Originally published on ilsr.org.
The transformation taking place in the electricity system is enormous, and the prescribed solution – a version 2.0 electric utility – offers a way for utilities to remain financially solvent, even profitable, in a massively decentralized and renewable energy system. The prescription is powerful: radically change the desired outcomes of the electricity system to include efficiency, flexibility, and clean power and pay utilities based on their ability to attain these targets.
But while the Utility 2.0 prescription cures what ails the electric utility, it fails to acknowledge the $364 billion opportunity this technological opportunity provides to change the ownership of the energy system and enable energy democracy.
The 20th century electric grid was characterized by two centralized components. The technology of power generation was centralized in large, fossil fuel and nuclear power plants, with transmission lines delivering this power to large cities. The economic ownership of the grid was also centralized within state-sanctioned monopoly utilities. Any third-party ownership of power systems was tightly controlled through utility requests for proposals (RFPs) and bilateral power purchase negotiations.
A revolution in the electricity system is inevitable and in progress. Low-cost wind and solar power are leading a dramatic shift toward renewable energy, much of it built close to where power is consumed. Microgrids and energy storage are on the rise. But while the technology of the 21st century grid is already different, it remains to be see if we write the rules to seize the potential ownership opportunity.
Consider the situation with distributed solar power. It’s becoming so economical that utilities in California are buying solar energy in bulk from 100 megawatt (MW) or larger solar arrays at a lower cost than new natural gas generation, and made of the same 200-some Watt panels that grace residential rooftops. Even when buying lots of solar, as Xcel Energy is doing in Minnesota, the 100 MW worth of solar will be installed in 1-2 MW chunks at electrical substations across its service territory. The technological shift in power generation is inevitable.
The future of ownership is less certain.
Under net metering rules commonly adopted in over 40 states, the technological revolution leading toward local solar energy production is also shifting the economics of the grid. Solar-producing customers are curtailing their export of energy dollars to dirty, remote power plants in favor of clean, local energy. A decentralized method of power production is leading to decentralization of ownership, a democratization of power production and ownership. This dynamic promises more dollars to local economies just as it has lent more political support for continued expansion of renewable energy.
This is energy democracy. And it’s an opportunity for individuals and communities to recapture $364 billion spent on electricity each year in the United States.
Unfortunately, in their search for a solution for utilities to the technological transformation, many of the thought leaders on the Utility 2.0 prescription may be missing the economic opportunity.
Former FERC Chair Jon Wellinghoff suggested in June that it would be fine, as Arizona Public Service desires, to let utilities build and own behind-the-meter solar installations and to include the cost of the solar in their rate base. He envisions utilities building distributed solar facilities, even on their own customers’ rooftops, and putting the cost (with a rate of return) into their rate base. He’s right that this would let utilities’ leverage their economies of scale and low-cost capital and that this is fundamentally different from getting their only rate of return from centralized infrastructure like utility-scale power plants and transmission lines.
It’s the danger of focusing on “Utility 2.0″ rather than energy democracy, because the APS proposal is as much an assault on the democratization of energy as the many utility-led fights against net metering. Fortunately, the Commission staff in Arizona agrees.
In this Utility 2.0 example touted by Wellinghoff, utilities maintain their economic hegemony, and customers lose the opportunity to capture the economic value of their rooftop. Utility 2.0 allows utilities to accommodate the technological transformation in the electricity system, but it assumes that they can and should remain the masters of the money.
The problem is that utilities that remain economic masters of the energy system will continue to have a conflict of interest between new, renewable, customer-sited power generation and their existing, dirty power plant assets. They will continue to fight EPA regulations and net metering and anything that undermines their ability to make money on power plants and power lines they already built.
If we stop at Utility 2.0, we allow utilities to use their customers’ money – lobbying the Public Utilities Commission, the legislature, etc – to defend dirty and outdated infrastructure instead of spending it on the tools – smart grids, energy efficiency, demand management – to reduce energy bills and carbon emissions, and that also encourage economic ownership by their customers. It will gut the opportunity for rural revitalization with renewable energy. It will slow progress in fighting climate change.
Ironically, Wellinghoff’s comments on New York’s Reforming the Energy Vision process suggest he understands the potential conflict. In the argument about whether incumbent utilities should be allowed to both control the grid and own generation on it, he says, “allowing the current grid owner (the utility) also to operate the distribution grid presents a strong conflict of interest…dissociating grid ownership from grid operations will greatly benefit the public and arguably the utilities, too.”
He’s right, because there’s actually an opportunity for twofold transformation – technological and economic – in our electricity system. It’s more than just a 2.0 business model, it’s an opportunity for energy democracy.
Let’s not settle for a halfway measure.
(Look for ILSR‘s report on the Utility 2.0 business model and energy democracy, coming Dec. 2)
Photo Credit: USAID