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Will Utilities Embrace Distributed Energy?

Disruptive technological changes are at work but utilities are hamstrung by outdates business models and regulations.

A homeowner who puts solar panels on his roof immediately slashes his monthly electricity bill and gains a measure of independence from the utility. As more distributed energy technologies take hold, utilities in the U.S. are wondering out loud what their future holds.

How will utilities maintain the grid infrastructure in an age when people consume less energy from the utility? Credit: Martin LaMonica.

It’s not just falling prices of solar photovoltaic panels that are slowly moving power generation out to the edge of the grid network. More people are looking at natural gas generators and energy storage systems that complement grid power and provide backup power during outages. And there are more ways to save electricity, such as efficient appliances and reports to encourage efficiency, or demand response to shave peak power use through smart thermostats. (See, Nest Thermostat Slays Peak Power.)  

Earlier this year, industry group the Edison Electric Institute (EEI) published a Disruptive Challenges report outlining the risks to the financial well-being of utilities from distributed energy. It recommends a push to reexamine policies that create incentives for renewable energy, particularly net metering, and advocating pricing changes that ensure utilities can recover the cost of maintaining the physical grid infrastructure.

David Crane, the CEO of NRG Energy, which owns power plants and provides residential utility service, called distributed solar a “mortal threat” to utilities earlier this year. Last week, he predicted that the natural gas industry will “disintermediate the electric power industry” and provide power-generating appliances in people’s homes, which could be fuel cells, microturbines, or types of Stirling engines.

“These energy-producing appliances on the cusp of being deployed will allow people to walk away from the grid and produce electricity in their home,” Crane said at the Bloomberg New Energy Finance conference last week.

The transition from a heavily centralized power grid to one with rooftop solar panels, natural gas generators at homes and businesses, plug-in electric vehicles, and technologies to reduce electricity use is clearly underway. Crane’s comments and the EEI report reflect the unease rippling through the traditionally slow-moving utility industry. The question is how utilities react to this transition and how that affects the future of electricity service.

Earlier this week, experts at the Advanced Energy Conference in New York City discussed how disruptive forces at play in electric power pose thorny questions, but offered few obvious paths for utilities to profit from them. Although there are a number of progressive utilities, their comments suggest that most utility industry companies will resist the dramatic changes imposed by technological changes.

The problem isn’t just that utilities will be marginalized if consumers and businesses can generate power themselves and only use the grid is backup. When customers use fewer kilowatt-hours either through efficiency or distributed generation, it cuts off utilities’ source of revenue and the way they fund up-keep of power lines, substations, and other equipment. Although rules vary, in general utilities propose infrastructure upgrades and state regulators approve those decisions and the rate of return they can make on those investments.

But if many more people lessen their reliance on power from utilities, the pool of available money to make those upgrades starts to shrink. The tab for upgrading the basic infrastructure, including smart meters, is hundreds of billions of dollars in the US in the next five years, says Bill Zarakas, principal at the consulting company the Brattle Group. Added on top are initiatives to make the grid more resilient in the wake of hurricane Sandy. Meanwhile, more efficient use of energy and muted economic growth means electricity growth nationally is essentially flat. “You’re really asking us to recover investments through sales but to sell less. It’s a bit of a disruption,” he says.

In a few cases, utilities have been able to earn revenue by owning rooftop solar arrays and other distributed energy assets, but that’s the exception. In New York, for instance, deregulation placed a de facto ban on utilities from owning power generation, which at the time meant centralized power plants. Now regulators are reconsidering those rules as distributed solar expands, says Kimberly Harriman of the New York Department of Public Service 

In many ways, electric power is going through a similar transition to the telecom industry in the 1990s when deregulation introduced competition in local telephony, which cut off a reliable source of revenues for phone companies. “Distributed energy resource technology…can do to electric utility industry what wireless handheld technology has done to the telecom industry. This will be revolutionary,” said Paul DeCotis, vice president of power markets at Long Island Power Authority.

But Brattle’s Zarakas is skeptical that utilities can mimic the telecom industry’s transition and will somehow make up lost revenue from distributed generation and efficiency with add-on services. Telecom companies were able to offer much desired services—broadband Internet, mobile phone service, and content—but utilities don’t have any clear equivalents and aren’t normally in the business of offering innovative services, he says.

The disruption spills into the commercial world as well, where more universities and businesses are looking to establish microgrids that can “island” themselves from the grid if power goes out. (See, Microgrids Keep the Power Flowing Through Sandy.)

Overall, experts say that the basic funding mechanism for utilities needs to change so they have financial incentives to enable adoption of new technologies and encourage customer energy efficiency. Many changes along those lines could be a tough sell in the utility industry, which is famously conservative. But they may not have a choice. “Distributed generation is something that couldn’t be stopped even if we wanted to,” says Zarakas. 

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