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A Market Transformation Is Underway in the U.S. Power Sector

In January the Edison Electric Institute (EEI) issued a report to its member utilities in which they warned of the "disruptive" challenges that renewable energy and energy efficiency posed to the utility business model.

That warning has been greeted by varying responses around the country -- from a circling of the wagons around the traditional century-old utility business model to utilities diversifying into subsidiaries to provide clean-energy products.

Earlier this week, the Energy Foundation answered the Edison warning with a series of eight well-reasoned position papers focused on the transformation of the U.S. electricity sector. The Energy Foundation tapped 150 energy experts to develop and review a policy roadmap for changing the power sector.  

Its title: America's Power Plan.    

The experts ranged from Andy Karsner, CEO of Manifest Energy and former Assistant Secretary for Energy Efficiency and Renewable Energy under President George W. Bush, to Ron Lehr, an attorney for the American Wind Association and a former Colorado Public Utility Commissioner.

EEI warned that as more customers generate their own power through solar rooftop units, non-solar customers will be left to pick up a bigger share of utility's infrastructure costs, and as a result rates increase for fewer customers to cover costs.  The report calls this "disruptive" to utility business models, causing more customers to join those producing their own power.

But as the American's Power Plan points out, this disruptive challenge doesn't have to be as the Edison report labels "a death spiral" for the utility business model.

A disruptive innovation is actually a good thing.  The definition of the term in business and technology literature refers to "innovations that improve a product or service in ways that the market does not expect, typically first by designing for a different set of consumers in a new market and later by lowering prices in the existing market."

This is where American's Power Plan (APP) enters the picture, by enabling dialogue to analyze changes needed to utility business models.

One of the eight APP papers, "Utility and Regulatory Models for the Modern Era,” asserts that "current business models were developed for a different time." It calls for a new social compact between utilities, regulators and the public to develop a modern electricity grid.  

Nobody can argue over the importance of utilities. They will be with us in some form for many years to come.  But what does the utility sector’s future look like?  

The new utility business models paper posits that a utility model dependent on profits based on ever-increasing energy sales is untenable. It suggests new ways for utilities to make a profit in the future.

"If the U.S. is to meet necessary climate goals with electric utilities remaining healthy contributors to America’s energy future, business models used by these familiar institutions must be allowed and encouraged to evolve,” the paper states.

APP references a wide range of utility diversification efforts in the past, both successful and dubious.  The lessons learned from these examples could help shape the future of utility diversification into solar and renewable energy generation, products and services. 

We are already seeing utility parent companies -- Edison International in Chicago is one -- enter the solar market through its recent purchase of an existing solar company.  There’s also Florida Power and Light's subsidiary NextEra, the nation's largest wind farm owner/operator.

The challenge is allowing the regulated utilities the flexibility to innovate.  Currently, utilities have inadequate incentives for innovation. Lehr suggests that regulators could grant utilities incentives if they do a good job or create new revenue streams associated with customer service.

The behind-the-meter opportunities are considerable. Smart phone apps are coming to the electric utility sector.  Some even suggest that Moore's Law (the doubling of computing power every 18 months) could be applicable to the electric utility sector of the future and that regulators need to encourage the utilities to seize these new opportunities.

APP juxtaposes a minimalist future for utilities -- they maintain a physical monopoly over wires and poles, but competitive providers supply the rest – against the traditional role utility role they play today, where they own and operate all necessary systems to deliver energy to consumers.  

Or, there may be what APP calls the "middle way," under which a utility maintains a series of partnerships with innovative providers that would benefit both partners and the customers they serve. This "Goldilocks outcome (not too hot, not too cold, just right) probably has the most appeal to utilities, who can find a positive future in it."

A ground-up market transformation of the electricity sector is under way, and America's Power Plan comes along at the right time to encourage discussion among decision-makers at the state, local, and regional level as they contemplate the future of the U.S. power sector and the role for solar, renewable and energy efficiency in that future.

Jim Arwood
Communications Director
Arizona Solar Center

Questions: Do you agree that utilities are facing a set of challenges that could cause them to consider how to evolve to new business opportunities? Do you think that utility executives, state utility regulators, customer representatives, clean energy advocates and other stakeholders are ready to engage in meaningful conversations about new utility business models and the regulatory reforms that are needed to support them? Are there new regulatory mechanisms, like performance standards supported by incentives, that could be applied to induce utilities to provide more value for money for their customers?

[Editor's note: Your expertise and perspective are highly valued – feel free to comment below. You must be registered on the site to comment. Register here. Log in here.]  

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