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Retail 2.0: Can DER’s Revive Retail Choice?

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Dean Chuang's picture
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Dean Chuang is an independent consultant providing advisory services to energy industry clients.  Dean has held a number of roles over a 13-year career in the energy industry, from financial...

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  • Mar 24, 2020

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Retail Choice has had a mixed record over the last 30 years…but DER penetration will increasingly influence Regulated and Retail Utility economics.  Is it time for Retail to rise again?

The restructuring of the American power industry in the late 20th century was driven by an expectation that increased competition would benefit utility customers.  However, while wholesale restructuring has transformed the generation landscape, customer benefits at the retail level have been more ambiguous.

In Texas, the bastion of American deregulation, Retail Electric Provider (REP, or “Retail”) rates have only recently begun to converge with rates at regulated utilities.  Referencing rate data from the Texas Coalition for Affordable Power and historic Henry Hub prices from the EIA, one can make the argument that Retail has lead to a closer alignment between rates and supply costs…but these potential savings have been accompanied by unsavory practices in customer acquisition, and by customer retention strategies that are reminiscent of cable television.  

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For all the shortcomings of Retail, Regulated utilities have struggled to innovate and provide customer driven service offerings.  The inherent incentive of any Investor Owned Utility is to preserve and grow the rate base; the dynamics of value creation at a regulated monopoly can foster an environment that favors the preservation of established precedent over innovation.  Change comes slowly in the utility world; the “smart grid” is now more commonly called “grid modernization,” but surprisingly little has changed from the utility “customer benefit” justifications of the ARRA/SGIG era (circa 2008) and the justifications for projects that utilities are filing today.

What has changed is the rise of the consumer Internet of Things (IoT) and an explosion in customer interest and adoption of Distributed Energy Resources (DERs). 

To provide a few examples:

  • Early “smart” thermostats were primarily utility driven; these thermostats provided the utility with a oneway DR asset, but offered limited customer benefits.  However, beginning with the introduction of the Nest thermostat in 2011, enrollment in proprietary utility programs has been widely surpassed by the customer adoption of smart, two-way communicating thermostats. Parks & Associates has estimated that 40 million US homes (or more than 1/3 of US residential housing stock!) could have a smart thermostat by 2020. 
  • SEIA reports that nonutility solar capacity has grown from <1 GW in 2000 to more than 35 GW in 2020. 
  • The Argonne National Laboratory reports that more than 1M plugin electric vehicles were sold between 2011 and 2019.  EV’s can present unique challenges for load balancing, as the installation of a residential charger can more than double the peak load of home.

In an industry built upon generations of precedent, the rapid, unplanned, customer-driven proliferation of DERs has upended the status quo.  Where power once flowed in a single direction, DERs have the potential to serve as both a sink and a source on the grid edge; a grid that has historically been designed to engineering standards of reliability now demands active real-time operation for load balancing. 

Investment in new technologies and methodologies is clearly necessary to manage this new grid paradigm.  However…does the traditional regulated utility model provide the right incentives for a DER world? 

In these transitory days, there is early movement towards mechanisms to enable a more participatory grid:

  • In Hawaii, where rooftop solar has proliferated in response to high supply costs, HECO’s modernization strategy calls for an open standards approach for “customer co-creation.”
  • In NY, the REV initiative is an explicit effort to create market mechanisms to enable customer sited DER.
  • The rise of Community Choice Aggregators in California represents the development of a new Municipal-Retail model that marries the non-profit motivations of a Muni with the customer product engagement playbook of a REP.    

These themes – the alignment of supply costs with rates, customer enablement, and product innovation for customer engagement – are the bedrock of the Retail business model.  As customers continue to adopt and install DERs, the economics of grid management will continue to evolve – will the “Utility of the Future” finally usher in the Retail era?

I believe that Retail is structured to evolve more quickly in response to changes in industry and customer economics than the Regulated world.  I further believe that the future Retail utility will combine predictive load analytics and customer sited technology to automatically optimize grid and customer priorities.[1] 

Given the gradual pace of change industry change, I believe that this future will continue to develop over the next 5-10 years.   Reader, what do you think?  Comments are most welcome!     

[1] This assumes the development of a Distribution level load-balancing marketplaces (e.g. DSO) or signals to mirror the more established wholesale balancing market. 

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Matt Chester's picture
Matt Chester on Mar 24, 2020

Really thought provoking, thanks Dean. The regulated vs. deregulated fight has looked mostly unchanged since the 90's, but you're absolutely right that one way or another the DER market is coming and going to shake things up. 'Because we've always done it that way' won't really fly any more, will it?

Dean Chuang's picture
Dean Chuang on Apr 6, 2020

Thanks Matt!  (and apologies for the delayed response)  

Totally agree...the energy world is clearly changing.  While the "death spiral" is exaggerated, I believe that the question is now "how and when" rather than "if."  

Chris Law's picture
Chris Law on Apr 4, 2020

As the network demand decreases through DER during the day, we are seeing in wholesale markets - negative prices regularly here in AUS because of DER uptake which in some states generates close to 50% of all energy used.  I'm working with one medium-size solar generator to turn off the exporting solar on his assets (to the grid) during the day at the period where the price is low and it costs him money - amazing!

However, from a Grid perspective, Low Load scenarios created by scaled DER create unintended grid impacts e.g voltage. All of which need to manage when you get to > 20% adoption in your network.  P2P trading and new market models will then face demand (utilisation) based tariffs from the Distributors to enable these future models...look out for that!

Its all very interesting indeed and loved your insights.

Dean Chuang's picture
Dean Chuang on Apr 6, 2020

Yep!  Regarding change in the US, Susan Tierney has presented a few fantastic papers on the "Value of DER to D."  Great reads if you have the time! 

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