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Threat From Behind the Meter

The case for utilities to compete directly with distributed resources.

Fortnightly Magazine - July 2013
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do so through unregulated affiliates, either newly formed entities devoted to behind-the-meter energy markets or existing merchant energy businesses.

Under this model, policy makers could prohibit cross-subsidization of unregulated businesses through familiar regulatory protections such as ring fencing and prohibitions on information or employee sharing with unregulated affiliates. With such protections in place, unregulated affiliates may develop, own, control and operate non-traditional behind-the-meter energy supply projects and services, and they also might elect to participate in competitive wholesale markets. Meanwhile, ring-fenced regulated utilities would retain the obligation to ensure access to the transmission and distribution system for all energy service providers on a non-discriminatory basis. An additional benefit is that by separating the increasingly risky wholesale and retail competitive energy services businesses from the traditional regulated utility operations, investors gain greater certainty of utility capital investment cost recovery. The resultant enhanced credit profile could lower a utility’s cost of capital and ultimately reduce the cost of regulated utility investments.

Energy firms that own both regulated utilities and unregulated merchant businesses appear to be recognizing the benefits of structural separation for mitigating the risk posed by behind-the-meter energy. Several are making investments and developing competitive behind-the-meter energy services through unregulated business units ( e.g., Dominion) and others appear to be targeting behind-the-meter energy business as a strategic focus ( e.g., Edison International). 24 These and other examples suggest that structural separation of regulated utilities from competitive merchant energy service businesses could again provide a useful strategy for addressing the emerging threat to the sustainability of the traditional utility and regulatory model.

And that’s fortunate, because there’s no time to waste.

Endnotes:

1. This analysis addresses the implications of behind-the-meter energy on regulated utilities, but industry transformation similarly affects wholesale merchant generators and other unregulated companies that are linked to the traditional utility regulatory model.

2. “If the cost of solar panels keeps coming down, installation costs come down, and if they combine solar with battery technology and a power management system, then we have someone just using us for backup.” See: “Are Traditional Utilities Becoming Obsolete?” ecsgrid.com, March 27, 2013.

3. “The increasing competitiveness of distributed energy poses a ‘mortal threat’ to the electric utility industry and utilities are starting to take notice.” “This is not just a threat to electric utilities, though, he said. It is actually a threat to the structure of any business that depends on selling into the wholesale grid – including the wind and other renewable industries that cannot sell behind, or without, the meter.” See: “NRG CEO: Distributed generation a ‘mortal threat’ to utilities,” SNL Energy , March 22, 2013.

4. “ Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business ;” prepared by Peter Kind, Energy Infrastructure Advocates for the Edison Electric Institute; January 2013.

5. “Global Trends in Clean Energy Investment,” Michael Liebreich, Bloomberg New Energy Finance , April 17, 2013, p. 8; and Tracking the Sun V An Historical Summary of the Installed Price of Photovoltaics in the United States from 1998 to 2011 , by Galen Barbose,

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