(August 2011) Economic consultant Michael Rosenzweig challenges Constantine Gonatas’s proposal for ensuring FERC’s demand response rulemaking achieves its objectives. Also, Juliet Shavit...
Beyond-the-meter technologies challenge the utility monopoly.
and likely will accelerate their penetration.
Third, and most important, as load continues to be shed, utilities will have to postpone investments in new generation facilities at a time when the new baseload fleet will have to be replaced. Utilities will have to explain to public utility commissions why building large central plant generation units is more cost effective than other emerging technologies such as distributed renewable generation—an increasingly difficult argument as alternative technologies reach cost parity.
The new power retail market is a real threat to the current utility business model. Regulated utilities and load-serving entities might be completely by-passed by the power retailer acting beyond the meter, and, ultimately, they might be relegated to being providers of last resort or just asset managers. Because the technology will be deployed beyond the meter, beyond the control of the regulator, there’s very little utilities can do about it from a regulatory point of view. However, a proactive strategy that puts the utility in front of the customer to participate in this market will help reduce the negative impact of these changes.
Most utilities in both competitive and regulated markets still have brand image recognition in retail power markets. However, few utilities have used it to improve their relationship with customers. In this brand new market, utilities will need to be proactive in their thinking about new technologies and recognize that there are many technologies competing for the same market. They also need to realize that it’s difficult to predict which technologies will emerge as winners. As a result, dealing with, and accepting, risk and uncertainty will have to be a part of any strategy.
However, this doesn’t mean utilities will abandon their traditional cost-of-service business model. Utilities have an opportunity to understand the impact of smart technologies and proactively engage in a simultaneous protect-and-grow strategy that will prepare their businesses for the future. A strategy aimed at protection will focus on minimizing or reducing the impact new technologies will have on the current core business in the short-term. At the same time, engaging in a growth strategy will help to build the new skills and capabilities necessary to prosper in the new market, while accelerating the deployment or maximizing the impact of technologies that will enhance the core business.
Doing nothing isn’t the prudent option because the utility can’t forever impede or eliminate the threats posed by emerging technologies.
The New Reality
Power retail will be a foundational business for utility companies that hope to succeed in a world after implementation of smart-grid technologies. It will allow a company to continue being connected to its customers while offering a wide array of products and services based on smart technologies. Controlling that gateway will be critical in this new beyond-the-meter era. Failure to recognize this new business environment might lead not only to disintermediation between the utility and the customer; it can ultimately diminish the utility to the role of asset manager and provider of last resort. The time to recognize this new reality is now, as competitors are already entering the market.