Jeff Navin, former chief of staff at the Department of Energy and now a partner at Boundary Stone Partners, discusses the future of the utility business model.
Monica Trauzzi: Jeff, in your view, does distributed generation in the United States provide a net positive or net negative to the changing landscape of the electric power sector?
Jeff Navin: Well, I think it's really, it's an inevitability, and you know, it's going to happen. I think, ultimately, it's going to be a net positive because it's going to give consumers greater choice over how they get their energy in their homes. It's going to broaden the way that we generate electricity in the United States, you know, and ultimately, you see a lot of the problems that are facing utilities regarding resiliency, more extreme weather events, and if we do it the right way and we approach it in a smart and coordinated way, things like rooftop solar on a home can actually help with some of the peak demand issues. The sun is shining the brightest at the times when demand is highest. And if we integrate that into the planning, it can actually help the utilities make some more strategic decisions. And I think, for example, it works really well with natural gas in terms of its ability to soften some of those peak demands in the middle of the day.
Monica Trauzzi: How is it changing the game for the industry, and how should utilities be handling the challenges and opportunities presented by DG?
Jeff Navin: I think it is probably the biggest change that's going to happen to the utilities since they were established, and I think some of the utilities understand that and are adapting. Some of them are resisting it a little bit. A lot of times, you hear this analogy between the phone companies in the '80s and '90s, the landline telephone companies, and how they reacted to the introduction of new technologies, like mobile phones. And the landline telephone companies approached it differently. Some of them embraced mobile telephones and became really mobile telephone companies. Others were a little slower to the game, and they weren't able to adapt as quickly, and it had pretty profound impacts on their businesses. You know, telephones, just like utilities today, used to charge you by the minute based upon how far you were calling and how long you were on the telephone. You don't see that anymore. They've changed how they bill. They've changed the services they offer. Many telephone companies are more broadband Internet companies or even mobile phone companies than they are sort of landline telephone companies. And I think utilities are going to have to confront some of that same, some of those same challenges. Distributed generation is coming, and it's not something that you're going to be able to stop. It's not something that you can go to a public utilities commission and say, "Well, we don't like this." Ultimately, consumers are going to have more choices, and the utilities are going to have to adapt to a marketplace that's very different than the one that they've operated in in the past. There'll be competition for the first time for many of these companies. There will be choices that consumers are going to have the power to make that hasn't existed in the traditional utility model, and utilities are going to need to think through how they're going to change their business models to compete in the 21st century.
Monica Trauzzi: So which utilities are we seeing taking steps already? Who is changing their business model or getting in line?
Jeff Navin: Well, there are companies like Duke Energy that are working to actually use distributed generation as a generating asset for themselves. There are utilities that are using programs like Feed Enteris largely to meet renewable portfolio standards, but it actually provides them an opportunity to have a guaranteed contract to buy the power off of these assets, and they have much more control if they're buying that energy and pulling it onto the grid rather than somebody operating through kind of a Solar City type of a lease. You know, I think it's going to vary from region to region and utility to utility, but I think there are some forward-thinking utilities who are seeing this change coming and are trying to see distributed generation as an opportunity for them to get in front of and to generate revenue for their companies rather than something that they just have to try to try to stop.
Monica Trauzzi: Are there specific regions of the country that will see a greater benefit from DG?
Jeff Navin: Well, they're, the sun shines brighter in certain places, and the thing about electricity is it varies from state to state and even region to region within states. So anywhere that you have a high cost of energy and/or a high solar resource, it makes sense. New Mexico is a, parts of New Mexico have both. So you're going to do really well in New Mexico. Solar is going to be able to compete. New Jersey has really high solar penetration. We don't tend to think of New Jersey as a particularly sunny state, but they've got very high electricity costs. So even though that solar resource isn't as strong, New Jersey, solar can compete well in New Jersey just because of the price of electricity.
Monica Trauzzi: We've seen headlines, the end of utilities as a result of distributed generation. Do you think there's truth to that?
Jeff Navin: Well, I don't think that it means that's the end of utilities. It might be the end of utilities as we've known them for the past 100 years. And you know, I think you're going to see more change in utilities over the next 10 years than we've seen in the past 100 years, and a lot of that has to do with the technology developments in things like solar.
But distributed generation isn't just solar. I mean, 37 million homes in the United States have natural gas lines going directly to those homes. There are companies working on everything from fuel cells to microturbines to, Dean Kamen, the inventor of the Segway, has a Stirling engine, and he's partnering with NRG to try to provide that kind of a technology that would sit next to your air conditioner outside of your home, and you could choose whether or not to buy your electrons from the traditional utility company or have them generated via natural gas directly on-site. And so, you know, how the utilities react to that, how they respond to that, how they deal with competition for the first time are going to sort of determine what the nature of the utility is. But it's going to require some rethinking, and it's going to be challenging. I mean, I think the one thing that we saw with telecom that we're going to see here is that utilities are used to having a relationship with public utilities commission and regulators. That's how they, that's how they determine what prices they're going to set, what services they can offer, and they've developed those relationships over decades. Now the power to sort of determine a lot of these questions around utilities is going to rest directly with consumers. And that's something that the utilities haven't confronted in the past, and it's going to mean they're not just competing with the public advocate of the public utilities commission on a rate increase. It means they're dealing with solar companies, distributed natural gas companies, energy storage companies, and consumers are going to have more choice. Kind of like they do right now with broadband Internet. You can get that from your phone company, you can get that from your cable company, you can get it from satellite company. There's going to be more choice, and the utilities are going to have to rethink how they, what they're offering, how they're pricing it, and how they're going to compete in a very new marketplace for them.
Monica Trauzzi: So are the shifted costs that some consumers might see initially, is that just a short-term negative?
Jeff Navin: You know, I think that overall, the technological innovation in things like solar energy storage and natural gas are going to continue to come down in cost over time. It's going to be hard for some utilities. I mean, the truth is they have to maintain these lines that go into every house. They have to ensure the reliability and resiliency of a grid at a time when demand for electricity has remained relatively flat, and we're seeing more extreme weather events, and we're seeing an aging set of infrastructure on the grid. And that's why I think we're, that the industry and the country are sort of going through this: How do we come up with a new model that allows the utilities to be fairly and adequately compensated for the services that they provide, but also ensure that consumers have choice and that they can remain competitive.
Monica Trauzzi: So what do you think the utility sector will look like in 10 years?
Jeff Navin: I don't know. I think it's really an open question. I think that you'll probably see things like connection charges and sort of flat rates for sort of monthly connection, kind of like you have now with telephones, where you could control the cost of your telephone bill in the past by limiting the number of long-distance phone calls you make. You know, today, you kind of have a flat rate for just access to that infrastructure. I think you're going to see some utilities more aggressively getting into the distributed space. So instead of having Solar City or one of these providers putting panels up and owning those panels and leasing them to the homeowner, you're going to have utilities get into that space. And they ought to. I think you're going to see utilities more aggressively looking at programs to use distributed assets to their benefit so that they can have a wider distribution of generation assets throughout their service areas on tops of commercial rooftops or even residential rooftops. And there's some smart people in the utility space, and they'll work very hard, and they'll figure it out. Not all of them, you know, but the ones who really understand this opportunity and this challenge I think are working very hard to figure out what that 21st-century business model for a utility looks like.
Monica Trauzzi: What policy developments do you anticipate?
Jeff Navin: Well, I think you referenced this, the paper that EEI put out about a year ago that really sort of started this public conversation about the death spiral for utilities, and if we don't stop distributed generation, the implications that that could have for utilities across the country. I think that paper was designed to get attention, and it did, but it was largely designed to get attention from regulators as the utilities started to push back a little bit on some of the net metering rules that had gone into effect. You know, when solar was taking a quarter of a percent or less than a quarter of a percent of a service area, it wasn't that big of a deal. But we've seen dramatic growth in distributed generation. In the last five years, it's grown by two and a half times. It's expected to grow another two and a half times in the next five years. Places like San Diego went from by a magnitude of 10X. They've seen increases in residential solar. That starts to have a real impact on utilities. Now what was interesting about that paper is it sort of led to these fights in California where you have broad deployment of solar, and Arizona, where you also have broad deployment of solar, and it was designed to really kind of push back against net metering. Interesting stage. Right? I mean, Arizona is pretty conservative. California is certainly not very conservative, but similar outcomes that because these policies proved so popular with constituents and with homeowners that the government entities and the regulators were not willing to completely take them off the books. And they made some compromises here and there, but it didn't, it was not a clear win for the utilities. And I think this gets to this sort of conceptual issue that some of the utilities have. They're used to having technical experts appear before a public utilities commission to make their case about their own viability, and a very sympathetic body in a lot of cases who would say, "We want you to remain in business." But now, they're dealing with homeowners, constituents, people who have made investments in their own property, and it's a very different kind of politics. And again, the utilities are now stepping out into a space that normally in the past has been very closed for them, and now they're entering a much broader public both political debate and a marketplace.
Monica Trauzzi: So what should regulators be doing?
Jeff Navin: I think regulators do need to ensure that utilities can survive, but you know, I don't see this really as a binary either/or question. There's going to be distributed generation. Some of it's going to be solar. Some of it's going to be natural gas. Some of it may even be wind in parts of the country. There are going to be new technologies that are developed in the next five to 10 years that you and I probably can't conceive of today. The cost reductions in renewable technologies, both in terms of solar and energy storage, are going to continue to come down. It's not a question as to whether or not there's going to be distributed generation. The question is how can regulators and utilities work to come up with a business model that allows the utilities to earn revenue and make a profit to remain viable and stable, but also deal with the reality that consumers want choice when it comes to their energy.
Monica Trauzzi: So is this a bigger challenge for regulators or utilities?
Jeff Navin: I think it's both. You know, I think ultimately for regulated utilities, their business model is predicated upon getting permission from regulators to get into new spaces. And I think regulators in states that recognize that giving utilities flexibility to play in the renewable space maybe to a larger degree, I think, is going to be important and could be quite helpful, but a lot of these regulators, remember, have done this a bit in the past. They've gone through this with telecom. So they're not going to be totally new to this idea that the world is changing and we need to allow the utilities to adapt and change with it.
Monica Trauzzi: How do you anticipate this issue will develop in 2014?
Jeff Navin: Well, I think we're going to continue to see some challenges to net metering. And I think those are going to play out, you know, we've seen some precedents. We've seen some precedents where you sort of split the difference and come up with a compromise and maybe a small interconnect charge and maybe an agreement that you're going to look at particular caps on net metering after certain levels. But when you've got liberal solar and environmental activities in California aligned with the tea party in Georgia, and they're taking the same side, that consumers deserve choice and that solar is something that they ought to have access to, it's going to be a tough row to hoe if the utilities believe that the way to deal with this is to just go to each state and have the PUCs roll back or stop net metering. I don't think the utilities are that hostile to solar, to be honest with you. I think a lot of that gets overplayed. I do think that it's incumbent upon both the solar industry, consumer advocates, regulators and the utilities to start to work to think through how can we come up with something that allows it to work for everybody.
Monica Trauzzi: All right, Jeff, we'll end it right there. Thank you for your time.
Jeff Navin: Great. Thank you.
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