Report: Transforming grid and energy sources need new utility business models

It’s no secret that the sources from which we get our electricity are changing. With that change comes new opportunities and challenges to the utility business model. In an effort to identify, evaluate, and encourage innovation in these business models, a new report released in November 2018 highlights 10 options for reform.

The report, Navigating Utility Business Model Reform: A Practical Guide to Regulatory Design, offers a menu of regulatory options for policymakers, utilities, and electric customers to best support and manage the evolution of a 21st-century grid. The report is the result of a joint collaboration between Rocky Mountain Institute (RMI), America’s Power Plan, and Advanced Energy Economy Institute.

“The grid is experiencing rapid changes in its shift to a 21st-century system, and electric utilities have a fundamental role to play in ensuring this transition strengthens resilience, improves environmental performance, and protects the interests of customers while maintaining essential features of affordability and reliability,” Dan Cross-Call, a manager at RMI and one of the report’s authors, said. “This report offers a practical guide to industry leaders—regulators, utilities, grid operators, policymakers and policy influencers—on how to best engage with an increasingly decarbonized and distributed energy system, shepherding and managing this transition to maintain the fundamental role of utilities and achieve new policy objectives.”

Some of the trends identified that are impacting the electrical system include: 

  • Growing policy demands for improved environmental performance;
  • increasing widespread availability of distributed energy resources like rooftop solar and storage;
  • more customer demand for energy choice; and
  • the need for strengthened resilience in the aftermath of extreme weather across the country.

A set of case studies was also released with the report, providing current examples of utility business model reforms and the regulatory constructs that make them work.

“As regulators and utilities think about new business models for a changing electric power sector, there is a lot to be learned from what’s being done already,” said Lisa Frantzis, senior vice president of Advanced Energy Economy, of which AEE Institute is the nonprofit educational affiliate. “These case studies shine a light on ways that utilities can better align their business goals with customer preferences and public policy objectives. As the electricity system becomes more distributed, meets evolving customer needs, and serves to power vehicles as well as homes and businesses, we need to build on examples of business model and regulatory reform like those discussed in our case studies.”

The five case studies examine:

  • Oklahoma’s Energy Efficiency Incentives—How Public Service Co. of Oklahoma and Oklahoma Gas & Electric are responding to shared savings and lost revenue adjustment mechanisms intended to remove the utilities’ financial disincentive to maximize customer energy efficiency opportunities.
  • Maryland’s Behavioral Demand Response Program—How Baltimore Gas & Electric (BGE) lowered summertime demand driven by air-conditioning use through customer rebates for reducing consumption during peak-demand days, with BGE able to sell the energy and peak-demand reductions directly into the PJM wholesale market.
  • Regulatory Accounting of Cloud Computing—How Illinois and New York are trying to level the playing field for service-based alternatives to traditional capital investments through the regulatory accounting treatment of software-as-a-service.
  • Brooklyn Queens Demand Management Program—How Con Edison is deferring distribution infrastructure upgrades in an area of rising demand by deploying nontraditional methods of customer- and utility-side demand reduction, with the utility rewarded with performance incentives and accelerated depreciation.
  • United Kingdom’s RIIO Performance-Based Framework for Driving Innovation and Delivering Value—How the UK’s Office of Gas and Electricity Markets (Ofgem) created RIIO (Revenue = Incentives + Innovation + Outputs), the most comprehensive performance-based regulatory system yet developed to reflect changing market conditions. RIIO allows utilities to take advantage of the growing service economy and rewards utilities for achieving desired outcomes.

“With so many utilities launching new grid modernization initiatives, now is the time to address utility-regulation and business-model shortcomings. Energy is now extremely cheap if solar and wind power are the backbone of our electricity system,” said Mike O’Boyle, director of America’s Power Plan. “To succeed, utilities must be intrinsically motivated to invest in modern technologies that make the grid more efficient, flexible, affordable, and resilient. Navigating Utility Business Model Reform is a toolbox for policymakers, utilities, and key stakeholders to do just that.”

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