New Utility Business Models: Response to a High Penetration Renewables Future

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New Utility Business ModelsResponse to a High
Penetration Renewables Future
ACORE Northeast Roundtable Ron Binz, Public
Policy Consulting June 24, 2013 New York City
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• Thesis Utilities are under great pressure to
  change
• Aging plant
• Brattle Group 2 trillion investment over next
  20 years
• Tougher environmental requirements
• Criteria pollutants
• Greenhouse gases
• Coal ash
• Water restrictions
• Flat to declining sales of electricity
• New technologies
• Smarter grid
• Distributed generation solar, CHP, micro
  turbines
• Electric vehicles
• Changing consumer requirements
• Disintermediation by third parties
• Weakened industry financial metrics

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US Electric IOUs Rating History1970 2010
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AA
A
AA
AA
22
A
AA
A
A
BBB
46
BBB
A
BBB
BBB
27
BBB-
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Source Standard Poors, Macquarie Capital
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• Thesis Regulation may not be up to the task
• May not reward utilities for desired behavior
• Societys goals for utilities are changing
  regulation is not
• Progress on demand side, not so much on supply
  side
• Lack of incentives for
• firm efficiency
• clean energy investment
• energy efficiency
• innovation
• Rate structures need revision
• Balky process
• Examples of poisoned relationship
• Entire orientation is based on utility as seller
  of a commodity

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Renewable Electricity Futures Study
(REF) Exploration of High-Penetration Renewable
Electricity Futures Available at NREL.gov
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EPRIs 2009 View
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NRELs REF Findings

• Renewable electricity generation is more than
  adequate to supply 80 of total U.S. electricity
  generation in 2050 while meeting electricity
  demand on an hourly basis in every region of the
  country.
• Increased electric system flexibility can come
  from a portfolio of supply- and demand-side
  options, like flexible conventional generation,
  grid storage, new transmission, more responsive
  loads, and changes in power system operations.
• The are multiple paths using renewables that
  result in deep reductions in electric sector
  greenhouse gas emissions and water use.
• The direct incremental cost with high renewable
  generation is comparable to costs of other clean
  energy scenarios.

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Helpful fact The US summer peak electrical
use is around 800 GW.
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Baseline Case
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REF ITI Case
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How does the assumption of an HREF affect the
business model?

• Much higher levels of variable generation at the
  bulk power scale
• Greater penetration of distributed energy
  resources at the distribution scale
• Greater need for flexibility in the grid
  components, operations, and architecture
• Much higher levels of energy efficiency
  (sufficient to eliminate load growth)

(affects utility
organization, operations)
(affects utility revenues, services)
(affects utility investment, operations)
(affects utility role, services)
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Utilities 2020

• Foundation funded
• Run by two former state regulators named Ron
• Advised by board of experts
• Goal to explore new business models and advocate
  new regulatory models to enable new utility
  business models to evolve.

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Advisory Council Members

• John Bohn
• GlobalNet Partners, LLC
•  
• Paul Bonavia
• Tucson Electric Power
• Ashley Brown
• Harvard Electricity Policy Group
• Ralph Cavanagh
• NRDC
• Richard Cortright
• Standard and Poors
• Peter Fox-Penner
• The Brattle Group

• James Newcomb and Lena Hansen
• Rocky Mountain Institute
• John Nielsen
• Western Resource Advocates
• Sonny Popowsky
• PA Office of Consumer Advocate
• John Quackenbush
• Michigan Public Service Commission
•  
• Lisa Schwartz
• Regulatory Assistance Project
•  
• V. John White
• CEERT

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• Methods
• Interviews with utility CEOs and leading states
  regulators
• Evaluations of other systems here and abroad
• Dialogues with utility execs and commissioners

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Interviews

• Paul Bonavia
• Tuscon Electric Power
• David Eves
• Xcel Energy Colorado
• Greg Abel
• MidAmerican Energy
• Susan Story
• Southern Company Energy Services
• Michael Yackira (five senior staff)
• NV Energy
• Bob Rowe
• Northwestern Energy
• Lewis Hay
• NextEra Energy
• Ralph Izzo
• PSEG
• Tom King
• National Grid

• Colette Honorable
• Arkansas PSC
• Susan Ackerman
• Oregon PUC
• Phyllis Reha
• Minnesota PUC
• Ellen Anderson
• Minnesota PUC
• Joshua Epel
• Colorado PUC
• John Quackenbush
• Michigan PSC
• John Savage
• Oregon PUC
• Jim Tarpey
• Colorado PUC
• Ann Berwick
• Massachusetts DPU

Note Organizational affiliations are shown for
identification purposes only
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What weve heard from
utility CEOs

• CEOs want a clearer, more consistent direction
  from state energy policies
• Utilities have little incentive for innovation,
  firm level efficiency
• Commissions need a better understanding of the
  utility business and its needs
• Utilities want certainty on climate policy
• Utilities want healthier working relationships
  with commissioners and staff

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What weve heard from
commissioners

• A primary concern is with increasing utility
  rates
• Regulators are open to modifying the regulatory
  model looking for ideas
• Some commissioners are dissatisfied with the
  adversarial process
• Many commissioners face severe barriers to
  communications with stakeholders, and even fellow
  commissioners
• Commissions have inadequate resources

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December meeting of the Tribal Elders

• Peter Fox-Penner
• Tom King
• Ralph Cavanagh
• Lisa Wood
• Richard Sedano
• Ron Lehr
• Ron Binz
• Ashley Brown
• Jim Kerr
• Sue Tierney

Old enough, but unable to attend
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Findings from the Elders

• The clean/efficient future is inevitable
  utilities will need to adapt business models to
  accommodate the transformation.
• Regulation must be reinvented to allow and induce
  utilities to change.
• Load will likely be flat or declining in the
  future, but costs will not. Need to move away
  from consumption-based models toward service- and
  performance-based models.
• This transition is best done as a partnership,
  not a system that attempts to bypass (leave
  behind) the utility.

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Findings from the Elders, contd.

• There is an irreducible role for the utility as
  an orchestra leader, a role very similar to the
  smart integrator role in Smart Power. The UK
  has gone too far with industry disaggregation.
• Regulation needs to move toward output
  regulation that rewards firms for outcomes,
  efficiency and innovation. The group coalesced
  around a revenue cap model with incentives for
  various outputs. (E.g., the UK RIIO model with
  decoupling)
• These recommendations should be robust across
  different scenarios with/without wholesale or
  retail competition, IOU/public utility structure,
  etc.

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Motivations for a new regulatory model
We need to align regulatory incentives so that
healthy utilities can pursue societys broader
policy goals in ways that also benefit customers
and shareholders. Regulation has become
confrontational, is often mired in judicial
process, and exists amid a charged political
setting. Its hard to imagine a worse recipe for
managing the transformation of the utility
industry. A threshold question is whether
state utility regulation will evolve to enable
the necessary industry changes, or merely follow
them, or worst, stand in the way.
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Three Potential Regulatory Models

• The UK RIIO model
• Price cap built on RPI-X
• Output regulation
• Reliability, Environmental, Innovation, Price,
  Efficiency, Social Responsibility
• The Iowa Model
• Seventeen years of constant rates, settlements
• The Grand Bargain
• Comprehensive multi-year output-oriented deal
• Regulator led

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Thanks for the invitation
I look forward to your questions.