Consumers as partners: the business model of utility companies in development

With the adoption of electric vehicles, rooftop solar systems, battery storage systems and smart devices, the role of the electricity consumer is evolving. Now able to provide services to support the operation of the local network, consumers are gradually becoming important partners for their local distribution services.

But with pricing, programs and member satisfaction teams designed around service delivery to consumers, how the utility business model changes when procuring services from consumers? And how can utilities prepare to support such changes?

The business model of traditional communal services

The electric utility business model in the United States has historically focused on providing consumers with safe, reliable, and affordable electricity, paid for through tariffs and earning a regulated return to the utility based on the cost of service.

For investor-owned utilities, that regulated return is passed on to shareholders—to whom the utility has a fiduciary responsibility to maximize value. For publicly owned communities, returns are reinvested in the community, often through capital loans.

Two megatrends collide

This business model is increasingly evolving in response to two major and intertwined changes in the utility landscape: the impact of climate change and the rapid adoption of consumer-owned distributed energy resources (DER).

Communities across the United States are facing the increasing frequency and severity of weather-related resilience challenges. Community members in affected areas have been vocal in their expectations for utilities to better prepare for these events – preventing outages when possible and restoring power more quickly when necessary.

Those community members, and very often the state legislators who represent them, are too pushing utilities to decarbonize and avoid contributing to even worse climate impacts – with 20 countries adoption of policies to reduce emissions.

In parallel, utilities are watching their consumers adopt distributed energy sourcessuch as rooftop solar energy, batteries, electric vehicles and smart devices, at record speed and independent of the utility company.

“Consumers will buy electric vehicles and rooftop solar if it’s profitable for them, regardless of whether it benefits the system or not. Utilities can try to slow that down, or they can create market opportunities for consumers to partner with them.” – Chris Villarreal, Plugged In Strategies

As a result, in addition to safety, reliability, and affordability, the “value delivery” for utilities will increasingly include resilience, decarbonization, and easier adoption of DERs. The traditional utility business model was not designed to support such expanded goals – and new approaches to how a utility creates, delivers and captures value are emerging.

Emerging Distribution System Operator (DSO)

Concept a Distribution system operator (or DSO) has been widely discussed as an attractive model for electricity delivery and supply by local consumers. Visions of how DSO actually works vary widely, with utilities, research institutions, and DER advocates in California, New York, the United Kingdom, and Australia offering different versions.

“Right now, the need for a DSO is more concrete than the concept of a DSO.” – Lorenzo Kristov, Climate Center

But regardless of the exact form a DSO may take, each version of the Distribution System Operator model enables consumer-owned resources to provide grid support services – at both the distribution and transmission levels.

There are utilities throughout the country trying out different approaches to harnessing these DERs to support the network, while still maximizing consumer benefits – often as baby steps towards a full DSO model. The most common examples include:

Each of these approaches encourages consumers to coordinate how their devices interact with the grid to support our power system. As utilities move toward large-scale dispatch and real-time coordination of DERs, new methods of compensating consumers will emerge, including markets at the distribution level – and will likely have a profound impact on the way utilities communicate with consumers.

Growing momentum for performance-based regulation

Parallel to the emergence of DSO, regulators and consumer advocates in 17 countries encouraged to explore the move away from cost-of-service regulation towards performance-based regulation (PBR). PBR is a cost-of-service alternative that focuses on desired, measurable outcomes rather than basing returns on total installed capital or “rate bases.”

Use PBR is intended to better harmonize the business model of utility companiesespecially for utility companies owned by investors, with an ever-widening set of goals and responsibilities. Almost every country investing in PBR efforts includes a combination of safety, reliability, affordability, resilience, and decarbonization impact measurement—often with the addition of user satisfaction and equity.

The transition to PBR is likely to be one of the most significant changes in how investor-owned utilities earn returns for their shareholders and how community-owned utilities communicate with their members. From a consumer perspective, the increased focus on metric-driven improvement will encourage utilities to offer new ways for distributed energy resources to play a role and be fairly compensated. Utilities will finally have a way to earn higher returns from making decisions like delaying asset upgrades.

Although it takes years to implement such a change (New York REV started in 2014), forward-looking utilities can lead the transition to PBR by providing new options for consumer participation and working to develop their relationship with regulators to better align utility returns with positive community outcomes.

Preparing for change

All these changes add up to a complicated landscape of what the future business model of utility companies will look like. But regardless of the exact version that appears, utility companies can and should prepare for changes.

We at Camus believe in that gathering of relevant utility operating systems – SCADA, GIS, DMS, AMI, etc. – with DER and customer data is a critical step utilities should be taking today to better understand how DERs can support their grid. The DER Orchestration Platform – which adds network awareness and market integration to traditional DERMS capabilities, can help network operators address today’s challenges, evolve their business models to treat consumers as partners, and take an important step toward the future of DSO.

Hear from utility executives live at Distributech

Curious about how leading utility and technology providers are thinking about the growing role of their customers and members?

Join Audrey Zibelman (former chairman of PSC in New York and former CEO of AEMO), James Conrad (Director of Distribution Operations for PPL Electric), Cyril Brunner (Innovation Manager Vermont Electric Cooperative), and Astrid Atkinson (CEO of Camus Energy) for a live panel discussion on Tuesday, February 7 at Distributech.

Can’t make it to San Diego? Subscribe for a recap after the panel.

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