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Don't Get Netflixed

The tide is turning. Are we planning for it – or hoping to stop it?

Fortnightly Magazine - March 2014
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The U.S. electricity industry has a less-than-stellar record of planning for long-term changes. With some notable exceptions, energy future plans tend to be built around ideological objectives, rather than engineering realities. Usually policymakers and planners begin by defining a desired outcome - such as reducing greenhouse gas emissions by 80 percent, or transitioning to a 100-percent renewable powered future - and then working backward from that foregone conclusion.

Such an approach is almost destined to run aground, because ideological goals change with shifting political winds. George W. Bush's energy priorities were different from Barack Obama's, and the same is true for commissioners, governors, and mayors.

Longer-term planning also is constrained by vested interests; historically, investor owned utilities have built infrastructure to last between 30 and 60 years, or even longer in some cases. They operate under franchise agreements that exclude competitors, and they invest capital in assets on behalf of ratepayers - as much capital as regulators will allow in the rate base. Thus utilities have an overriding financial incentive to grow the rate base, and keep those assets operating for as long as possible - and utility executives have a fiduciary duty to preserve the market conditions and regulatory structures that support that exclusive, central-planning approach. When markets change in ways that render utility assets prematurely obsolete, utilities advocate rate structures that make them whole, or they seek recovery for stranded investments.

In sum, investor owned utilities - the biggest corporate players in the electricity business - are intrinsically opposed to market changes, and they have powerful tools to slow it or stop it.

However, nobody can stop the inexorable march of technology, and dramatic advances have happened in the past decade - most notably the rise of DERs, renewables, smart grid systems, and cheap shale gas. The industry's leaders now acknowledge that these developments portend real threats to the traditional utility. Across the country, utilities and regulators are openly discussing changes in the regulatory model - and even in the utility regulatory compact itself - to accommodate fundamental changes in the way electric utilities will need to serve customers in the future. The most radical of those changes can be summarized in three bullet points:

Flexible architecture: Greater reliance on variable renewable generation and pipeline-constrained natural gas, combined with volatile weather patterns and rising consequences for system failure, requires a more flexible and adaptive grid. Distributed intelligence and communications make it possible.

Differentiated service: New technologies, including economical distributed energy resources (DER), expand the range of options available to suit customers' specific requirements, forcing utilities to offer differentiated service.

Independent distribution system operation: DER technologies combined with increasing grid intelligence enable new retail energy markets to evolve. The distribution utility becomes part of an independent distribution system operator (DSO), a new platform that facilitates market trading and economic dispatch for distribution-level resources.

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