How Do Utilities Make Money in an Age of Energy Efficiency?

Electric utilities are survivors. Their doom has been predicted many times over the last few decades as their industry restructured, competitors arrived and new technologies emerged.

Rather than die, utilities morph.

We’ve entered yet another period of utility disruption. This time the challenge is formidable. Electricity sales are flat in the U.S.  Worse,  electricity use could decline as much as 10 percent from 2013-2040, according to the American Council for an Energy-Efficient Economy. That kind of prognosis would unnerve any industry.

So how will utilities save themselves? What will they morph into this time? Some recent events provide clues.

Kill Our Old Network

Electricity sales are falling because our appliances, homes, offices and factories are now more energy efficient. With less energy, we get more light, heat, and machine action.

It’s good for us, bad for utilities. We don’t have to buy as much of an electric utility’s main product. So some utilities are beginning to think they need a different value proposition.

One of these is National Grid, a utility in the Northeast that often acts as a testing ground for new ideas.

“Can utilities and energy companies adapt quickly enough and continue to grow and prosper? We believe they can,” said Rudy Wynter, National Grid’s president of FERC regulated business, in a recent interview with EnergyEfficiencyMarkets.com.

National Grid has developed an internal point of view about the utility industry’s future that it calls Connect21. The premise is that “it’s time to kill our old network paradigm and create a new one,” the utility said in a white paper. National Grid uses Connect21 as a framework to consider new projects and policies as they arise.

Policy vendor

Connect21 brings a kind of honesty to the relationship between utilities and regulators.  Utilities tend to be the vehicles through which states carry out energy and environmental policy. National Grid proposes that regulation be changed so that utilities are paid based on how well they fulfill that mission.

Wynter described it as “aligning and rewarding utilities for meeting some big public policy goals, whether those policy goals are energy efficiency, carbon reduction, resiliency – whatever the big public policy goal is.”

Connect21 has three main components.

First, the utility works to improve the grid’s backbone, its transmission system, so that the grid is ready for the changes now occurring, such as the addition of renewables, microgrids, and other distributed resources.

Second, the utility partners with third-party technology companies, so that it can bring to energy the kind of innovation we’ve seen in telecommunication and personal computing.

“If this industry is going to have the big catalyst it needs to really change how customers use energy, how we move energy, we’ve got to bring in some new thinking,” he said. “To be honest, we haven’t done, as an industry, a great job at embracing these technology partners.”

And third, the utility needs to foster the trend of putting customers more in charge of their own energy and making educated choices about energy efficiency and distributed energy.

Connect21 is the broad stroke business plan; National Grid said it will be honing it as policy evolves in the states where it does business. The utility likes New York’s proposal to make utilities ‘system integrators’ that manage the many different kinds of distributed resources on the grid, Wynter said.

What about competitors?

“We think the utility is going to play a vital role as a well-placed system integrator that provides delivery, infrastructure and other related services. I think that’s the model we are probably morphing into in this industry,” he said. “As the business model and industry evolves, someone is going to have to play the role to integrate the distributed resources and dispatch some of these very localized forms of generation and help the customer manage that. We think the utilities are well positioned to play that role.”

Some aspects of  National Grid’s plan are likely to be controversial. Independent companies  worry about too much utility influence and control over the market. Some already are challenging the idea of the utility – rather than a neutral third party – acting as the system integrator.

In addition, some distributed energy advocates are concerned about creating  incentive for utilities to build more infrastructure. They worry say that it will lead to an over-build – that generation and transmission will be used to meet demand in places where energy efficiency would be most cost effective. And finally, competitive companies see utilities using their market clout to dominate technology distribution and installation.

When states restructured their power generation markets more than a decade ago, several  placed prohibitions on utility ownership of generation. Should the same be done for distributed resources? Wynter says no.

“You’ve got to look at the right solution. If the right solution is to have a third party provide it, then let the third provide it. If they cannot, then the utilities should be allowed to provide it,” he said. “We just have to put in the right mechanisms to be sure we’re making the right decisions.”

This article is published under a cross licensing agreement with EnergyEfficiencyMarkets.com