What Must Utilities Do to Successfully Navigate the Energy Transition?
by Bob Shively, Enerdynamics President and Lead Facilitator
Electric and natural gas utilities are going through what may prove to be the largest transition since becoming regulated monopolies back in the early 1900s. Given the pressures from climate change, decarbonization, digitization, technology advancement, decentralization, and customer evolution, the utility model of 2030 is likely to look dramatically different than structures that have endured the last 100 years.
Utilities face many challenges including:
- How to fulfill changing public policy objectives
- How to rethink system needs to address climate change
- How to evolve from traditional rate structures to pricing that works in a world of distributed energy resources (DERs) and decarbonization of the gas system
- How to afford grid modernization, resilience, and regulator updating without making rates skyrocket
- How to offer customers the choices they desire either through new utility programs or cooperation with third-party providers
- How to successfully navigate the transition to variable renewable electricity and to low-carbon natural gas or hydrogen fuel
A recent report by Rocky Mountain Institute (RMI) titled Navigating Utility Business Reform used the following graphic to demonstrate that utilities, while continuing to do a good a job of what they have always done, must also expand to meet modern needs and expectations:
Source: RMI, Navigating Utility Business Reform, 2018
Utilities’ abilities to transition rapidly are limited by various factors including a slow adversarial regulatory process, risk aversion, a bias toward capital expenditures due to the cost-of-service model, incentives to grow throughput, conventional rate structures, and limits on new revenue and profit opportunities.
To successfully transition, utilities must learn skills to drive change in concert with customers, regulators, government policymakers, and various third-party stakeholders. These skills are very different than those that worked well in the traditional regulatory process.
The RMI report suggests utilities explore various strategies including:
- Adjustments to the cost-of-service model such as revenue decoupling, multi-year rate plans, shared savings mechanisms, and performance incentive mechanisms. These could shift utilities' focus to specific performance outcomes and remove profit motivations that may no longer work in our current environment.
- Removing incentives that encourage capital expenditures over use of third-party services and adjusting supply procurement practices to focus on outcomes that provide the best overall results for customers and society.
- Providing tools for utilities to retire uneconomic assets without unfairly penalizing shareholders who build those assets under a regulatory compact that required universal service. Tools may include securitization of retired assets or accelerating depreciation.
- Reimagining the utility business function to find new sources of revenues beyond raising rates to traditional customers. Such new sources may include platform revenues or new value-added energy services that are provided to customers under different business models than the traditional cost-of-service methodology.
Earning streams in the future may come from a range of earning models:
Utilities may decide to focus on simply being a well-run network creating a platform for third parties to offer supply and behind-the-meter service alternatives (think the "Amazon of energy"). Or they may decide to offer a full suite of services themselves either under a regulated model or through bundled partnerships with third parties:
As we emerge from COVID-19 response plans and rebuild from wildfires and damages from extreme weather, it is now time for utilities to begin defining and transitioning to dramatically new ways of doing business.
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