Utilities in a Prosumer World

The electric power industry is rapidly and fundamentally changing on a number of dimensions including generation, transmission, distribution and most important on the customer end.

While the pace of change has accelerated along the industry’s long value chain, it is most pronounced in distributed energy resources or DERs – which includes energy efficiency improvements plus distributed generation, particularly from rooftop solar PVs.

The former allows consumers to use less; the latter allows them to generate more of what they need. Combined, they are turning an increasing number of consumers into prosumers, eroding utility sales and revenues and threatening the historical business model, which was traditionally based on fixed tariffs applied to volumetric consumption.

In state of California, for example, the solar rooftop PVs will soon reach – and exceed – the 5 percent cap established by regulators, that is 5,200 megawatts  of capacity on customer’s roofs, the equivalent capacity of five 1,000 ,megawatt  nuclear reactors. This, incidentally is happening as California’s last two reactors are scheduled to be shut down in 2025.

Add energy storage, whose costs are projected to be rapidly falling, and the new buzz word becomes “prosumage,” that is consumers who have become prosumers, who will increasingly be able to store some of the excess generation.

For anyone questioning the rapid transition of the industry, several other facts may be in order:

 

  • In the first quarter of 2016, new renewable capacity coming on line in the United Statesbeat natural gas – which is at historically low prices – by 70 to 1;
  • Over the past 5 year, net energy – that is energy fed into the grid by consumers – has grown on average at 500 percent per annum while net utility generation grew at 1.2percent;
  • In month of May, solar exceeded coal generation in not-so-sunny UK; and
  • In Australia, one out of seven households now have solar panels on the roof, the highest global penetration on a per capita basis and rapidly growing.

As these trends suggest, what we have seen to date is clearly the tip of the iceberg, with far more to follow at a pace that will stun many observers, utility executives and regulators included.

For a flavor of what more to expect, consider the following:

  • Apple Energy – It was recently announced that Apple has obtained a license from FERC to re-sell green energy as a retail provider. While the details of what the company intends to do is yet to be determined, it is likely to turn Apple into a electricity retailer with a powerful brand. Instead of selling its excess renewable energy portfolio at wholesale prices, it can get a much better margin this way.
  • Tesla as a one-stop transport, solar and storage shop – Tesla’s CEO Elon Musk has announced his intention to acquire SolarCity, the biggest solar PV installer in America. In a bog posted at his website, Musk has outlined in no uncertain terms how he plans to disrupt the traditional utility incumbents by offering an integrated solution that combines electric mobility, solar self-generation and storage as a convenient and seamless package.
  • Peer-to-peer trading – A host of start-ups are working hard to disrupt the traditional utility business model by allowing prosumers to trade excess self-generation with neighbors across the street, across the city or – eventually – across the country. Such schemes, sometimes called transactive energy – are yet to reach critical scale, but could quickly take off and spread, especially if regulators reduce or eliminate lucrative net energy metering regulations.

For the first time in history of the electric power sector, consumers in high retail tariff regions are able to meet most if not all their service needs through self-generation at costs that are on par or lower than the grid-supplied electricity, a phenomenon that is likely to spread as the cost of distributed solar generation continues to fall while the cost of grid-supplied electricity is projected to rise.

Equally important are rapid technological advances in energy storage, electric vehicles, micro-grids, intelligent home energy management, demand aggregation, and demand response, all pointing to a different future with a different role for the incumbent stakeholders in the power sector, particularly for the distribution business.

Many experts believe that these developments will disrupt the historical utility business model just as mobile phones, Uber and Airbnb have disrupted phone, taxi and the hospitality industries by offering more convenient services at lower costs.

Which explains why regulators in New York, California, Hawaii and a host of other states are scrambling to stay ahead of the rapidly changing business environment. New York’s reforming the energy vision (REV) and the debate in California on distributed resource planning are examples of the realization by both the incumbents and the regulators that the historical schemes to reward utilities for providing regulated services are getting out of synch with the realities of the market and prosumer expectations.

One thing is for sure: the stodgy utility business has become exciting and fast moving, attracting fresh blood and fresh ideas. Regulators cannot mandate technological innovation, nor should they stifle it. It is a delicate balancing act since they set the rules in many cases and ultimately decide who can do what, or who can play in which sand-box, as NY regulators are trying to do.

Fereidoon P. Sioshansi is president of Menlo Park Economics and author of "Future of Utilities: Utilities of the Future."

 

 

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