The electric utility industry is currently in the middle of a major paradigm shift. This paradigm shift is sometimes referred to as Utility 2.0. The Utility 2.0 nomenclature is utilized to indicate a fundamental step change from the historical utility business model (Utility 1.0). The primary indicator of this shift is the transition from one-way to multi-directional power flow on the electrical grid. A utility infrastructure, which was originally designed for one-way power flow, is evolving to work in tandem with a growing number of distributed energy resources (DERs). DERs include various forms of distributed generation (DG), but also encompasses an assortment of devices, controls, and intelligence that work together to optimize grid system operations.
Utility 2.0 embodies all of the technical innovation associated with this grid modernization effort, but also involves a larger holistic transformation of the utility sector. The utility business model is adapting to incorporate greater levels of customer participation and engagement. The development of customer-centric business models and the evolution of utility financial metrics to include new forms of revenue diversification and evaluation, will be part of this broader utility transition.
Key Implications Caused by Competition
At the center of this Utility 2.0 transition, utilities are encountering increasing levels of market competition. This competition can come from new or existing independent power producers (IPPs) or solutions providers that assist existing utility customers to more efficiently reduce, produce, or manage their energy use. The implications of this competition to the utility are threefold:
1) Loss of revenue due to reduced consumption of energy by customers (load defection)
2) Reduced relevance with their customer due to other available options (competitive threats)
3) Limiting operational capability (DER deployment independently driven by external entities)
The Key Decision — Who Will Fill the Gap?
Competition within the utility industry is not going away. In fact, competitive threats are continually growing. Therefore, one of the primary decision points surrounding a Utility 2.0 transition is in terms of leadership. Who will lead in filling the gap between the transmission grid edge and the distribution grid edge? Electric utilities currently control most activity up to the transmission grid edge, but the distribution grid edge is where the growth of utility competition is primarily occurring. This creates a noticeable gap within the evolving distribution system. This gap will either be bridged by leadership that originates from external markets or electric utilities.
Three Key Components of Utility 2.0
Although various internal and external utility challenges must be overcome, the longer a utility chooses to wait to respond, the less relevant they become and they will find themselves further behind a rapidly growing learning curve with increasing market competition. A Utility 2.0 transition is characterized by three main components:
1. Increased Technical Complexity — Growing pace of available technology options and integrated solutions associated with DER deployment and interoperability
2. Enhanced Customer Engagement — Growing need to understand, engage, and provide enhanced services to the meet the needs of the evolving utility customer
3. Greater Financial Flexibility — Growing necessity to shift to more nimble utility financial constructs, new revenue sources, and enhanced characterization of value-based services
The Value of Simplicity – Reduced Cost & Risk
When considering a topic as complex as Utility 2.0, a systematic methodology is needed to translate multiple considerations into a holistic energy strategy. Although the topic is complicated, the development of a strategic process to help order and drive directional change does not have to be mired in unnecessary complexity or ambiguity. A simplified systematic structure does not imply less analytical rigor or avoidance of important details, rather it seeks to pull up from the details to find broad and high-level points of connection. The result is a systematic process that considers the entire “Utility 2.0 forest” rather than specific “analytical trees” of interest.
The benefits of this simplified strategic approach are twofold — it reduces cost and mitigates risk. By establishing order and direction, the utility creates greater internal alignment and efficiency. Secondly, by utilizing a more broad and holistic process, rapid and dynamic changes, common place with industry paradigm shifts, are more effectively addressed. Additionally, providing directional clarity to the market, enhances customer trust and increases external business partnership potential. In short, a simplified strategy creates a “no regrets” pathway to reduce cost and risk for the utility and their customers.
Systematic Utility 2.0 Methodology
A sequential approach is presented which details a simplified four-stage process. The graphic below provides a quick overview of all four stages. Each stage is then described further to provide additional context regarding the objectives and goals of sequentially completing each stage.
Stage 1 — Observe & Identify
The primary objective of the first stage is to comprehensively and impartially observe energy sector market movements to identify relevant trends. The first stage focuses on a utilities’ mindset regarding a Utility 2.0 transition. The goal at the end of this stage is to move towards a state of proactive preparedness that is led by the utility executive leadership team. Being convinced of the need for a Utility 2.0 directional path is at times a difficult first step, but its importance cannot be overstated. The leadership’s viewpoint regarding Utility 2.0 will directly impact how DER options are evaluated across all levels of the utility organization.
Stage 2 — Analyze & Synthesize
The objective of the second stage is to analyze the identified trends from Stage 1 and synthesize them into a simplified high-level construct. The result is the development of Utility 2.0 focus areas that serve as guiding principles and benchmarks for all future framework development. Effective implementation within the areas of member service (external customer focus), operational capability (internal technical focus), and financial prudence (enhanced financial flexibility), will serve as key markers of success as part of a Utility 2.0 transition. Essentially, these focus areas ensure that money is spent wisely and that a balance of internal and external considerations are considered in all Utility 2.0 decision making.
Stage 3 — Develop & Shape
The objective of the third stage is to develop a comprehensive Utility 2.0 framework that is aligned with the focus areas established in Stage 2. The focus areas provide high-level direction and project-level metrics for all Utility 2.0 decision making. To develop a Utility 2.0 framework, incremental steps or “stepping stones” of DER options need to be identified. These stepping stones consist of all the potential DER options that are available to utilities (shown in silver). The full array of DER options creates flexibility for utilities to traverse in multiple directions while continuously making incremental forward progress. This enables a utility-led transition that proactively closes the Utility 2.0 gap previously described.
DER stepping stones can be categorized into three primary competencies: data & analytics (intelligence), assets & devices (tools), and energy management (controls). A list of a few DER stepping stones examples are provided within each category. Each utility can select its own path of DER stepping stones (shown in green) based upon its own unique needs and desires.
Stage 4 — Implement & Refine
The objective of the final stage is to solidify a plan for continuous project implementation and improvement by applying robust and reliable project management principles. This stage involves regular review of the overarching, high-level DER direction and the optimization of on-going project implementation.
In summary, the simplified and systematic process presented will equip electric utilities for a Utility 2.0 transition in a manner that reduces cost and mitigates risk. By taking incremental steps along a defined DER pathway, utilities can become the trusted “Utility 2.0 enabled” service provider of choice.
This article was originally published by the author on LinkedIn and was republished with permission.