As renewables come online, business models, regulatory structures lag — panel

Source: Nathanael Massey, E&E reporter • Posted: Thursday, February 6, 2014

Fifty years from now, the U.S. electrical grid will look less like a one-way exchange of supply and demand than a network of interchangeable power sources, batteries, appliances and devices. It will be smart enough to balance the intermittency of solar and wind power, while simultaneously optimizing the power demands of hundreds of millions of customers — customers who know more and have more control over their consumption of electricity.

These are the broad facts upon which most power providers and grid operators agree, according to a panel of experts who spoke yesterday at the Brookings Institution. But half a century is a long way out, and it is much less clear how — and when — we’ll reach that goal, they said.

“Today’s utilities are still far from where they need to be,” said Ron Binz, nonresident senior fellow with Brookings’ Energy Security Initiative. “Today’s regulators give [utilities] little incentive to evolve in the way they need to evolve.”

At the heart of the problem is a utility business model that couples profits with the sale of electrons, the panelists said. If a utility’s profits hinge on the power it can sell, it has little incentive to invest in energy efficiency and may prove hostile to new renewable generation from third-party providers.

A better model, Binz said, might take a lesson from the United Kingdom, where regulators set electricity rates based, in part, on the utilities’ ability to cut inefficiency and bring renewable power online.

“Basically, the regulator gives the utility a set of [power] prices effective for eight years, along with a list of goals and targets, and then they set them loose,” he said. Each year, he said, utilities receive a “report card” measuring their progress toward the targets, and earnings for the following year go marginally up or down depending on the card’s recorded score.

Lingering need for ‘big actors’

In the United States, the traditional utility business model is already coming under strain.

“If you look at demand for electricity in the U.S. today, growth has been pretty much flat or anemic. You can even make the case that it’s in decline,” said Jim Rogers, former president and CEO of Duke Energy and a current trustee at Brookings.

Productivity gains in production and delivery, along with the growth of energy efficiency in buildings and appliances, mean that the nation’s gross domestic product has finally begun to decouple from the growth of electricity demand, he said.

“In the days of 1 to 10 percent load growth, you could afford to be a little inconsistent” in your approach, Binz said. “That’s no longer a luxury under today’s conditions.”

At the same time, new power providers, particularly those offering renewable wind and solar power, are coming online in droves, helped along by state renewable portfolio standards and interest from companies and individuals looking to lower their carbon footprint.

These new sources get paid for their product without incurring the costs of maintaining the grid, said Mike Chesser, who like Binz is a nonresident senior fellow with the Energy Security Initiative. The higher costs to the utilities that do maintain the grid’s infrastructure invariably get passed on to ratepayers, he said.

“The business model looks great from the perspective of the distributed generator, because everyone from the single mom on up is subsidizing them,” he said.

As more distributed generation comes online, utilities should move into a role as a “power services provider,” said Binz, essentially ensuring the integrity of the grid and overseeing the balance of power among many sources.

Of course, not every building or institution will become a self-sustaining power station, he added. Dense urban centers don’t have enough space for the solar or wind power needed to supply their infrastructure

“You’re still going to need some big actors out there,” he said. “We might as well call them utilities.”