What is the Future of Electric Utilities?

What’s the utility of the future going to look like within two or three decades? That was a question put to former Duke Energy CEO Jim Rogers, Great Plains CEO Mike Chesser, and former chairman of the Colorado Public Utilities Commission Ron Binz by the head of the Brookings Institute’s Energy Security Initiative (ESI) last week.

Moderated by Brookings Institute Senior Fellow Charles Ebinger, who is the head of the ESI, the Feb. 4 discussion sought to shed more light on how utilities are reacting to major transformative trends that are creating opportunities for new, non-utility players. Rogers is now a trustee of the Washington D.C.-based private nonprofit organization that conducts independent research on current and emerging issues. Chesser and Binz are both nonresident senior fellows of the ESI.

Ebinger sparked off the discussion by pointing out that passage of the Public Utility Regulatory Policies Act (PURPA) in 1978, a law meant to promote greater use of domestic renewable energy, introduced the concept of independent power generation. “And since then, of course, through a number of [Federal Energy Regulatory Commission (FERC)] orders and a variety of other pieces of legislation, we have seen … the transmission sector also torn asunder with the development in some markets, at least of [independent system operators (ISOs)] and [transmission system operators (TSOs)].” But the traditional modes of utility distribution were now “also coming under assault under the rubric of distributed generation,” he said.

The Future Tied to a Grid Transformation?

Binz responded that the future of the utility was tied to the future of the grid. In 20 to 30 years, it could be characteristically “low carbon”—marked by a general, if not exclusive, presence of renewables— and a “connected, webbed grid in much the same way the Internet is today,” he said. Utilities will still be “big actors,” he said, noting that the amount of distributed generation has a “natural ceiling” of about 30%.

“The utility of the future, the orchestra leader of the future, is going to learn how to balance an entirely different sort of grid—one where you’ve got very many inputs,” he said. However, he added, “today’s regulation gives very little incentive to utilities to evolve in the way society needs them to evolve.”

Chesser, who noted he had spent most of his career with four or five utilities, disagreed: “I come down very optimistic about the potential for utilities to not only thrive, but to also evolve into a more exciting kind of a company.” Overhauling the aging grid (the average age of a transformer in a U.S. substation is 40 years, he noted), on the other hand, will be lengthy and costly and will require the participation of even distributed generators, he said. The business model for distributed generators “looks pretty good,” because they were taking full advantage of the grid but not paying for benefits like backup power, noted Chesser. But it wasn’t sustainable.

Finding a “Higher Sense of Purpose?”

The key will be that companies succeeding over the long-term have a “sense of higher purpose”—not “just looking at earning next quarter or earning next year, but they’re thinking about, ‘how can we make the world better?'” Chesser said. That’s possible, even if they have to change the way they approach the marketplace, because improving the lives of their customers has been the legacy of utilities for over 125 years, he added.

If the utility does a “good job” taking care of its customers and its community, the political circle—including the media and other stakeholders—will appreciate and recognize that, and regulators will want the utility to stay in business and earn a fair return, Chesser said.

At the same time, utilities will have many opportunities to provide unique services, he said. One example that has arisen over the last five to seven years is their role in raising funds and capital in the public markets to fund energy efficiency in buildings—and earning a return on that capital. A less obvious solution comes from community solar, he said. If a utility could install an array of photovoltaic cells (maybe 50 MW), “there is technology available today where the utility could carve out a specific cell and have that be attributed to an individual residential customer. The utility would basically lease that cell to them and credit their bill for every kilowatt that’s generated by that cell at 70% of the cost,” he said. It would help the customer avoid “headaches of rooftop solar.”

A Future Assured by Past Experience?

For Rogers, a “macro-challenge” that will require attention is the projected “flat” or declining electricity demand. “There’s been a decoupling of the growth and demand for electricity from growth in [gross domestic product (GDP)] for the first time in our history,” he said, adding “it’s going to have profound implications for the way forward.” By 2050, meanwhile, almost every power plant in the U.S. could be retired and replaced. “It’s almost a virtual blank sheet of paper in terms of how do we design the generation next going forward,” he said. The grid is being transformed to digital, which is a long process, but it will in the end make the system more efficient, he added.

Yet the utility of the 21st century won’t be radically different from the past, Rogers speculated. “Today, we are a battery. We have tens of millions of customers making random decisions every second—turning lights on, turning on their TVs. And we handle that because we have an infrastructure that acts like a battery. We’re always there.” Because utilities have been doing it on the demand side for a long time, the sector’s ability “to balance, to optimize on the supply side and demand side” is doable.

Productivity gains lie in optimization from generation all the way to the meter, Rogers said, even if it will be costly. He called his proposal, “decoupling on steroids,” which meant “moving all the way to a formula rate approach, with incentives built in for us to optimize and produce productivity gains in the use of electricity.”

Making Money in the New World

Binz agreed with Rogers, but added that if utilities are to “make money in the new world,” they must get  “on the other side of the meter.” He also agreed “their regulator revenue model has to change to accommodate that.” Rogers countered that utilities have already, for two decades and more, been helping with demand side management, investing on the other side of the meter. The number one roadblock was posed by “the regulator,” Rogers said, who “didn’t kind of modernize their thinking to give us the incentive to go to the other side.” He said: “Regulators don’t necessarily want the utility to be competing with all the new entrants coming into the market, and they’re trying to structure the rule to keep us from competing because they know we’re effective at a low cost when we jump into the market.”

He later added, however, that utilities must “embrace the future,” even calling for utilities to invest in it because utilities generally have a lower cost in capital than all their customers. Likewise, regulators “have got to embrace the future” by changing the rules. Perhaps what would certainly break down regulatory barriers is technology, Rogers acknowledged. “I’m a great believer that technology and innovation will force utilities as well as the regulators to change the rules and behave differently.”

The Future of Deregulation

Responding to a question about how states with deregulated markets and states with regulated markets would fare in the future amid the changing environment, Rogers noted that though 19 states had moved into the “competitive market,” those markets aren’t seeing modernization.

“The modernization of the generation in this country is occurring in the regulated markets just because of the regulatory compact,” he said. “But if I were betting today, I would bet on the vertically integrated model. It’s going to produce more value and cleaner energy in a more modern system than the competitive market.”

“My projection today would be that none of the lower priced states have any kind of competitive ending,” Chesser replied. “On the other hand, I think there’s such an infrastructure buildup around the competitive model. So, I think the hybrid model is something we’re going to see,” he said.

For Binz, the movement will slowly be towards competition in the generation market. “I don’t see as much progress or change in the retail markets. I think the West is going to undertake an interesting … experiment of an energy and balance market. That’s not a fully competitive market, but its kind of the first step on the way.”

—Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)