Between the Poles

DistribuTECH2016: By 2020 the largest power utility will not own generation or network assets

Today at DistribuTECH2016, three very distinguished, experienced people in the technology business, Zarko Sumic, Distinguised Analyst at Gartner; Chandu Visweswariah, IBM Fellow; and Sharon Allan, CEO of the Smart Grid Interoperability Panel (SGIP), each presented their perspective on the utility sector of the future.  What emerged appeared to be the same remarkable animal but from three different perspectives. 

 

Zarko started by pointing out the extraordinary coincidence that Facebook (market cap $230b), Uber (est value $50 B), and Airbnb (est value $24 B) are the largest (or the second largest in the case of Airbnb) companies in their line of business, but significantly none of them own content, cars or rooms.  Zarko and Gartner call this phenomenon the sharing economy.   A sharing economy uses IT to distribute, share and reuse excess capacity in goods and services. Information is the fuel and the digital platform is the engine.  The sharing economy operates in a market with customers and sellers and the value of the goods and services shared is determined by the network effect (Metcalfe's law) and increases as the square of the number of nodes (customers and sellers).  

 

Zarko sees an analogy with the electric power industry today, as we move toward a world where energy flows are increasingly determined by market forces (referred to as transactive energy).   Based on the analogy with Facebook, Uber, and Airbnb Zarko predicts that by 2020, the largest energy company in the world (by market cap) will not own any network (grid) or generation assets.  It will manage information about energy sources and consumers.   He does not see any technical barriers to this vision.  The only thing standing in the way at the moment is current regulation.

 

The utility digital distribution platform creates new value by enabling an open energy market which brings together those who have energy with those who want it.  It requires a network operator who manages and ensures the reliability of the grid (similar to the role of Network Rail in the UK) and a sharing energy economy platform operator (like Facebook, Uber and Airbnb) who brings together energy providers and buyers including prosumers, and calculates transaction and delivery costs. 

 

Chandu put it this way, "energy is getting digitized".  His perspective is that renewable energy, whether wind or solar, introduces a major element of variability into power networks which is seven times greater than in our current networks where most of the variability is due to demand.  Weather is the source of most of the variability.  Predicting when the wind will blow and with what force and cloud cover are critical for managing future power networks in addition to predicting and managing demand with techniques such as demand response.  IBM has two major projects based on predicting these external factors, Deep Thunder for weather prediction and Opus for a power project whose first implementation is in Vermont.  In Chandu's view time of use pricing, demand response, and other programs are practical examples of capabilities that utilities have already implemented and that are required to support transactive energy that underpins all three's vision.  Transactive energy means fundamentally that market forces control the flow of energy.   It requires price signals from the energy supplier and demand signals from the buyer. 

 

Sharon shares a similar long term vision of the energy sector and also sees transactive energy as the future toward which the sector is heading.  It is the consumer that is driving the industry.  As Jon Wellinghof, ex-chairman of FERC put itthis way

 

"Advances in technology and the desire we are seeing at the consumer level to have control and the ability to know that they can ensure the reliability of their system within their home, business, microgrid or their community. People are going to continue to drive towards having these kinds of technologies available to them. And once that happens through the technologies and the entrepreneurial spirit we are seeing with these companies coming in, I just don't see how we can continue with the same model we have had for the last 100 or 150 years."

She gave a number of examples of how interoperability standards from IEEE, IEC, and SGIP; programs from government agencies such as the Department of Energy, ARPA-E and Pacific NW National Lab (PNNL); and industry organizations such as EPRI are moving toward a common vision of the utility of the future.   Sharon put it very strongly in front of a room filled with utility employees and vendors and consultants, "get ready for transactive energy, this is real, this is not hype."

 

Changing the world's energy economy: Elon Musk announces Tesla Energy

At the beginning of May Elon Musk gave a presentation is which he offered his vision of an alternative to fossil fuels as the future of humanity's energy sourcing and delivery.  Musk's long term objective is global carbon free energy for power generation and transportation.  He announced Tesla Energy and its first products, lithium-based Powerwall consumer (10 kWh) and Powerpack utility-scale (100 kWh) batteries.  He also discussed a third product, GigaFactory, which he described as a gigantic machine to manufacture Powerwall and Powerpack batteries. 

Elon Musk is an entrepreneur with a vision for humanity.  He is the chairman of SolarCity and his vision for practical carbon-free energy helped start the company.  SolarCity has already had significant transformative impact on the traditional power utility business model.  He is also the founder and CEO of Tesla Motors, a manufacturer of electric vehicles and batteries. (He is also CEO of Space-X, but that's another discussion.)  Musk is proposing a fundamental transformation of how the world works, by developing an alternative model for how energy is sourced and delivered.  He believes it is possible with solar and batteries to wean the world off fossil fuels and reduce  anthropogenic CO₂ emissions to near-zero.

The Problem

The world's electric power and transportation is powered by burning fossil fuels. The result is that anthropogenic CO₂ emissions have pushed atmospheric CO2 concentrations (first recorded by climate scientist Charles Keeling) to levels not seen even in the paleoclimate record.

The Solution

Musk thinks that collectively we should do something about this, but is has to be practical (and not win the Darwin award). His proposal for a solution has two parts.

1. Solar
Musk pointed out that we have this "handy fusion reactor in the sky" in the sun.  We don't have to do anything except harvest the energy.  Musk calculated the total surface area needed to generate enough power to get the U.S. completely off fossil fuel power generation.   Shown as a blue square on Musk's slide it covers less than 1/4 of  the Texas panhandle.

2. Batteries
The obvious problem with solar energy is that the sun does not shine at night and even during the day the the power generated varies.  Energy captured from the sun needs to be stored.  Battery technology has evolved to the point where the size of the batteries needed to wean the U.S. power generation off fossil fuels is the size of a pixel ("the red pixel") on Musk's slide.

In Musk's view what is needed is a battery that simply works.  A battery that doesn't require a lot of space, is reliable, works with existing home electrical networks and solar installations, is safe, can be used for years and is affordable. The Tesla Energy consumer battery, the Powerwall, is wall-mounted and comes in different colours so you don't need a battery room.  It stores either 7 kWh (priced at $3000) or 10 kWh ($3500) and can be stacked for up to 90 kWh.  To put this in context the average Ontario homeowner uses about 800 kWh a month in energy which translates to an average of 27 kWh a day.  The Powerwall comes with a 10 year warranty.

What it gives you is peace of mind. You don't have to worry about being without power after an ice storm.  It also gives consumers energy independence.  Together with solar panels with these batteries consumers can go completely off the grid.  This presents a huge challenge to the traditional electric power utility business model, comparable to the impact of cell phones on traditional land-line telephone companies.

Powerwall is targetted for homes and small commercial sites.  You can order the Powerwall right now on the Tesla web site.  Musk said that shipping will start in 3 to 4 months.  Initially the rampup will be slow because the batteries will be made in Tesla's Freemont, California factory.  But next year the rampup will accelerate as Tesla transitions to its Nevada Gigafactory.

Tesla is not the only company producing this type of battery.  Aquion Energy and Iron Edison are also also producing consumer-scale power batteries.  You can see how Tesla's Powerwall and these other companies' products compare from a financial perspective here.

Powering remote locations

Battery power is even more crucial for people in remote locations where there is no grid (remote parts of India and Africa), electricity is intermittent (many urban areas in India), or extremely expensive (northern Canada).  Musk thinks that the Tesla Powerwall can scale globally.  What he expects to see is what happened with cell phones and landlines.  The cellphone leapfrogged the landline.  There wasn't any longer a need to put landlines in remote locations. People on islands or remote locations can install solar panels and Tesla Powerwalls and never have to worry about electicity lines.

Utility-scale battery storage

The Tesla Powerpack (100 kWh), which is designed to scale infinitely, can provides gigawatt power.  According to Musk Tesla Energy is already working with a utility on a 250 mWh Powerpack installation. 

Emphasizing that the Powerpack is a reality, Musk announced that the entire evening event had been powered by Powerpack batteries that had been charged by the solar panels on the roof of the building where the event was taking place.  The entire evening was powered by stored sunlight.

Tesla's competitors in this market include Eos Aurora and Imergy Flow.  You can see how Tesla's Powerpack and other companies' products compare financially here.

The big picture: transitioning the world to sustainable energy

Musk calculated that 900 million Powerpacks would be required to transition the world to renewable electric power (90,000 GWh).  To transition the world to renewable electric power and electric powered transportation would require 2 billion Powerpacks.

Musk made the case that this is something that humanity is capable of by looking at what humanity has already done with transportation.  There are about 2 billion cars and trucks on the road.  About 100 million cars and trucks are produced every year so that the world's transport fleet gets refreshed every 20 years.  Musk's argumemnt is that if we can do it with vehicles, it is within our power to do it with batteries.

This is the reason that Tesla's approach in developing the Gigafactory is to treat it as a product. They are designing a giant machine for making batteries.  Musk foresees that there needs to be many gigafactories in the future. He emphasized that this is not something that Tesla is going to do alone.  Many other companies need to develop their own gigafactories. 

Musk also announced that Tesla's policy of open sourcing patents will continue for gigafactories, Powerwalls, Powerpacks, and other technologies.Musk foresees with this technology a future where the Keeling curve will flatten and where there will be no incremental anthropogenic CO2 increase.  The path that he has described based on solar panels and  batteries is the only path that he knows can achieve this.  In his view  it is something that we must do, that we can do, and that we will do.  I have to agree with Ed Parsons.  This is on the level of Steve Jobs revolutionizing consumer electronics and commercial music delivery, but working on the "slightly bigger challenges" of carbon-free transportation and power generation.

New York State moves toward Utility 2.0

The New York Public Utility Commission is moving the New York state utility industry toward a radical refinition 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 may be comprised of distributed system platform (DSP) providers, basically providing the grid but not directly selling energy, and and energy market with many energy providers including bulk power generators and many distributed energy generators, you and me with rooftop solar panels.

Currently the grid is comprised of large, central power plants interconnected via transmission lines and distribution networks that feed power to customers. But this is beginning to change with the rise of distributed energy resources (DER) such as small natural gas-fueled generators, combined heat and power plants, electricity storage, and especially solar photovoltaics (PV) on rooftops and in larger arrays connected to the distribution system.  DER already has had a significant impact on the operation of the electric power grid and its role will undoubtedly become even more important in the future. 

Solar power is growing rapidly.  4.2 GW of solar power was added in 2013 in the U.S.  It is not unreasonable to expect reaching 20GW of solar and a million installations in the near future.  This proliferation of solar is driven primarily by customers wanting choice and by solar PV becoming very economical.  For the first time in 100 years companies like SolarCity are providing consumers with a competitive alternative to the local power company.  This is disruptive for the traditional utility business model.   Many utilities are aleady trying to adapt to this new world, for example by utility-provided solar power at Wright-Hennepin Cooperative Electric Assn.

In the traditional utility model, if you compare variable and fixed costs with fixed and variable revenue, there is a mismatch.  This translates into a revenue shortfall or unrecovered cost when you compare a non-solar customer's with a solar customer's annual bill.  The problem is not technology, it is the current utility business model and in the utility industry in the U.S. there is an increasing recognition that it has to change.

In Maryland earlier this year in response to a recommendation from the Governor’s Task Force on Grid Resiliency to “scope out a Utility 2.0 pilot proposal", the Energy Future Coalition (EFC) prepared recommendations for a smart grid pilot project that would address key business objectives including a regulatory framework for the smart grid and a new utility business model that would keep utilities financially viable even as they delivered less electric power.  EFC's key recommendation is a new utility business model that would decouple utility revenue from selling electric power.

Reforming the Energy Vision in New York State

New York has gone a step further.  A Straw Proposal submitted by New York Department of Public Services (DPS) staff in its capacity as adviser to the Public Service Commission (PSC) proposes increasing the use and coordination of distributed energy resources(DER) via markets operated through a distributed system platform (DSP). Fundamentally this means that DSPs are not in the business of directly selling power themselves (unlike today's utilities), but create and maintain the market and infrastructure for the sale and distribution of electricity produced by the wholesale market (bulk generation) and thousands of DER generators.  In the Straw Proposal DER is used to describe a wide variety of distributed energy resources, including end-use energy efficiency, demand response, distributed storage, and  distributed generation. 

Earlier this year New York’s Governor Andrew Cuomo asked the New York Public Service Commission to fundamentally shift utility regulation to meet the needs of a more distributed, consumer-focused energy system.  In April 2014, the Commission issued an Order Instituting Proceeding for Reforming the Energy Vision (REV) which proposed a platform to transform New York’s electric industry, for both regulated and non-regulated entities, with the objective of creating market-based products and services that would drive an increasingly efficient, clean, reliable, and customer-oriented industry.  Regulatory reform would enable coordination of a wide range of distributed energy resources  to manage load, optimize system operations, and enable clean distributed power generation.  New and existing  markets and tariffs would be developed to empower customers to optimize their energy usage and reduce electric bills, while stimulating innovation and new products. 

The Straw Proposal supports the central vision of REV, that increasing distributed energy resources(DER) via markets operated through a distributed system platform (DSP) is achievable and offers substantial customer benefits.  The proposal found there is large potential for the integration of Distributed Energy Resources (DERs) into the New York electricity market, via a Distributed System Platform (DSP) framework.  The integration of DER offers customers the opportunity to manage their usage and reduce their bills while at the same time creating important system and societal benefits such as increased system efficiency and reduction of carbon emissions. (The DPS Staff was assisted in preparing this proposal by Rocky Mountain Institute, the Regulatory Assistance Project, and the New York State Energy Research and Development Authority. )

Distributed System Platform

The foundation for Utility 2.0 in New York is the distributed system platform.  The definition of DSP used by the DPS staff is an "intelligent network platform that will provide safe, reliable and efficient electric services by integrating diverse resources to meet customers’ and society’s evolving needs. The DSP fosters broad market activity that monetizes system and social values, by enabling active customer and third party engagement that is aligned with the wholesale market and bulk power system."

The DSP provides basic functions including market operations, grid operations, and integrated system planning. 

• The DSP will enable participation by DER service providers in a transparent, open market.  It will also  create an open platform for new energy products and service delivery by third parties and energy suppliers to consumers.
• The DSP will need to integrate new market operation functions with both utilities’ existing grid operations and advanced “smart grid” capabilities.  The distributed grid will facilitate deployment of DERs, two-way power flows, advanced communications, distribution system monitoring and management systems, and  automated balancing of energy sources and loads. This is intended to lower peak demand on the bulk power system, increase reliability and manage investment needs of the distribution system.
• The DSP will  the require modernization of power distribution systems.  In the future distribution systems will need to operate under conditions very different from those of today.  Modernization of distribution systems must meet and balance important policy objectives such as system reliability and resiliency, customer empowerment, consumer protection, system efficiencies, cost-effectiveness, competitive markets, energy efficiency, power quality, fuel diversity, and responsible environmental stewardship.

Implementing the DSP

Currently, power distribution utilities deliver electricity services directly to end-use residential, commercial and industrial customers.  The New York Independent System Operator (NYISO) operates the transmission network and manages wholesale electricity markets.  Distribution utilities construct, maintain and operate distribution system infrastructure and assets.  A growing number of customers are engaged in distributed generation, for example, rooftop solar.   There are demand response and energy efficiency programs sometimes run by the utilities themselves, sometime by other agencies.

The Straw Proposal recommends that New York's existing distribution utilities, such as Consolidated Edison, National Grid, and New York State Electric and Gas, serve as the DSPs. This would entail New York's utilities focusing on energy distribution (the grid), market-creation and other electric services but getting out of the business of direct energy sales. 

Under the REV vision, the DSPs will responsible for creating a retail energy market which includes both the wholesale energy market and the growing DER markets - you and me with our rooftop panels.

Utility grid operations divisions will continue to be responsible for distribution system planning across the electric network, including the distribution network and connections to the bulk power system.

The NYISO will continue planning for bulk system upgrades, bulk generation forecasts, and other service needs.

Customers will become participants in the management and optimization of the electric system through wide-scale adoption of DER products.  For larger customers this could involve actively managing energy usage and generation.  For smaller customers automatic technologies and controls could optimize their usage patterns.  DER service providers could become aggregators between customers and the DSP.

The Public Services Commission's role will be to maintain a critical oversight of the market.  This will include guidance and processes for market rule making, approving investment plans and rate designs by regulated utilities, and reviewing the activities of ESCOs (energy suppliers), third-party service providers, and utilities for compliance with market rules.

Information exchange

One of  the important features of the Straw Man proposal is an information exchange.  Since customer electric power usage data can reveal opportunities for DER investment and development of innovative products and services such as consumer apps, the Straw Man proposes a bi-directional electricity data  information exchange involving customer usage data from smart meters and data from energy generating installations on both sides of the meter.  The data exchange is intended to help with monitoring the distribution system, identifying opportunities for DER products and services tied directly to customer data, and to support the development of innovative DER products and services.  Customers would have the option to opt out of the data exchange program.

Privacy

Customers would also be able to access to their own energy usage data in a standard format.  In addition, customers would be able to authorize that their energy usage data be provided to third-parties such as DER providers, to enable providers to develop and offer products and services that are tailored to the customer’s specific energy patterns and needs.   New tools, often apps running on hand-held devices, are being developed to help energy consumers understand the alternatives in purchasing electricity from a third party provider, installing solar PV on their roof, and other energy-related services.

Arizona utility proposes renting rooftops for solar PV generation

I've blogged several times about the challenge that customer installed solar PV as well as companies like Solar City present to traditional electric power utilities.  Utilities across North America are evaluating alternative business models, trying different strategies for both encouraging renewable power generation, responding to customer demand for solar power and protecting their revenue base.  For example, a small utility Wright-Hennepin Cooperative Electric Assn created its own solar park which customers could buy shares in.

A new twist comes from the Arizona Public Service (APS), the largest power utility in Arizona.  APS has proposed a 20 MW utility-owned residential distributed generation (DG) program that will help APS meet Arizona's 2015 renewable energy requirement. Under this program, APS would use  third-party local solar vendors to install solar PV on customers' rooftops across APS’s service territory.  APS would pay for the installation and own the solar PV panels.  APS would rent customers' rooftops and pay customers $30/month rent.  This enables customers to participate in solar PV generation with no upfront costs.  As APS points out, this makes it possible for everyone to participate in solar PV regardless of their income. 

It also represents an alternative to customer installed solar PV and net metering and to companies like Solar City.  Most importantly from APS' perspective, APS owns and controls the DG infrastructure.  Presumably the solar PV is directly connected to the APS grid without going through a customer meter.  Customers remain electric power consumers, not generators, and this should not be expected to reduce APS revenue.

Minnesota Public Utilities Commission (MPUC) offers alternative to net metering for valueing solar PV electricity

The Minnesota Public Utilities Commission (MPUC) in a close decision approved a formula for determining the value of electricity from solar photovoltaic (PV) generation, in other words, what the utility will pay customers for the power generated by rooftop solar PV panels. The Value of Solar methodology includes avoided fuel cost, avoided plant and O&M cost, avoided generation cost, avoided reserve capacity cost, avoided transmission capacity cost, avoided distribution capacity cost, and avoided environmental cost. 

It also includes the cost of carbon as estimated by the Federal Government as the social cost of carbon (SCC), whch is an estimate of the economic damages associated with an  of one metric ton in carbon dioxide (CO₂) emissions in a year.  The SCC is meant to be a comprehensive estimate of climate change damages including changes in net agricultural productivity, human health, and property damages from increased flood risk. 

The MPUC ruling is not binding on Minnesota's investor owned utilities, but offers an alternative to net metering.  According to an Xcel Energy filing which uses the new formula, solar PV is valued at 14.5 cents/kWh which is higher than the current retail electricity rate for residential customers in Minnesota of 11.3 cents/kWh.  MPUC's value of solar is remarkably close to the 14 cents/kWh above which Solar City says it can offer a competitive solar option.

Maryland's Utility 2.0 proposes "utility of the future" business model

In response to a recommendation from the Governor’s Task Force on Grid Resiliency to “scope out a Utility 2.0 pilot proposal", the Energy Future Coalition (EFC) prepared recommendations for a smart grid pilot project that would address key business objectives including eliability and resiliency, residential customer empowerment, large customer flexibility, infrastructure upgrading, a regulatory framework for the smart grid, and a new utility business model that would keep utilities financially viable even as they delivered less electric power.  EFC's "Utility 2.0" recommendations include

• Utility investment in an interoperable, integrated suite of smart-grid technologies, for the utility's own system, but also on customer sites.  This would include time-of-use rates, automated demand response, conservation voltage regulations and other technolgies.
• Allowing utilities to provide low-cost loans to consumers to finance new technology to be repaid by customers on their utility bills.
• Automated system sectionalizing and reclosing (self-healing networks)
• Support for micro-grids in areas where customers could safely provide their own energy during an outage.
• Utility-controlled vehicle battery charging.

Utility of the future

But the key recommendation is a proposal for a new utility business model that would decouple utility revenue from selling electric power.  EFC is proposing that a set of five performance parameters measured through objective metrics would be used to vary the utility’s rate of return on equity by up to one percent above or below the current rate of return determined by the regulator. The performance parameters would be: cost, reliability, customer service, adoption of smart grid technologies and services, and support for alternate energy.

EFC is proposing that the relative weighting of these five factors would be determined by customers’ own rankings of their relative importance. This would provide utilities with a geographically detailed understanding of their customers’ priorities, and a direct incentive to serve those priorities. It would also encourage a potentially mutually beneficial utility-customer dialog.

Inflection point for electric power utilities: the threat of disintermediation

I've blogged previously about the challenges that solar PV and companies like Solar City pose for the traditional asset-based utility business model.  For the first time in 100 years companies like SolarCity are providing consumers with a competitive alternative to the local power company.  This is disruptive for the traditional utility business model. 

Regulators are very concerned about this trend.  The National Association of Regulatory Utility Commissioners (NARUC) and FERC periodically meet for what they call a Sunday Morning Collaborative to discuss common burning issues.  As a measure of the level of concern, at a recent SGIP meeting FERC Commissioner Norris said that the burning issue currently being discussed at these meetings is new utility business models.  Jon Wellinghof, outgoing chairman of FERC, has said

"Advances in technology and the desire we are seeing at the consumer level to have control and the ability to know that they can ensure the reliability of their system within their home, business, microgrid or their community. People are going to continue to drive towards having these kinds of technologies available to them. And once that happens through the technologies and the entrepreneurial spirit we are seeing with these companies coming in, I just don't see how we can continue with the same model we have had for the last 100 or 150 years."

A recent study of decoupling suggests that providing energy services may be one of the important future options for utiltiies.  Some utilities have come to a similar conclusion. 

At the Second Annual Summit on Data Analytics for Utilities in Toronto, Bradley Wasson, Project Director at NB Power did not pull any punches when he said that the traditional utility business model based on a return on investment in assets has come to an end.  He emphasized that we are in the midst of an inflection point for utilities. 

Ductless mini-splits and disintermediation

The immediate driver for this in New Brunswick is not solar PV, but heat pumps known as ductless mini-splits, which improve energy efficiency for heating and cooling (reducing demand for power) and of which there are about 20 000 in New Brunswick.   The threat is disintermediation, when a third party comes between the utility and its customer.  As another example, Microsoft Hohm and Google Powermeter were perceived as threats because utilities found the idea of a Microsoft or Google insinuating itself between the utility and its customers unattractive.

Future utility business model

This led Brad to the conclusion that utilities need to understand their customers better.  He outlined some of the things that NB Power is doing to improve communications with its customers including developing a customer maturity model. 

He sees the utility business model evolving to providing energy products and services.  Other utilities have come to a similar conclusion.  

21st Century energy utility business models: Decoupling as a first step

Decoupling first appeared in the 1980s to help utilities overcome what is referred to as the throughput incentive which ties a utility's revenue to its sales of electricity.   The throughput incentive motivates the utility to sell as much power as it can because that increases its revenue.  This worked with rapidly increasing power demand and generation in the 20th Century.  But the current power climate is different.  Consumers are being encouraged to reduce emissions and conserve energy.  In addition and perhaps more importantly alternative sources of energy such as solar PV are achieving grid parity so that consumers can reduce their power bill by generating their own power or buying it from companies like Solar City.

These disruptive challenges have arisen due to a number of factors including the:falling costs of distributed generation (DER), for example, solar PV, demand-side management (DSM), government programs to incentivize solar PV and other technologies; and the very low price of natural gas.  The financial risks created by these disruptive challenges include declining utility revenues, increasing costs, and lower profitability.  As DER and DSM programs become broadly adopted, utility revenues will tend to decline. The higher costs to integrate and subsidize DER and DSM could squeeze profitability, which will affect investor returns. As a result the availability of capital for the electric utility industry could be adversely impacted.  Ultimately this could result in upward pressure on consumer electric power rates.

Decoupling revenue and energy sales

A decoupling mechanism attempts to separate a utility’s revenues from its unit sales volumes without affecting the design of customer rates. In other words, utility customers continue to pay for service primarily according to the amount of energy they use.

Decoupling adjusts rates periodically to ensure that the amount a utility books as revenue for fixed cost recovery is no more and no less than the amount of revenue authorized by the regulator. Under traditional ratemaking methodologies for residential and smaller-usage commercial customers, a utility’s revenues come from customer energy usage (kilowatt-hours) and the rates the regulator has approved.  Periodically, a decoupling mechanism causes a rate adjustment to ensure that customers receive refunds or pay surcharges based on whether the revenues the utility actually received from customers is less or greater than the amount the regulator has approved. This difference can occur for several reasons but chiefly it is intended to support energy efficiency programs and incentives and customer conservation behavior that reduces electricity or natural gas usage from the amounts assumed in the ratemaking process.

For example, in a recent filing with the Minnesota PUC, Xcel Energy has proposed a partial decoupling for residential and small commercial and industrial customers.  If electricity sales were lower than forecasted for a given year, the utility would be allowed to make up the difference by charging a higher rate the following year.  If electricity sales exceeded forecasts, the utility would refund the surplus to customers through a lower rate the next year.   What this could mean is that as energy sales are eroded by energy conservation and alternative sources of energy, rates would be adjusted upwards to keep the utility's revenue constant so that it can continue to maintain its infrastructure.

For Xcel Energy, the motivation for decoupling is clearly financial: “While the Company has thus far been willing to promote its [conservation] programs as effectively as it can in order to meet energy efficiency goals, the financial pressures … increase the importance of removing the Company’s financial disincentives to promoting conservation and energy efficiency.”

A Decade of Decoupling for US Energy Utilities

A recent report (Graceful Systems Feburary 2013) assesses the decoupling mechanisms that 52 local distribution companies (LDCs) and 25 electric utilities have used since 2005.  This includes 1269 decoupling rate adjustments in 25 states in the U.S.

The study found that historically the decoupling rate adjustments have been mostly small. Across all utilities the study considered 64% of the adjustments were within 2% of the retail rate.  The adjustments amounted to about $2.30 per month for the average electric customer and about $1.40 per month for the average natural gas customer.

Secondly, decoupling adjustments can generate both refunds and surcharges.  The study found that across all electric and gas utilities 63% were surcharges and 37% were refunds, so about 2/3 led to increased revenue to the utility.

Conclusions

The study's conclusions are very interesting. 

First of all the report found that historically "the rate impacts of decoupling are small to miniscule. The amounts that flow through utility cost adjustment clauses, such as power cost or purchased gas adjustment clauses or trackers for capital additions, environmental remediation expenses or any of a myriad of other large costs dwarf decoupling adjustments."   But I wonder with the disruptive forces that many see affecting the electric power and gas industries which could lead to dramatic reductions in energy demand from the tradtional grid, whether in the future decoupling adjustments will tend to increase and possibly quite considerably.

But the study concludes that the real question that needs to be answered is what should the 21st Century utility's objective be ?  In the 20th Century it was to sell as much energy as the utility could get people to buy.  Now it could be to maximize utilization of the existing physical infrastructure or to become an energy services company that gets most of its revenue from services instead of from selling a commodity.  Decoupling is a first step in moving utilities from the 20th Century to the 21st Century, but it is not yet clear to many utilities where this path will lead.  Some utilities have already decided that the future is in energy services.

Is cheap solar PV disruptive in the electric power industry ?

I blogged previously about a presentation that, Rod Nikula,  VP Power Supply at Wright-Hennepin Cooperative Electric Assn (WH) in Minnesota, gave at a NRECA conference that hit on a very sensitive topic among power utilties.  Companies like SolarCity, a full service solar PV energy company,  offer a financially attractive solar package once the power rate from the local utility reachs 14 cents/kWh or above.  SolarCity offers a unique leasing plan that requires no money down.  It offers a flat rate for 20 years, and payments are made against savings from the monthly utility bill.

This is an example of what a recent Edison Electric Institute (EEI) report refers to as disruptive challenges that threaten to force electric power utilities to change or adapt the business model that has been in place since the first half of the 20th century, These disruptive challenges have arisen due to  number of factors incluiding the:falling costs of distributed generation such as solar PV, demand-side management technologies (DSM), government programs to incentivize solar PV and other technologies; and the very low price of natural gas. EEI sees these forces as potential game changers to the U.S. electric utility industry. They are seen as likely to dramatically impact customers, employees, investors, and the availability of capital to fund future investment. The EEI does not attempt to predict the timing of this  potential industry transformation, but argues that  the potential for a transformation of the electric power industry must be taken seriously.

By 2022 it is projected, assuming continued decreases in the cost of solar panels, that solar power will deliver power more cheaply for 10% of residential demand in 49 states, the only exception being Washington State which has the lowest power rates in the United States.  Furthermore according to another report, solar PV installed by businesses is projected to be competitive with at least 10% of commercial power demand in the United States by 2022.

The financial risks created by these disruptive challenges include declining utility revenues, increasing costs, and lower profitability.  As DER and DSM programs become broadly adopted, utility revenues will tend to declline. The higher costs to integrate and subsidize DER and DSM could squeeze profitability, which will affect investor returns. As a result the availability of capital for the electric utility industry could be adversely impacted.  Ultimately this could result in upward pressure on consumer electric power rates.

The current level of lost load nationwide from DER is estimated to be less than 1 %.  At this point investors are not seeing this as an immediate threat.  However, EEI believes that this will change as the pace of change accelerates.

The EEI report recommends revising utility tariff structures to mitigate or eliminate subsidies and provide real customer price signals. It also recommends that the electric utility sector should proactively plan to address these disruptive challenges. Specifically it needs to ensure that thirty year investments are recoverable in the future in a timely manner.

But while the paper does not propose new business models to address these disruptive challenges by protecting investors in order to retain access to capital, it does consider the expectations and objectives of investors, which it is suggested could lead to a transformation of the traditional utiltiy business model.

Solar PV on the verge of becoming a disruptive technology in the electric power industry

I blogged previously about a presentation that, Rod Nikula,  VP Power Supply at Wright-Hennepin Cooperative Electric Assn (WH) in Minnesota, gave at this year's NRECA conference that hit on a very sensitive topic among power utilties.  Companies like SolarCity, a full service solar PV energy company,  offer a financially attractive solar package (that does not involve the local power utility) once the power rate from the local utility reachs 14 cents/kWh or above.  SolarCity offers a unique leasing plan that requires no money down.  It offers a flat rate for 20 years, and payments are made against savings from the monthly utility bill. 

According to Rod Nikula, Solar City is taking 600 homes off the California power grid every month.  Mark Vogt, CEO of WH, put two and two together and concluded that "We better find a way to be in the home generation business,"  or face a serious drop in revenue.

In a report by John Farrell at the Institute for Local Self-Reliance, Rooftop Revolution: Changing Everything with Cost-effective Local Solar, the levelized cost of solar PV power is compared with the cost of power from local utilities.  The report conclues that right now solar PV delivers power more cheaply than the local power utility for 10% of residential demand in California, Connecticut, Hawaii, New Hampshire, and New Jersey. 

By 2022 it is projected, assuming continued decreases in the cost of solar panels, that solar power will deliver power more cheaply for 10% of residential demand in 49 states, the only exception being Washington State which has the lowest power rates in the United States.  Furthermore according to another report Commercial Rooftop Revolution, solar PV installed by businesses is projected to be competitive with at least 10% of commercial power demand in the United States by 2022. 

As ponted out in a recent article in IEEE Spectrum, Farrel's asumptions are fairly conservative - the most important assumption is that the driver behind these projections are technology and industrial efficiency.  Farrell also assumes that utility power rates will continue to rise about 2% per year.  Most importantly, he does not include government subsidies in his projections of the cost of solar PV.

Farrel's conclusion (both of his reports have the word "revolution" in their titles) is that solar PV is poised to dramatically change the electric power industry as we know it.  Wright-Hennepin Cooperative Electric Assn (WH) is one of the utilities that has recognized this trend and is trying to do something about it, by getting into the residential solar PV business.