Exploring Alternative Utility Business Models Sustainable Paths Forward or the Bridge to Nowhere?

Transcription

1 Exploring Alternative Utility Business Models Sustainable Paths Forward or the Bridge to Nowhere? Mike Messenger, Senior Principal Consultant, Itron Presented to Joint Electricity, Environment Committee Julty 14 th 2014 at NARUC conference in Dallas Texas

2 NETWORK LESSONS: PAST AND PROLOGUE» The most significant innovations (and profits) in the 20 th century were generated by firms who integrated/analyzed data across multiple communication networks.» Successful use of big data collection/analysis methods to optimize value obtained across multiple resource networks will be considered the crowning achievement of the 21 st century» Resource networks=energy, Water, Agriculture, Transportation, Manufactured goods and Health services.

3 CHOICES FOR HOW TO DEAL WITH CONVERGENCE OF NETWORKS Or?

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5 KEY POLICY CHALLENGES ON THE WAY TO NETWORK NIRVANA» Encourage/Convince customers to invest in the next wave of network innovation» Develop common regulatory investment policy and applications platform for major resource networks: water, energy, transportation of people, food, ideas, and Goods; (From 15 regulatory regimes to 3?)» Encourage growth in utility network management skill sets; minimizing externalities and max load factor across networks

6 FUTURE UTILITY ROLES, SYSTEM OPERATOR AND PROFIT MOTIVE LOW TO HIGH RISK Utility Role System Developer/Owner- Central Gen & customer side assets Financier - return on T&D assets - not gen or EE assets Grid Integrator; no generation or end use asset ownership - limited to T&D Grid Integrator + Apps Partner - no Gen or Customer EE asset ownership Operator ISO Profit Mechanism- Motive ROR on Gen, T&D and EE assets plus Payment for Optimizing System Performance (POSP) ISO or Utility ROR on T&D, interest income plus POSP Utility Utility ROR on T&D assets, Commissions on all contracts+ POSP All Network management assets including T&D, POSP targets and earnings from apps Utility Investment Risk Low Medium Medium/ High High

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8 CONCLUSIONS» Best Utility Business model depends on : 1. Most important public policy goals: make energy delivery reliable, affordable, and or sustainable? Multiple networks? 2. what functions in the electricity system should continue to be a monopoly, (related to investment risk) and 3. what is the best way to stimulate innovation on the customer side of the meter.» One constant across all futures= more investment needed in smarter network management ACROSS all networks to generate sustainable future- current business models won t get us there.» Worst Case- Experts agree on the best business model for the nation as a whole, experience of last three decades shows that allowing states to experiment and learn is optimal strategy» Best case-states should explore alternatives now rather than make quick/rash decisions later when some systems begin to fail

9 APPENDIX- SUPPPORT SLIDES For use in Q and A session during panel

10 BACKGROUND- MY EXPERIENCE» Worked for 35 years developing energy efficiency, demand response and smart grid energy policies; 25 years at the California Energy Commission, and 10 years as a consultant for OPA and Itron» Biggest struggle was to overcome my engineering and economist bias to understand that there is no best regulatory policy based on the merits, all policy is culturally dependent and experiential based

11 PROS AND CONS OF ALTERNATIVE UTILITY BUSINESS MODELS Electric Utility Business model Developer/Owner Financier Grid Integrator Grid Integrator plus Application Developer Pros Allows comparison of Demand & Supply options Access to Low Cost Capital and ability to fund critical projects Emphasis on new role as network manager- Societal benefits Most innovative approach, high risk and high reward Cons Monopoly may restrain innovation on end use side Banking role is new skill set for most, equity vs efficiency Broker vs Owner roles are difficult to untangle, Private market risk Match between App developers and utility as equity partner is uncertain

12 CURRENT DRIVERS OF ALTERNATIVE UTILITY BUSINESS MODELS» Regulators seeking more end use efficiency and distributed energy generation, both require smarter grid management assets and tools» Businesses seeking higher electricity reliability, stable e prices, and more sustainable sources of generation.» Financial analysts seek clarity on future utility role: builder, manager or financier of distributed electricity resources?» Most residential customers want greener futures, more convenience AND lower costs AND more reliability with low risk of technology failure/privacy invasion» Can any utility meet all of these expectations using current business models?

13 POLICY AND INNOVATION DRIVERS OF ALTERNATIVE UTILITY BUSINESS MODELS» Regulator Use of Efficiency and DG Programs as strategy to achieve lower cost energy services with lower carbon footprints (witness rule 111d)» Increased policy emphasis on making grids/networks more efficient and resilient to threats from adverse weather events, natural disasters and cyber hackers» Significant technical breakthroughs in advanced sensors, local storage and predictive algorithms for intermittent resource dispatch require increased network investments» Convergence of network pipes and use of big data analysis techniques to predict and mitigate network congestion in transit and resource delivery systems

14 EXPLORATION OF POSSIBLY UTILITY ROLES IN A MORE SUSTAINABLE ENERGY FUTURE» Utility as Developer: Utility plans and builds generation at centralized and distributed level but leaves system management functions to ISOs or their equivalent at the local level and innovation at the end use level to ESCOs» Utility as Financier: Utility finances generation, transmission and end use efficiency improvements and leaves system management functions to ISO at bulk and local level due to possible conflicts of interest.» Utility as Network integrator/grid Manager: Utility responsible for system reliability by procuring supply and demand side bids to balance loads, and ensure increase system resiliency - but does not build, own or manage generation or onsite efficiency systems» Grid Manager plus Apps Enabler: Utility enables and manages DER platform and takes a small cut of all trades it brokers and all applications sales designed to process raw data into customer specific strategies or insights asset ownership not resolved

15 RECOMMENDED READING LIST FOR UNDERSTANDING NETWORKS AND LIKELY REGULATORY POLICY RESPONSE 1. Nudge by Cass Sunnstein and Richard Thaler(2009) 2. Big Data: A Revolution That Will Transform How We Live, Work, and Think by Viktor Mayer-Schönberger and Kenneth Cu (March 5, 2013) 3. Guns, Germs,and Steel: The Fates of Human Societies by Jared Diamond (1999)

16 DETAILS ON UTILITY AS A DEVELOPER» Utility Developer Utility plans and builds generation at centralized and distributed level» Revenue Recovery Rate of Return plus performance bonuses for diversifying into non traditional generation options or meeting other public policy goals» What s New ROR allowed for investments in efficiency, storage, DG at community or customer level congestion sensors» Assumptions Utility in best position to make decisions on where to build new supply or demand side resources Benefits of system level management outweigh potential risks

17 UTILITY AS A FINANCIER» Role Utility provides low cost financing to customers, Gencos, or ESCOs who bid to provide grid support services» Revenue Recovery Rate of Return on T&D plus performance payments for achieving public policy goals» What s New Fewer or no Rebates for EE or DG programs» Assumptions Future utility has access to low cost capital and planning knowledge to decide where new investments on demand and supply side are needed

18 UTILITY AS THE GRID INTEGRATOR» Role Utilities will plan for and accommodate customer-sited generation and demand response resources, in addition to tradition functions of maintaining T&D system» Revenue Recovery Rate of Return on T&D plus commissions on all contracts signed to support Distributed Energy Resources» What s New Utility focus on developing contracts to obtain the supply side or DSM services needed to balance low cost delivery and high levels of reliability, limited or no gen ownership» Assumptions Future utility has access to low cost capital and planning knowledge

19 UTILITY AS THE GRID INTEGRATOR PLUS APPLICATION DEVELOPER/PARTNER» Role Utility Role is grid integrator (previous slide) but they gradually divest their T&D assets to the ISO» Allowable Revenue Recovery Gradually declining ROR from transmission investments, commissions on contracts, performance payments for achieving public policy goals/outcomes and small share of revenue generated from the new energy applications» What s New Focus on outcomes-based goals, effective management of grid and animating market for energy applications and or big data catalyzed sales in other markets» Assumptions Monopoly provider role is limited to grid management and achieving increased system reliability and spurring innovation in apps market.

20 PILOTS TO DETERMINE IF NEW BUSINESS MODELS WORK IN THE REAL WORLD» Each state should choose an alternative business model they are interested in exploring» Commissions should seek willing utility volunteers to test one or more models out at a local level for a 12 month pilot» Staff or Independent evaluator should assess pilot performance» Alternatively, the costs and feasibility of alternative business models could be simulated by constructing a video game with roles for utility owners, ISO, ESCOS, customers, and regulators