure. SMUD and other utilities are in the interesting position for a retailer of trying to sell less of its product, in this case electricity. People are using less electricity as a result of personal interest as well as SMUD's own energy efficiency programs. But the money has to come from somewhere. SMUD has introduced a flat infrastructure fee. Currently every customer pays $18/month for the grid, independent of how much power they consume. SMUD has determined that $28 is the breakeven point, where the cost of maintaining the grid would be covered by infrastructure fees, and is moving towards that monthly change.
Another interesting innovation at SMUD is its solar power program. Customers have the option to buy into solar power without having to install solar panels on their roofs. The first solar program was a 1 MW solar PV program designed for residential customers. The next was the recently opened 11 MW program for commercial customers. The new solar plant at Rancho Seco Solar Power Plant is owned by D. E. Shaw Renewable Investments. Power purchased from the project will provide energy for SMUD's commercial SolarShares® program. The SolarShares program is designed to provide business customers with a low-cost solar alternative to installing solar panels onsite.
In 1999, the Texas Legislature began restructuring the state’s electric industry which allowed consumers to begin choosing their retail electricity provider. As of Dec. 31, 2001, deregulation of the ERCOT electricity markets required investor-owned utilities to unbundle their operations. The provision of service to end-use retail customers became competitive. There are over 100 retail electricity providers of which more than a quarter offer a 100% renewable plan to their customers as an option. Since 2002, approximately 85% of commercial and industrial consumers have switched power providers at least once. Approximately 40% of residential consumers in deregulated areas have switched from the former incumbent provider to a competitive retail energy provider. One 2011 study found that Texas customers paid up to one-third less in 2010 compared to 2001 before competition and energy deregulation.
In 2007 TXU, the largest utility in the state, was acquired by a consortium and broken up into electricity distribution called Oncor Electric Delivery, power generation called Luminant, and an electricity retail provider TXU Energy without any electrical distribution or generation assets.
At the SGIP conference Cheryl Mele, Senior Vice President and Chief Operating Officer at ERCOT, pointed out that wind penetration has at times provided 48% of Texas power demand. Over the past year wind provided 12% of all power generation. Some electric utilities in Texas, most of whom participate in the ERCOT grid, invest in renewable energy generation. For example, NRG Energy, an integrated energy company, owns wholly or partially 1.1 GW of wind and solar power.
The state that is getting the attention of state regulators is the New York Public Services Commission (PSC). In the United States, a number of states have restructured their electric power industry with the goal of opening what has been a monopoly market to open competition. In New York, the regulator PSC has been aggressive in changing regulation ("Reforming the Energy Vision" or REV) to promote a competitive electric power market.
The New York Public Service Commission (NYPSC) has taken a major step toward a future of transactive energy. New York's "Reforming the Energy Vision" (REV) is moving the New York state electric utility industry toward a radical redefinition of utilities as we have known them over the past hundred years since Tesla and Edison created the electric power industry. In the future in New York State the utility industry will be comprised of distributed system platform (DSP) providers, basically providing the grid but not directly selling energy, and a competitive energy market with consumers and many energy providers including bulk power generators and distributed energy generators including you and me with rooftop solar panels. This model has similarities with the UK model which is disrupting the traditional energy market in the UK..
An important implication of restructuring is that in restructured states, electric power utilities are typically restricted from owning distributed energy resources (DER) including wind, solarPV and battery storage.
In many of these states in response to policies promulgated by state regulators utilities in are increasingly looking at “non-wires alternatives” to address system overloads. Non-wires alternatives include distributed energy generation (DER), demand response, energy efficiency and other non-traditional means to address system overloads instead of building conventional transmission and distribution infrastructure. State regulators are asking utilities to use non-traditional solutions to address grid problems and in some cases utilities are asking the competitive market to come up with ideas.
For example, ConEd and New York State Electric & Gas (NYSEG) circulated solicitations for non-wire alternatives. ConEd is interested in demonstration projects to determine whether utilities can derive significant market-based benefits from integrating energy storage (utility-scale batteries) onto their electric systems. ConEd has suggested that storage could reduce operating expenses, reduce peak demand for generation, manage distributed energy resources, or provide customer benefits, such as power quality or reduced risk of outages. New York State Electric & Gas has issued a request for proposals for non-wires alternatives including distributed generation, demand response, energy efficiency, and energy storage that can reduce peak loading on a transformer bank. The utility hopes to defer an expensive upgrade to one of its substations. In both cases the utilities have excluded fossil fuel proposals, except those that use natural gas or propane.
But if these solicitations involve distributed energy or storage, the PSC will only allow utilities to own distributed energy sources under very restrictive circumstances.
- The utility issues a solicitation, but the market response is inadequate or too expensive
- A project consists of energy storage on the utility's property and integrated into the utility's distribution system
- A project will enable low or moderate income residential customers to benefit from the resource where markets are not likely to satisfy the need
- A project is being sponsored for demonstration purposes.
For example, Consolidated Edison (ConEd) had an electrical overload problem in Brooklyn and Queens. Instead of building a new substation estimated to cost $1 billion, it proposed a non-wires solution involving fostering the development of local energy sources, demand management and energy efficiency. As part of the solution, ConEd planned to install battery storage on its own property. In this special case the commission approved the storage ownership by ConEd because it would be on the utility’s property and integrated into its system. But it reiterated that it will only allow utilities to own distributed energy resources when the open market does not offer a solution.
In Illinois in 1997 the Customer Choice Act mandated that state utilities could no longer own generation facilities. During the Mandatory Transition Period 1997–2007, utilities were required to sell their electricity generation assets to other energy companies. Utilities no longer sold power and became responsible for delivering electricity only. Since 2002 in the deregulated market, customers were permitted to buy electricity from competing retail electric providers. In 2006 the Retail Electric Competition Act encouraged residential and small business customers to switch to alternative electric providers.
in July 1999, Ohio restructured its energy market to give consumers choice with their energy provider. The law took effect on January 1, 2001. Customers could now choose to buy energy from retail electric suppliers instead of automatically receiving it from the utility company (primarily AEP Ohio, Dayton Power & Light, Duke Energy, and FirstEnergy) in their area. In May 2008, each incumbent utility was required to shed its power generation operations and become a purely electric distribution utility.
FirstEnergy, headquartered in Ohio and one of the largest investor-owned electric utilities in the U.S. with customers in Ohio, Pennsylvania, West Virginia, Maryland, New Jersey, and New York, has just annnounced a strategic decision to exit the competitive power business not just in Ohio but in all its service territories. FirstEnergy is getting out of the business of generating and selling power and plans to become purely a regulated transmission and distribution entity.
In the Southeast Duke Energy is a vertically integrated energy company with generation, transmission and distribution assets. Duke Energy owns, operates or maintains renewable energy assets in its regulatory service territories and through Duke Energy Renewables.
Since 2012, the Southern Company system has added or announced more than 4 GW of renewable generation. Southern Power owns more than 1,600 megawatts of solar generating capacity at 26 facilities operating or under construction in California, Georgia, Nevada, New Mexico, North Carolina and Texas. Seventeen of these facilities are co-owned by third parties with Southern Power having the majority ownership. Georgia Power, Southern subsidiary, is a national leader in solar energy. Georgia Power began offering rooftop solar to customers in July of 2015. Alabama Power, another Southern subsidiary, is currently constructing two 10.6-megawatt solar facilities.
Florida has had a law for nearly a century that gives utilities a regional monopoly on power production. In some states solar companies like Solar City can install panels for free and then sell the power to the home or business owner at a rate lower than local utilities. These third-party sales are generally illegal under the Florida law that gives utility companies a local monopoly on supplying power.
The Nevada Public Utility Commission has just re-established its previous, favorable rates for about 32,000 customers that already own rooftop solar panels in Nevada. These solar customers had been facing a significant rate hike. However, new solar customers will face the new rates that were changed in December. Solar City and other solar providers have said that the new rates make it uneconomic for them to do business in the state. NV Energy is developing its own solar energy sources, often together with large customers who have requested solar energy. Three casinos opted to leave the grid, but the exit fees for leaving the NV Energy grid are so exorbitant that one of the casinos (Wynn) is opting to contest the fee in court. Another casino opted to collaborate with NV Energy in the development of a solar PV farm. The other casino (MGM) has opted to pay $86 million to leave the grid and rely on its own huge rooftop solar array on the Mandalay Bay and to buy the remainder of its power needs on the open market.
It should be clear that there are a lot of different approaches to creating, regulating and adopting a new business model among the 3,500 or so electric power utilities in the U.S. A consensus on the way forward for U.S. utilities has not been reached and it appears that the different regions will likely end up with different business models and different regulatory policies. It is clear that that whatever the business model and regulatory framework that are ultimately adopted in different regions, they all will have address the big issues of increasing customer choice, a growing array of consumer, commercial and industrial applications (hardware and software) that interact with the grid, distributed energy, microgrids which may or may not be connected to the grid and transactive energy. Gartner has forecasted that by 2020 the largest electric power utility will be an Uber-like entity that will neither own infrastructure nor generate electricity, but will manage energy flows by putting energy producers together with energy consumers.