Future of Utilities - Utilities of the Future

How Technological Innovations in Distributed Energy Resources Will Reshape the Electric Power Sector

Fereidoon Sioshansi, Fereidoon P. Sioshansi

• Publisher: Academic Press
• Year: 2016
• ISBN:
  9780128043202
• Topic: Business
• Subtopic: Energy Industry
• Index: Business

Future of Utilities - Utilities of the Future: How technological innovations in distributed generation will reshape the electric power sector relates the latest information on the electric power sector its rapid transformation, particularly on the distribution network and customer side. Trends like the rapid rise of self-generation and distributed generation, microgrids, demand response, the dissemination of electric vehicles and zero-net energy buildings that promise to turn many consumers into prosumers are discussed.

The book brings together authors from industry and academic backgrounds to present their original, cutting-edge and thought-provoking ideas on the challenges currently faced by electric utilities around the globe, the opportunities they present, and what the future might hold for both traditional players and new entrants to the sector.

The book's first part lays out the present scenario, with concepts such as an integrated grid, microgrids, self-generation, customer-centric service, and pricing, while the second part focuses on how innovation, policy, regulation, and pricing models may come together to form a new electrical sector, exploring the reconfiguring of the current institutions, new rates design in light of changes to retail electricity markets and energy efficiency, and the cost and benefits of integration of distributed or intermittent generation, including coupling local renewable energy generation with electric vehicle fleets.

The final section projects the future function and role of existing electrical utilities and newcomers to this sector, looking at new pathways for business and pricing models, consumer relations, technology, and innovation.

• Contains discussions that help readers understand the underlying causes and drivers of change in the electrical sector, and what these changes mean in financial, operational, and regulatory terms
• Provides thought-provoking ideas on the challenges currently faced by electric utilities around the globe, the opportunities they present, and what the future might hold for both traditional players and new entrants to the sector
• Helps readers anticipate what developments are likely to define the function and role of the utility of the future

Part I

What is Changing, What are the Implications

Chapter 1: What is the Future of the Electric Power Sector?

Chapter 2: Value of an Integrated Grid

Chapter 3: Microgrids: Finally Finding their Place

Chapter 4: Customer-Centric View of Electricity Service

Chapter 5: The Innovation Platform Enables the Internet of Things

Chapter 6: Role of Utility and Pricing in the Transition

Chapter 7: Intermittency: It’s the Short-Term That Matters

Chapter 1

What is the Future of the Electric Power Sector?

Fereidoon P. Sioshansi Menlo Energy Economics, Walnut Creek, CA, United States of America

Abstract

It is broadly agreed that the electric power sector is going through rapid transformation in all segments of the value chain but particularly in the distribution end of network and on the customer side of the meter. Technological advances in self-generation, storage, microgrids, and zero-net energy buildings promise to turn many consumers into prosumers. What is not clear, however, is whether, how, and when will the incumbents respond to the challenges they face. This chapter asks, “what future,” or perhaps, “if there is a future” for electric utilities?

Keywords

electric power sector

distributed energy resources

utility business models

prosumers

microgrids

1. Introduction

In 2014, the New York Public Service Commission (NYPSC) initiated an ambitious regulatory proceeding called Reforming the Energy Vision (REV) to redefine the state’s future electric utility business model, further described in chapter by Jones et al. The effort, spearheaded by Audrey Zibelman, the chair of the Commission with the support of New York Governor, Andrew Cuomo, involves a thorough examination of the evolving role of utilities, particularly the distribution network, at a time of rapid change and technological innovation.

New York, of course, is not alone in reexamining the industry’s future. Similar proceedings are underway in California, Hawaii and a number of others states—and regulators in Europe, Australia, Japan, and a number of other countries are also addressing similar issues, but with a local flavor and with different degrees of urgency.

To those not familiar with the issues, this may seem perplexing, especially since the general public views utilities as stable, stodgy, slow moving enterprises that have been around forever—not particularly liked, but ultimately necessary. Why all the hype about new utility business models and the need for new forms of regulations?

As the following chapters of this book explain, the reasons are rather obvious to those within the industry, as well as those who regulate it. For a start, the utility business is no longer a growth industry—something that was taken for granted for a very long time.

As the experience of the Empire State illustrates (Table 1.1), electricity demand growth has fallen precipitously since WWII, and not just in New York. On the other hand, retail electricity prices, historically flat or falling, adjusted for inflation, are now flat or rising,¹ even in the United States (Fig. 1.5), where shale gas is plentiful and cheap, certainly by international standards.

Table 1.1

Average Electricity Sales Growth in New York, 1996 to Present Plus Projections to 2024, in Percentage

Period	Average sales growth (%)
1966–76	3.8
1976–86	1.5
1986–96	1.4
1996–2006	0.9
2003–13	0.3
2014–24	0.16

Source: NY Public Service Commission, Feb. 26, 2015.

Get used to it: no growth in utility business—New York or elsewhere.

Rising retail rates is not limited to the United States. As noted in chapter by Nelson and McNeil, rising retail prices have been especially pronounced in Australia, mostly due to increased network costs. In many parts of Europe, including Germany, retail tariffs have also risen, even when wholesale prices have been falling, as explained in chapter by Burger and Weinmann.

In New York, the electricity demand² is projected to grow at a tepid average annual rate of 0.16% through 2024, which is among the underlying reasons for redefining the utility business model. The same low or flat demand projections are evident in other states (Fig. 1.1) and in other mature economies, as far away as in Australia.

Figure 1.1 Electricity demand growth rates in different states. (Source: QER Report: Energy Transmission, Storage, and Distribution Infrastructure, Apr. 2015.)

While sales growth has stagnated, retail tariffs are expected to rise, partly due to the need for upgrading and modernizing the distribution network. The US power sector expects more, not less, investment going into the network, as illustrated by recent trends in Fig. 1.2. Historically the industry thrived by investing lavish amounts, routinely expanding and upgrading its infrastructure. Since the volume of sales was growing, the costs could be spread among more kilowatt-hours sold, which meant that the average consumer did not feel the pinch.

Figure 1.2 US investment in transmission and distribution, 1997–2012.
More, not less, grid investments by US utilities. (Source: Quadrennial Energy Review, US Department of Energy, Apr. 2015.)

As described by Averch and Johnson (1962), under traditional rate of return regulation, all else being equal, regulated utilities historically had an incentive to overinvest in capital if/when they could, and there are indications that some in the industry still operate on this basis, if they can get away with it (EEnergy Informer, 2015b).

To frame the discussion, between 1960 and 2000, electricity sales in New York grew 422%, while retail tariffs, adjusted for inflation, declined from 20.8 to 11.32 cents/kWh.

These were the industry’s golden years, where demand grew, while prices fell through the miracle of economies of scale. The increased investments could be spread among the rising volume of sales, which meant lower prices per unit for the average consumer that, in turn, encouraged more consumption—straight from the Economics 101 chapter.

As covered further in this chapter and in following chapters of this book, these fundamentals are now reversed. While sales are stagnant or falling, retail tariffs are expected to be rising, encouraging conservation and distributed self-generation. Adding to the industry’s woes is the fact that a growing number of consumers in high retail tariff jurisdictions can now produce some, or virtually of all, their electric needs through distributed self-generation, primarily by investing in solar panels on their roofs.

What makes rooftop photovoltaics (PVs) compelling is supportive policies that either pay a generous feed-in-tariff (FiT), or offers a credit for all generation in excess of domestic consumption—the so-called net energy metering (NEM) schemes currently prevalent in much of the United States. Among the thorny issues facing regulators in many parts of world is deciding how much to pay for such intermittent consumer self-generation because it erodes utility revenues without a commensurate reduction in utility fixed costs, which are significant.

Other technological advancements, notably in storage, microgrids, and home energy management al...