This Is The Future Of Electricity Pricing

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Originally published on Energy Post.
By Fereidoon Sionshansi

The rapid transformation of the electricity sector will make it necessary for utilities to adopt radically new pricing methods, writes Fereidoon Sionshansi, publisher of newsletter EEnergy Informer and editor of a new book, Innovation & Disruption at the Grid’s Edge. According to Sionshansi, existing volumetric tariffs will increasingly be replaced by fixed service fees.

By now the narrative on the rapid transformation of the electricity sector driven by the 3Ds – decentralization, de-carbonization and digitization – is well-known.

Far less, however, is known about how this transformation is going to materialise, and when and who may be the ultimate winners as the incumbents’ traditional business models are disrupted.

Not surprisingly, there are as many predictions on the end game as there are analysts and experts following the developments. As I write in a recently published book titled Innovation & Disruption at the Grid’s Edge, in which a great many expert analyses are brought together: “…innovation and disruption enabled by new technologies – notably information & communication technology (ITC) – are transforming the electric power sector at an unprecedented pace … “

Charging based on volume is outdated and will become unsustainable as a means of covering the cost of the delivery network.

One important change, as consumers will evolve into “prosumers” and then “prosumanagers”, is that the definition of electricity service, and more importantly how it is priced, will undoubtedly undergo radical transformation.

Bundled retail tariffs – designed for the one-directional networks of the past century with passive consumers – which are still prevalent nearly everywhere in the world, are clearly outdated.

Volumetric tariffs no longer capture the emerging value proposition offered by the grid – which offers connectivity, balancing services, frequency control, voltage stability and 24/7 reliability most coveted by increasingly sophisticated prosumers or prosumagers rather than delivering a large volume of kWhs.

Mobile phone industry

This suggests that the power sector is on a path not unlike that of the mobile phone industry where most users pay a fixed monthly fee based on a 2-year contract with a network service provider.

While the analogy is not perfect – e.g., currently electrons cannot be delivered without copper wires – it is clear that mobile phone service is increasingly about connectivity and access to the network rather than the volume or frequency of calls.

Subscribers choose a provider on the basis of the ubiquity and reliability of its network access, the strength of the signal, bandwidth and speed.

They are rarely charged anymore on a per-call or per-minute basis.

The regulators, who control all aspects of the business in most markets, are having a difficult time following the rapid technological changes taking place, let along being in a position to lead or encourage innovation.

The cost of service is much better reflected, and collected, through a fixed fee almost regardless of the volume of service.

The same goes for garbage collection and many other services where the fixed costs account for the overwhelming percentage of cost of service.

Another reason why electricity service is moving in this direction is the fact that as the proportion of renewable generation on many networks increases, the cost of electrons – the commodity portion of service – is rapidly falling, eventually approaching zero, occasionally going negative. The kWhs are already relatively cheap and getting cheaper over time.

Thus, charging based on volume is outdated and will become unsustainable as a means of covering the cost of the delivery network.

Zero net energy

Moreover, with the advent of zero net energy (ZNE) buildings, the volume of consumption in many places is flat or falling.

The implication is rather clear: tariffs based exclusively or primarily on volumetric consumption are unlikely to deliver sufficient revenues, nor do they make much sense.

Moving towards the inevitable end, however, is not easy for a number of reasons:

• the path and pace forward looks different to different stakeholders who are often competing with conflicting views and perspectives;
• the incumbents don’t like being disrupted and/or becoming irrelevant; and, most important
• the regulators, who control all aspects of the business in most markets, are having a difficult time following the rapid technological changes taking place, let along being in a position to lead or encourage innovation.

This is evident, for example, in the current piecemeal and fragmented treatment of distributed energy resources (DERs) and net energy metering (NEM) in various parts of the US.

The value and/or the cost of DER resources, poorly understood, need to be better monetized and reflected in future tariffs, which must increasingly account for the bi-directional flows of electrons based on time, location and their value or impact to/on the distribution network.

Consider the following examples:

• A solar rooftop panel feeding a huge surplus – in excess of local consumption – to the distribution network on a cool, breezy, sunny day is not adding much value in a place like California, with its famous “Duck Curve”.
• By contrast, an electric vehicleor distributed storagedevice of any shape, form or size, taking unneeded excess electrons from the same circuit, and injecting it back after sunset, is providing a highly valuable service.

Current tariffs and regulations, with a few exceptions, do not fully or even partially recognize, monetize, reward or penalize for the vastly different cost/value of such resources.

The good news is that regulators in states including California, Hawaii and New York – with the latter’s pioneering Reforming the Energy Vision (REV) – are beginning to address how the changing role of the distribution network will redefine the role of stakeholders, including better clarity on who can do what, when and where and under what types of rules, rewards and investment recovery.

Walk, jog, run

A number of such issues are covered in Innovation & Disruption at the Grid’s Edge.

In the book’s Preface, Michael Picker, President of California Public Utilities Commission (CPUC), says he has “chosen to focus actively at the CPUC on more tangible tasks that can deliver benefits quickly, rather than questioning the fundamental nature of utility business models,” adding “the overarching philosophy I have followed in pursuit of more distributed energy future can be described as ‘Walk, Jog, Run.’”

With so much on his plate, so to speak, the measured approach is understandable.

Picker goes on to say, “The vision we (the CPUC) are pursuing is that, over time, DERs will be able to benefit from ‘stacking’ multiple value streams.”

Stacking, of course, refers to the fact that DERs, depending on when, where and how they feed or withdraw from the network, imply costs or value, often from multiple sources, as the examples of the solar PVs and EVs (above) described.

The key question for the incumbents in the business, retailers, distribution companies, generators and gentailers, is how to survive – and hopefully thrive – in the energy transition.

In this context, stacking entails improved monetization of the multiple benefits of DERs while – paradoxically – acknowledging their increased demands on the distribution network – for example, with high concentrations of PVs and/or EVs on certain distribution circuits.

California’s regulators are already sensitized to the new realities of DERs and other innovations and disruptions taking place at the so-called grid’s edge, referring to the intersection of the distribution network and customers’ meter and beyond- or behind-the-meter.

On this, Picker adds: “Targeting DERs to high-value locations also necessitates development of a tool to highlight areas of the distribution grid where DERs can provide location-specific values, such as distribution capacity deferral and voltage support.”

The key question for the incumbents in the business, retailers, distribution companies, generators and gentailers, is how to survive – and hopefully thrive – in the energy transition and the disruptions. With so many moving parts, uncertainties, and pitfalls, it won’t be easy.

Fereidoon Sioshansi is president of Menlo Energy Economics, a consultancy based in San Francisco, CA and editor/publisher of EEnergy Informer, a monthly newsletter with international circulation. He can be reached at fpsioshansi@aol.com.

Reprinted with permission.