Experts weigh impact of distributed generation on utility business model

Distributed generation is creating challenges and opportunities for regulators, utilities and consumers. How will it affect the evolving utility business model, and how should the various stakeholders manage the challenges, including net metering, as consumer demands change? During today's E&ETV special report, utility, regulatory and renewable energy experts discuss the critical issues surrounding distributed generation and debate the path forward. Interviewed experts include Jon Wellinghoff, past chairman of the Federal Energy Regulatory Commission and now a partner at Stoel Rives; Jeff Navin, former chief of staff at the Department of Energy and now a partner at Boundary Stone Partners; Lisa Wood, vice president of the Edison Foundation and executive director of the Institute for Electric Innovation; Rhone Resch, president and CEO of the Solar Energy Industries Association; and Peter Behr, reporter with E&E Publishing's EnergyWire.


Jeff Navin: 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. 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.

Jon Wellinghoff: So utilities are going to have to have the ability to morph into those roles of entrepreneurs and marketers and deliverers of these energy services to be able to effectively compete with all the other people in the space.

Peter Behr: This is a great example of some of the pressures that are on the utility sector, the electric/power sector at a period of very intense transition. This is probably the most change that this industry has seen since the end of the 1800s when it took its modern form.

Rhone Resch: I think there's a real threat to their business model. If utilities do not evolve and adapt and start providing more services, the services that their customers want, then they are at risk for losing a significant amount of market share. So this is a wakeup call, I think, in large part to utilities to start getting more entrepreneurial. And if utilities do not embrace distributed generation as a business model or accept the competition that's going to be provided, they are going to find that they're going to be overrun in a very similar way that happened in the telecommunications industry in the last 20 to 30 years.

Lisa Wood: [Laughter] I think that anything is possible. DG I think will become another way for us to generate energy. And I think we're going to see the same power sources we have today plus other power sources.

Jon Wellinghoff: I don't think anybody should necessarily be preserving the role of the future of utilities. Utilities, I think, are going to have to change and have to evolve, and evolve in ways that they can restructure their business models to be accommodating to and consistent with this new distributed world.

Jeff Navin: 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: Last January, the Edison Electric Institute, a trade group representing U.S. investor-owned utilities, released a paper identifying distributed generation as a disruptive challenge facing the industry. The paper helped fuel the public conversation on distributed generation.

Jeff Navin: 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.

Monica Trauzzi: Regulators will play a critical role in shaping the utility industry's future business model.

Jon Wellinghoff: I think the utilities have an obligation to inform their regulators as to how they're going to transform their business models in ways that can be consistent with and aligned with the desires of consumers to have more distributed systems, to have more control and better reliability and security of systems. I think they should be allowing utilities to move into more competitive areas and allow utilities to be much more flexible and competitive and nimble to be able to compete with all the other entrepreneurs and various providers of these solar and distributed resources that are being sold to consumers.

Jeff Navin: 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." 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.

Rhone Resch: I think the role for regulators is to provide flexibility; is to ensure that we keep net metering; we don't cap it artificially; we allow innovation and entrepreneurialism to thrive in this country; we create competition between a government protected monopoly interest, like the utility, and a small developer.

Peter Behr: I think the goal, as some would say, is to try to find this fair sweet spot so that the utility is being fairly paid, not just for the energy that it supplies to the solar customer when the sun isn't shining, but also for the contribution to the network because, in a lot of cases, in most cases, the residential electricity customer is buying power based on how much they use. And the problem is that there is also the infrastructure, the power lines, the transformers, the relays, the control room, the trucks, all of that has got to be paid.

Monica Trauzzi: Last year, the Georgia Public Service Commission ordered Georgia Power to add 525 megawatts of solar energy to its portfolio over the next three years. This was in addition to the capacity already established in the State's "Advanced Solar Initiative," which also includes a distributed generation element.

Tim Echols: Look, the ratepayers of Georgia, they didn't elect me to rubber-stamp the power company's plan. So just because the power company comes to me and says, "We want to do this with this plan," or "We don't want to add any solar," people are electing me to have judgment and make decisions on what's best for the state. I'm not going to rubber-stamp the power company's plan. If I don't like what they're doing, I'm going to vote against what they want to do.

Jon Wellinghoff: I think the regulators certainly have significant challenges because they have to consider their process of approval of utility investments to the extent that utilities are continuing to make central station investments that at some time in the future could become stranded and could become no longer useful. Then there are very hard decisions to be made as to how you allocate those costs and how you ensure that the system is maintained in a reliable and efficient and cost-effective way overall.

Lisa Wood: Regulators are really important in this situation, and I think there's a lively conversation going on right now among regulators about distributed generation. And I think what regulators should be talking about and thinking about is how do we price this right so that it's fair to all consumers.

Monica Trauzzi: A key challenge facing regulators is net metering. As of this year, 43 states have adopted the service. E&ETV contacted several utilities involved in net metering cases for comment, but we were denied interviews due to the sensitivity of the issue.

Jon Wellinghoff: I think one thing we need to look at is hopefully solving this ongoing war between the distribution utilities and the solar distribution providers on the net metering issue. I think that's a very disruptive engagement that I think needs to be brought together in a cooperative sense

Jeff Navin: 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 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.

Rhone Resch: At the moment, it's a battle, and the battle is being fought state by state. But rather I view net metering as an opportunity. I mean this is a business opportunity for utilities. It's a business opportunity for small and large solar developers. But, more importantly, it's a business opportunity for customers.

Lisa Wood: Right now customers that are distributed generation customers are paying pretty much across the country what's called a net metering rate. And that rate really doesn't take into account the cost of grid services. So because the DG customer's not paying for the cost of grid services, that cost gets shifted onto the non-DG customers.

Peter Behr: Certainly the industry is going to push to get more revenue from owners of rooftop solar and other distributed energy owners because of their argument that they're not getting a fair value for the network that they provide. I think the two interesting cases to watch involve the city of Austin, Texas, and the state of Minnesota. In Minnesota, at the end of this month, you're going to see the development of an alternative to net metering, which is a plan to try to set a price on the value of solar, which would be the credit that solar owners would receive for the energy that they put back into the grid when the sun is shining bright and they're got more power than they need.

Rhone Resch: Today distributed generation in the big states of California, Hawaii and a few others represents about 1 percent of total retail electricity sales, but net metering itself is about a quarter of 1 percent, so it's definitely overblown. Literally two or three years from now when you have commercially viable and affordable storage technologies, you're not going to need net metering, so this conversation is going to be mute in just a short period of time.

Jeff Navin: 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.

Jon Wellinghoff: I think natural gas is certainly going to be a primary fuel for distributed generation. I think we're going to see more and more expansion of distributed micro-turbines, fuel cells, reciprocating engines and other devices that will use natural gas at the local level to provide multiple services. To provide energy services, to provide heating, hot water, cooling. All those services can be provided by natural gas as a primary fuel and used in conjunction with other distributed resources like solar.

Rhone Resch: So while solar may be getting the brunt of the force from the utilities in the fight on net metering, ultimately there are dozens of technologies right behind us that are also going to be competing in the marketplace, and the key for us to allow that competition to occur.

Monica Trauzzi: Regulators and industry are gearing up for a busy 2014 that will likely shape the future of distributed generation and the role of net-metering.

Rhone Resch: We want to make sure that the free market has the ability to allow solar to grow, and that's our focus in 2014. It's Georgia. It's Colorado. It's Massachusetts. It's New York. It's continuing to work in states like Arizona and California. But really making sure that the utilities understand this is what their customers want. DG has really caught on in the last couple of years. Today it represents about 40 percent of the total solar market, but it's the fastest growing segment of the solar market, and we see by 2016 distributed generation being a larger market segment than utility scale in the United States.

Jon Wellinghoff: I think what we're going to see in 2014 with distributed generation is a much more accelerated integration of that generation with storage. We're starting to see storage come on now. Battery storage especially, a number of perspective companies like Eos of New Jersey, Ambri out of Massachusetts, Aquion out of Pittsburgh, are on the edge of commercializing some very cost-effective battery technologies that could revolutionize the use of distributed generation, especially solar, for example, that could allow it to be much more flexible and much more effective for consumers overall.

Lisa Wood: We'll see continued growth in distributed generation. We've had quite a bit of growth; I expect that continue. And we'll also see state regulators with utilities starting to change how DG customers pay for grid services.

Jon Wellinghoff: In a decade I think it will be totally competitive. I think you'll see a competitive system where all types of services will be competitive.

Peter Behr: So this is not about the end of utilities, but it certainly is a tough transition where climate policy is not settled. That's a problem. And where this balance between fairness for utilities, fairness for customer, and the recognition of the solar value has to all be worked out, and there is no blueprint for that.

Lisa Wood: I look at it as a lot of spokes in a wheel. I mean, we're used to seeing a one-way highway of power delivery. I think we're going to see a lot of two-way power sources and information sources going back and forth between customers and the utility companies.

Jeff Navin: 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.

Jeff Navin: 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.



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