This is the third in a series of blog posts on EPA’s forthcoming rules on greenhouse gas emissions (GHGs) from existing power plants – known as 111(d) for the section of the Clean Air Act under which the rules are being developed. In this series we have been discussing how 111d offers us a unique opportunity to modernize the grid for the 21st Century while meeting GHG reduction targets. We have already discussed how we can create a high-performing grid that is efficient, clean, affordable, reliable and resilient, by making investments in advanced energy technologies and services. In this post we argue that an important way to achieve these objectives is to create a customer-focused grid, which will require modernizing not just the physical grid, but the way utilities are regulated.
For most electricity customers, electricity is generated, delivered and sold in the exact same way it has been for decades. The average U.S. residential customer spends just seven minutes per year interacting with their electricity provider. (What’s worse, the more time customers spend interacting with their electricity company, the lower their reported satisfaction as consumers.) Beyond paying their bill, most consumers know little about their electricity service, what it costs, what the environmental impacts are, and what their alternatives might be. They are also given little incentive or information with which to make changes to how they source and use electricity – they simply flip the switch and expect the lights to come on.
A new paradigm is emerging, however, driven by strong market, technology and policy developments that reinforce each other. Customer expectations are changing as we become more dependent on electricity and the information services it enables. Technology that is readily available and increasingly cost-effective allows customers of all types to use electricity much more efficiently or to produce it onsite. And a range of state policies seek to reduce the environmental impact of energy use and capture the local economic development benefits of efficiency and local production of electricity. Moreover, the levels of service and choice we have in other industries, such as telecommunications, entertainment, and financial services, have evolved significantly in recent years, while electricity has not kept pace.
A customer-focused grid is one that offers greater value by providing more service options and greater control over energy use and costs. Electricity customers pay for electricity but what they really want are the services electricity enables – light, heat, cooling, transportation, telecommunications, etc. A customer-focused grid also engages customers in meeting important policy objectives, i.e., a clean, efficient, reliable, resilient, and affordable electricity system. The grid of the future will be one where customers recognize the value it provides to them, and customers can be compensated for the value they provide to the grid. These are two sides of the same coin for achieving a high-performing grid.
In physical terms, this means that electricity will not just flow one way, from central-station power plants to customers, but that it will follow more complex paths across the system, as increasing numbers of customers generate their own electricity. The operation of the grid will become much more complex, and this will be reflected in new relationships between utilities, third-party providers of energy products and services, and customers.
An intelligent, flexible, customer-focused grid will give customers more choices with respect to where and how their electricity is generated, including options for purchasing clean power (already available in some states) or generating it themselves, for example, with residential micro-combined heat and power (micro-CHP) or rooftop solar, or large institutional customers installing microgrids and CHP systems. It will also empower them with data and tools to better manage when and how much electricity they use – helping them to control total consumption and costs, e.g., by shifting energy use from peak to off-peak times, when electricity is less expensive. At the same time, the grid of the future will reward consumers for providing the utility or regional grid operator with valuable services – for example, reducing demand when the grid’s reliability is compromised, or using onsite generation assets to provide the utility with grid services, such as voltage support.
This transition is already starting to happen, as the technologies to empower customers are readily available. One example is rooftop solar, which allows a customer to take control over where and how their electricity is generated. In states with well-developed solar policies, this option is often less expensive than purchasing power from the grid, and in some states solar can be economic with little or no direct financial incentives. Third-party solar companies offer hassle-free leases or power purchase agreements, making solar economically feasible (and desirable), regardless of a customer’s financial situation. Similarly, a broad portfolio of energy efficiency technologies and services are helping customers reduce energy usage while providing the same, and often superior, energy services and comfort.
The technology trends now playing out are strong enough on their own to disrupt the current utility regulatory/business model, but these are being compounded by market trends and state policies. The existing model, which has worked well for many decades, is based on utilities making long-term investments and recovering their costs, plus a fair profit, through monopoly service and carefully regulated rates. But utilities are increasingly facing an unsustainable situation where costs are rising (e.g., to replace aging infrastructure and make it more resilient in the face of severe weather) but retail sales are flat or even declining, due to rising use of distributed generation and greater customer energy efficiency.
The concept of a grid that is customer-focused is gaining traction in states that are on the leading edge of modernizing their grids for the 21st Century, such as Hawaii, New York and Massachusetts. These state utility commissions are starting to examine how to update their regulatory frameworks to address the technology, market and policy developments that are undermining the current utility business model. In New York, AEE organized and facilitated an Energy Industry Working Group that produced a position paper, Creating a 21st Century Electricity System for New York State, that, for the first time, involved utilities and advanced energy companies in proposing changes to the utility business model and its regulatory framework. But the conversation about the “utility of the future” – a utility that offers many more options for customers in meeting their power needs – is going on across the country.
It is not too much of a stretch to say that the electric power sector is today where telecommunications was about two decades ago – at the beginning of fundamental technological and business model change that is poised to transform the industry. It is a transition that will be accelerated and driven by modernizing the grid in response to EPA’s carbon emission regulations.