Distributed Energy: A Disruptive Force

Distributed Energy: A Disruptive Force

          
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Distributed Energy: A Disruptive Force

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    Utilities Must Respond Proactively

    We believe that utilities must respond proactively to the rising threat of DE. The fallout from changes in other industries underscores the danger of resisting disruptive technology or hesitating to act in the face of such a threat.

    So far, most utilities have taken a defensive approach, primarily by fighting regulations and rate designs that encourage DE adoption. For example, many utilities have opposed net metering. Others have tried to introduce broader fixed charges to lower variable rates or have attempted to impose specific charges on customers that have adopted DE. But our analysis shows that unless implemented aggressively, these responses will not combat the economic appeal of DE or halt the shift away from centralized generation. Instead, utilities must consider business models that will capture more of the shift in the value chain that is resulting from greater DE adoption.

    Utilities are well positioned to capitalize on the key areas in which DE companies are struggling. Consider customer acquisition, for example. Utilities already have access to customers and have earned their trust. In terms of targeting and understanding customers, utilities can capitalize on the benefits of smart meters and the smart grid by either exploiting these advantages directly or partnering with third parties to become common carriers of energy-related services. DE companies, by contrast, are starting from scratch.

    Utilities crafting their response to DE should ask themselves the following questions:

    • How do we choose the right business model and strategy given the potential disruption of DE?
    • How can we adjust our regulatory and policy positions?
    • How can we adapt our product and services offerings?
    • How will we need to modify our grid and generation assets?
    • What skills, resources, and competencies are required to execute our plan?

    The Need for Innovative Business Models. To develop a strategy, utilities must consider how to approach the DE market. Do they want to own assets such as rooftop PV solar installations and storage? Do they want to offer services “behind the meter”? Do they want to simply enable third-party services, or do they want to compete as fully integrated providers? (See Exhibit 4.)

    exhibit

    But before they develop such a strategy, utilities must first consider how aggressively they will respond to DE trends. One approach would be to focus more on core investments in the grid, such as adding a rate base for more grid-scale storage to enable DE, and on using regulatory or policy channels to seek increases in fixed charges that would reduce the cross-subsidies from net energy metering. As we discussed earlier, however, utilities might risk stranding their assets with this approach, which also fails to capture the shift of value and capital to DE assets and their related products and services.

    Other responses to DE would avoid that pitfall. For example, utilities could scale back or divest their generation assets and instead equip the grid for DE by investing in smart meters, advanced metering infrastructure, and grid management capabilities. Or, utilities could facilitate third-party DE services in which utilities capture the value by leveraging data collected across their networks to provide and enable value-added services. For example, they could use real-time data to track PV production. Utilities could also invest in DE companies directly, develop regulated DE offerings, or begin building unregulated DE capabilities themselves.

    While becoming more involved in DE could cannibalize their retail electricity sales, utilities cannot allow themselves to be hamstrung by such concerns. Too many companies in other industries—telecommunications, movie rentals, and film photography to name just a few—have made this mistake in the face of a technological shift. Rather than trying to stem the tide of DE, utilities should consider offering distributed-generation solutions through bill payments and by facilitating the transfer of asset ownership. Utilities could also monetize their assets by offering DE installers access to grid information or to communications infrastructure to help them monitor and track customer usage.

    As markets evolve, utilities will need different strategies to adapt, and those strategies must take into account possible scenarios for a future with more DE. They should also identify potential tipping points. Utilities should use a specific set of metrics, monitored regularly, to do so and to refine those strategies. Utilities must also stay flexible so that they can adapt to changes in the market.

    The Role of Regulatory Dialogue. Utilities’ interaction with regulators has always been important, but the relationship will be particularly instrumental in sorting out the role of utilities and DE companies in the coming years. Rather than fighting DE, utilities would be better off seeking a rate structure that avoids cross-subsidies and more accurately reflects their costs. At the same time, they must find a way to participate in these new markets to reduce the destructive effects of DE on the existing value chain.

    Utilities must be careful in their approach to regulators, of course. If they are perceived as impeding the growth of DE, especially in states that favor renewable energy, utilities may find themselves opposed by regulators, lawmakers, and customers. What’s more, utilities must consider interdependencies and the unintended consequences of their regulatory and policy positions. For example, pushing for aggressive capacity or fixed charges may discourage DE adoption in the short term, but over the longer term it may encourage increased use of storage, community aggregation—or even complete disconnection from the grid.

    Because regulators play such a dominant role in dictating utilities’ business models, any strategy should call for starting a dialogue and testing ideas with them. This must be done early in the process to allow for the lag in regulatory response times.

    Heightened Customer Expectations. The increase in DE adoption has raised customers’ expectations for utilities as well. As a result, utilities must be prepared to offer customers new DE-related products and services. Rather than view these new offerings as a burden, utilities should see them as a vital way to capture the shifting value caused by DE while also deterring third parties from disintermediating important parts of the energy value chain.

    As the incumbents in the market, utilities have greater access to customers than new entrants, and they can use that advantage when selling new products and services. Leasing services for heating and cooling, water heaters, or even distributed generation could represent new revenue opportunities that build on utilities’ core business models. Leased products can drive efficiency and service reliability for the utilities while offering customers more choices and convenience.

    Storage offers another opportunity for revenue generation. Utilities could provide distributed-storage equipment as a service for commercial and industrial customers to improve power quality and reliability. Utilities are uniquely positioned to provide storage services because they can use the entire grid as a virtual storage space.

    By leveraging customer access, utilities could partner with energy efficiency manufacturers and service providers and collect referral fees or create redundant billing options and monitoring services, such as smartphone applications, for residential customers.

    Pilot programs allow utilities to test these new products and services and gauge the reactions of regulators, customers, and third parties. At the same time, such programs give utilities a better understanding of the capabilities they will need to compete in a market in which DE plays a larger role.

    Preparing the Grid for DE. To prepare for increasing DE penetration and the problems of balancing the grid that will come from additional intermittent generation, utilities must consider investments in energy storage, smart-grid solutions, grid management and dispatch, flexible generation, advanced inverters, and other new technologies. This will typically require significant investment in the grid. Utilities with generation assets will need to become more flexible and shift away from traditional base-load plans. Altering those plans will require an open dialogue among the companies, consumers, and regulators to ensure that everyone is aware of the costs involved.

    The rise in DE adoption and the evolution of technology will transform the energy landscape. We predict an increasingly rapid pace of change, a greater focus on customers, and a more complex environment with multiple products, services, and pricing structures. This will require traditional utilities to develop many new capabilities. (See Exhibit 5.) For example, just as DE companies have developed financial and technical solutions, utilities will have to identify and build similar capabilities if they hope to keep up with the level of innovation.

    exhibit