America's Power Plan Part 2: Utility Business Models

a guest post by Ken Whiteside, Director of Business Development at ONTILITY, LLC.

Americas Power Plan Utility Business Models

In the face of the continuing, rapid growth of distributed and variable generation, mostly due to market penetration of renewable energy, utility company business models are being disrupted in significant ways. The 100-year-old structures, created as the industrial era got into full swing, are out of date. These companies, whether they are investor owned or public entities, must adapt to the demands of our 21st century, information and service based economy.

A variety of possible utility roles emerge from Peter Fox-Penner's book Smart Power and from a recent feasibility study of business models and regulatory incentives. Nationwide, the variety of utility company structures and the significant regional, state and local differences in the way those companies are operated and regulated ensures that there is no one-size-fits-all business model. Nevertheless, we can see the beginnings of some constructive options. So far, roles have fallen into three broad categories.

A minimum involvement role is one in which utilities specialize in a single aspect of the power production and distribution chain. This approach could result, for example, in a "wires company," which would maintain the part of the grid that is a physical monopoly – the wires and poles – while competitive providers supply the rest. Those who advocate for this model point out that utilities are not well positioned and they have little incentive to take the risks that come with change and innovation. Utilities are creatures of engineering and financial standards with expectations primarily centered on providing reliable service, steady returns and reasonable costs.There is speculation about how much the electric industry could be like telecommunications, where new technologies – especially mobile phones – have changed the business realities of traditional regulated telephone companies so entirely that a regulated monopoly structure has nearly disappeared. A lot of customers on the winning side of that equation believe that technology in the electric sector will have the same impacts.

Skeptics of this point of view emphasize that even the best restructured electric markets still struggle to meet public policy requirements for long term supply reliability, to amass capital for long term investment and to meet current minimum renewable energy standards, much less the challenges presented by further penetration of distributed generation capacity. Therefore, they say, there will always be a significant role for the regulated, monopolistic utility. Regardless of your point of view, the minimum utility role raises the specter that utilities potentially face a dignified “death spiral” in which their business model is made irrelevant by new technology and customer demands.

At the other end of the spectrum lies the maximum utility role, or the "energy services company," which would own and operate all systems necessary for delivery of energy services to consumers. Such a utility would be supported by public policy and, hopefully, continuously improve its economic, environmental and financial performance. While the public policy changes needed to fully implement this model are daunting in many markets, given the wide variety of utility experience in the U.S., a maximum utility role outcome could be the avenue of choice for some states and localities. Between these two is a Goldilocks just-right model: a "smart integrator" or "orchestrator" role in which utilities form partnerships with innovative firms to coordinate and deliver energy services without necessarily doing it all themselves. Under this model utilities would maintain their strong engineering and reliability standards, but adapt and apply them to new technologies and service offerings. New standards and changes to existing standards would be needed to incorporate new equipment, simplify and rationalize interconnections between new equipment and utility distribution and transmission grids and integrate new generation into utility operations and markets.

Each model has its champions and its critics. As said at the top, there won’t be a single national solution (we barely agree on the color of highway signs, much less on anything as complex as electric utilities), but out of a diverse collection of markets and policies innovative models are and will continue to emerge. Models that will satisfy customers, regulators and investors.

Ken Whiteside photo Ken Whiteside has been a fan of solar energy for decades. His first hands-on experience was installing solar on off-grid houses around Telluride, Colorado in the 1990’s (summer in the San Juan Mtns. - somebody had to do it). From his home in Austin, Ken writes and works for widespread adoption of solar electricity, smart energy production and use, and sustainability.

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