Utility CEOs debate the merits of a retail surcharge to fund clean-tech R&D.
IOUs Under Pressure
Policy and technology changes are re-shaping the utility business model.
utilities will be under increased financial pressure as electricity sales are projected to decline 1.7 percent in 2009 following a 0.7 percent decline in 2008. 9 In the long-term, the impact of the emphasis on energy efficiency, as well as increased penetration of distributed generation technologies, is sure to strain a usage-based model. And distribution planning—and accompanying capital expenditures—will be complicated further by new and not easily forecasted changes in load and network design to allow for changing system conditions. Utilities and regulators in several jurisdictions are pursuing solutions, such as rate decoupling, that guarantee utilities a return on their investment irrespective of demand. Such approaches have merit, but rate decoupling is less a matter of cost control than cost distribution. It doesn’t address the more fundamental issue associated with an ever-increasing cost base requiring continuing support by customers who might have alternatives, or at least might desire them. Either way, alternatives will exist.
The pace of change across many related fronts—technological, social, and regulatory—will create demand for change that utilities might struggle to meet. For example, a smarter grid is smarter because it provides more knowledge about real-time grid conditions and, presumably, allows operators to take nearly instantaneous actions. This will increase data flow by orders of magnitude. The management of this data is essentially an information technology (IT) issue. Regional Transmission Organizations (RTOs), such as PJM, are effectively large IT houses and can be assumed to be equipped to adapt to the massive change in data flow at the transmission level. But RTOs do not manage or control distribution systems, which are likely to see an even greater need for data-management capabilities as DG becomes more widely deployed and millions of smart meters are installed at residences and commercial entities. To position themselves to handle these new data-management requirements, utilities will be challenged to adapt their skill sets, recruiting tactics, resource base and even their cultural temperament to pursue IT as a core competency.
Politicians and analysts predict the transition to a smart grid and a green power system will bring fundamental change. Can there be any doubt that utilities will be profoundly affected? Many questions present themselves. For example, if a smart grid becomes a reality, can reliability or power quality be localized and priced accordingly? As the costs of renewable and DG technologies decline, what’s the appropriate rate structure for a customer requiring limited delivery or backup-only service? Will utilities in deregulated markets be allowed to own generation connected at the distribution level, and to what degree? How will third-party competitive entities be treated? How will customer interactions and relationships change? What will be the disruptive technologies? Are utilities prepared to develop and deploy cutting-edge IT systems?
Whatever the questions and whatever the answers, it seems increasingly clear that the utility of today will be dramatically reshaped in the coming years. But with challenges come opportunities.
The investor-owned utility business model is not immediately threatened, but it will come under pressure. Cost increases necessitated by grid reinforcement and enhancement, widespread implementation of smart-grid technology, imposition of environmental externalities,