Utility of the Future

by Bob Shively, Enerdynamics President and Lead Facilitator

As we have discussed in previous writings, the world of the electric utility is changing rapidly. The grid is transforming from a one-way system powered by large centralized power plants to a two-way system with multiple sources of centralized and distributed power:

Consumers will have the opportunity to transform into prosumers, who sometimes buy services from the grid and who sometimes sell services to the grid:

Electric utilities across the world are working diligently to identify new business models that will provide success in such a future world. Then each must begin the arduous task of implementing the models in a typically slow-moving industry. 

To assist utilities in this task, the MIT Energy Initiative (MITEI) recently released the study Utility of the Future. The study was based on more than two years of primary research and analysis on how the provision and consumption of electricity services is likely to evolve over the next 10 to 15 years. According to the report authors, the study “aims to serve as a guide for policy makers, regulators, utilities, existing and startup energy companies, and other power-sector stakeholders to better understand the factors that are currently driving change in power systems worldwide.”[1]

The study concludes that unnecessary barriers and distortionary incentives are preventing the efficient evolution of the power sector. MITEI goes on to recommend a framework for establishing a level playing field that can result in efficient choices by consumers and producers based “on accurate incentives that reflect the economic value of these services and their own diverse personal preferences.”[2]

The study highlights six core findings:

1. Prices and regulated charges for electricity services must be dramatically improved: Locational time-based pricing should replace existing flat, volumetric tariffs. Grid injections and withdrawals should be priced the same regardless of time and place. They also support peak-based capacity charges that “unlock flexible demand and distributed resources and enable significant cost savings.” Lastly, MITEI recommends that care be taken in applying social goods and other network charges with the risk that inefficient grid defection may occur. To facilitate such pricing, all consumers and producers will need Advanced Metering Infrastructure (AMI).
    

2. Regulation of distribution utilities must be improved: Forward-looking, multi-year revenue requirements with profit-sharing mechanisms for cost-savings investment and operations will result in better outcomes for consumers and market participants. This includes equalizing financial incentives related to capital and operational expenditures so that utilities are not incented to build infrastructure when other solutions are more cost-effective. And, MITEI supports use of outcome-based performance incentives and incentives for longer-term innovation. 
    
3. The structure of the electricity industry should be evaluated to minimize potential conflicts of interest: “Network providers, system operators, and market platforms constitute the critical functions that sit at the center of all transactions.” In the future, maintaining a data hub or data exchange is likely to become a fourth key function. Properly assigning responsibilities for these functions is critical. MITEI suggests that it is best if the entity or entities responsible for system operations and system planning are financially independent of competitive market participants. Without financial independence, strong regulatory oversight is necessary.
    
4. Wholesale market design should be improved to integrate distributed resources and create a level playing field for all technologies: Services traded in wholesale markets need to be updated to reflect the operational realities and new distributed resources as well as the new ways that conventional power plants are operated on systems with a high level of renewable and/or distributed resources.  Markets needing updates include capacity mechanisms, day-ahead and real-time markets, and payments for operating reserves and other ancillary services.
    
5. The importance of cybersecurity and privacy protections will continue to increase: Robust regulatory standards for cybersecurity and privacy must be developed and implemented across all sectors of the electricity network.
    
6. Better utilization of existing assets and more optimal energy consumption: Use of DERs for optimizing the system holds great potential for cost savings, but market participants must also be aware of potential for uneconomic deployment of resources if rate or market signals are improper. 

Since the value of some electricity services varies significantly by location on the grid, it is “impractical to define a single value for any distributed resource.” Locational pricing will allow resources to be located in the right spot on the grid for highest value and unlocking this value can be an efficient alternative to traditional generation, transmission, or distribution investment. Due to economies of scale, widely distributed deployment of many technologies may be inefficient in some locations, but this may continue to change as new innovations transform the economics of any given application.

It's clear that the future world envisioned by MITEI is far from where most utilities are today. To assist with the transformation, the last 18 pages of the study are devoted to a toolkit for regulators and policy makers. More than 20 years after the start of deregulation in the electricity industry, the goal posts for success keep changing. Our current competitive system (where adopted, many jurisdictions have not moved into the competitive world) was designed around a model of centralized power plants delivering power to generally passive consumers along a one-way transmission and distribution system. The electricity industry must prepare itself for yet another huge market transformation. MITEI’s Utility of the Future study is a good reference manual to vision how the industry is likely to evolve.

Does your work group need to learn more about the future of utilities?  Enerdynamics offers a one-day classroom class titled The Future of the Utility: Business Models, Regulation, and Opportunities. Call us at 866-765-5432 or e-mail us a info@enerdynamics.com for more information.

Footnotes:

[1] Utility of the Future, page VI

[2] Utility of the Future, page IX

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