Technology transforms the utility business model

In my first two blogs for The Energy Collective I talked about how utilities should deploy automation via sensors and controls on the distribution grid to maximize efficiency and reliability instead of relying solely on customers to stop using electricity anytime that they want based on complex price signals. I discussed how a smarter distribution grid will make it much more convenient and effective for retail customers to participate in demand response.

Utilities have historically done a great job of automation in generation and transmission and are now trying to achieve a smarter grid within the longstanding paradigm of centralized power generation and transmission. However, I suggested that a modern grid for the 21^st century will require the power industry to move over time to a more de-centralized paradigm, one that embraces distributed generation, storage and energy management systems. New complexities will arise, including large mobile loads (PHEVs, EVs), interconnected microgrids and multi-directional flows of energy and information. The aforementioned distribution automation will enable some of this change, but utilities will be forced to adopt new business models based on a new force that will shake the industry.

That new force is my topic today. The winds of change blow through the power industry and will topple existing infrastructure and business models whether utilities are ready or not. We have seen over and over that technology enables nimble third parties â€" non-traditional players who are willing to accept the risks and rewards of the retail market â€" to seize the initiative to effect revolutionary change while incumbents ponder evolutionary changes.

Just as the Internet created a structural realignment of the telecommunications and entertainment industries, the very same smart electronics, two-way digital communications and information technology will result in a realignment of the electric utility industry. Telcos discovered that manifold disintermediaries could and would provide their customers with not only their existing products and services, but also with entirely new ones that the incumbents could not provide.

Most in the electric utility industry recognize and many even accept that profoundly new approaches are going to be necessary for generation, transmission, distribution and customer service. But, the old Sam Insull holding company model itself, with a cost-plus monopoly return on prudent investment, will change because non-utility players will innovate and intervene.

For example, demand management aggregators can sign up and pay retail customers (across multiple utilities, even multiple states) so as to be able to offer demand reduction to an independent system operator (ISO). An aggregator might say, “When you have a generation or transmission constraint I can take X megawatts of demand off the grid. What's that worth?” They may even be able to customize the demand reduction geographically to best suit the ISO’s needs. The ISO won’t care who the aggregator is if it can deliver virtual power that relieves stress on the system. So the ISO says “That's worth Y dollars a kilowatt (or the energy supplies may be worth Z cents a kWh) during a constraint period and we'll gladly pay for that if you'll push the button and show us you can do it." Just imagine what these aggregators might be able to do if they trade their virtual power in regional and national, competitive, wholesale power markets!

Already companies are at work serving the electricity needs of large, private residential and commercial developments by buying and/or generating power, operating their own distribution systems and providing electricity to multiple individual customers. Others are providing retail consumers with rooftop solar PV or other distributed generation as a managed service. Yet others are offering the on-site monitoring and automation that will allow customers to conveniently and effectively participate in demand response. I recently heard a representative of Best Buy describe their plan not only for providing retail consumers with monitoring and automation, but also affinity retail power suppliers and demand management aggregators. These are classic cases of disintermediation and it’s already happening all over the country.

This is a controversial subject on many levels. It has huge implications beyond driving utilities to new business models. For example, will existing federal and state regulation work well in this new set of circumstances? The debate will be superheated, and there will be smoke and fire everywhere it takes place.

I believe that we will see a revolutionary reorganization of the electric utility business in this country in the next 10 to 15 years, a sea change, and in Internet timeframes. The timeframe for physical de-centralization, to actually move to a set of loosely connected microgrids, would take decades. But the drivers that change the utility business case are here now and will change the business model long before the physical grid is comparably changed.

Utilities will do well for themselves, their customers, their shareholders and the general public to make the effort (and I know some already are) to understand the forces of disintermediation and how they can take full advantage of them â€" not just eliminate them or compete with them. Failure to do so will leave a utility vulnerable, if not eventually render it obsolete.