Experts from Rocky Mountain Institute, the Advanced Energy Economy Institute and America’s Power Plan have released a new report that shows why new utility business models are key to the energy transition.
The report focuses on 10 options for utility business model reform that address the evolving needs of customers, policy changes, grid resilience challenges, and the introduction of new grid-connected software and technology; five case studies accompany the report, providing examples of business model reforms in action.
Navigating Utility Business Model Reform: A Practical Guide to Regulatory Design offers a menu of regulatory options for policymakers, utilities and electric customers to best support and manage the maturation of a 21st-century grid. The electric system is undergoing several major changes including the rise of distributed energy resources (DER) like solar PV and energy storage (batteries) coupled with customers who are demanding more from their electricity providers. In addition, more severe weather events have caused major outages that utilities must wrestle with. The report offers electricity system leaders and stakeholders 10 reform options to best respond to these pressures and support policy and regulatory decision-making.
The 10 reform options the report examines include revenue decoupling, platform revenues, performance-incentive mechanisms and multiyear rate plans, among others.
The five case studies examine:
- Oklahoma’s Energy Efficiency Incentives—How Public Service Co. of Oklahoma and Oklahoma Gas & Electric are responding to shared savings and lost revenue adjustment mechanisms intended to remove the utilities’ financial disincentive to maximize customer energy efficiency opportunities.
- Maryland’s Behavioral Demand Response Program—How Baltimore Gas & Electric (BGE) lowered summertime demand driven by air-conditioning use through customer rebates for reducing consumption during peak-demand days, with BGE able to sell the energy and peak-demand reductions directly into the PJM wholesale market.
- Regulatory Accounting of Cloud Computing—How Illinois and New York are trying to level the playing field for service-based alternatives to traditional capital investments through the regulatory accounting treatment of software-as-a-service.
- Brooklyn Queens Demand Management Program—How Con Edison is deferring distribution infrastructure upgrades in an area of rising demand by deploying nontraditional methods of customer- and utility-side demand reduction, with the utility rewarded with performance incentives and accelerated depreciation.
- United Kingdom’s RIIO Performance-Based Framework for Driving Innovation and Delivering Value—How the UK’s Office of Gas and Electricity Markets (Ofgem) created RIIO (Revenue = Incentives + Innovation + Outputs), the most comprehensive performance-based regulatory system yet developed to reflect changing market conditions. RIIO allows utilities to take advantage of the growing service economy and rewards utilities for achieving desired outcomes.
“As regulators and utilities think about new business models for a changing electric power sector, there is a lot to be learned from what’s being done already,” said Lisa Frantzis, senior vice president of Advanced Energy Economy, of which AEE Institute is the nonprofit educational affiliate.
“These case studies shine a light on ways that utilities can better align their business goals with customer preferences and public policy objectives. As the electricity system becomes more distributed, meets evolving customer needs, and serves to power vehicles as well as homes and businesses, we need to build on examples of business model and regulatory reform like those discussed in our case studies.”
“With so many utilities launching new grid modernization initiatives, now is the time to address utility regulation and business model shortcomings. Energy is now extremely cheap if solar and wind power are the backbone of our electricity system,” said Mike O’Boyle, director of America’s Power Plan.
“To succeed, utilities must be intrinsically motivated to invest in modern technologies that make the grid more efficient, flexible, affordable and resilient. Navigating Utility Business Model Reform is a toolbox for policymakers, utilities and key stakeholders to do just that.”