Going Local: Utilities and Their Customers as Partners

Utilities are at the nexus of three major trends – climate change, community leadership to decarbonize, and companies providing the tools and services to achieve decarbonization. These trends will affect utility business dramatically over the next decade and beyond. Utilities need to develop and implement effective strategies to address these trends, or they risk stranded assets, loss of customers, or worse. Utilities are also well positioned to take advantage of the opportunities that these trends portend, becoming stronger, more resilient, and customer-focused businesses. 

Moving Toward a More Decentralized Electricity Grid
Climate change risks and realities from more frequent extreme weather events, such as hurricanes, wildfires, cyclones, and flooding, are impacting utility business. Many utilities must deal with greater than expected numbers of downed power lines, longer than typical power outages to their customers, and in some cases, dramatic loss of major infrastructure for protracted periods of time, leaving customers isolated and without power for weeks or months. The financial burden to utilities from repairing the infrastructure damage, as well as dealing with any legal burdens that may ensue, is forcing utilities to rethink their infrastructure planning and investment toward building into their grids more resilient, autonomous, and flexible infrastructure to protect against future environmental events. This is leading to a more decentralized electricity grid.

At the same time, leading cities and towns that utilities serve are taking a proactive role by setting aggressive decarbonization targets for their municipalities in collaboration with stakeholders to address climate change. This can include, for example, setting a specific timeline for action, developing a roadmap of actions to achieve the target, and beginning to implement those actions in collaboration with local businesses, non-profit organizations, community leaders, other levels of government, and ordinary citizens. This people-centric approach is creating buy-in for achieving the targets and for garnering funds to finance the steps necessary to achieve them. Communities and their businesses, as well as their citizens, are contributing to decarbonization and decentralization by becoming part of the electricity grid through owning or leasing electric vehicles and other distributed energy resources. These customers are no longer just consumers. They are also producers of utility services, but with a smaller carbon footprint.

In addition, there is leadership among local, national, and international companies to provide technology and services to residential, business, and industrial consumers within communities to achieve decarbonization. This can include, for example, rooftop solar technologies, battery storage, vehicle-to-grid and building-to-grid facilities, less costly electric vehicles with longer life batteries, and innovative energy efficiency and demand response technologies and programs. These products and services increase consumer choice regarding their electricity services and also contribute to decarbonization and the decentralization of the electricity grid.

Utilities can participate in the new markets for energy products and services. By enabling local sourcing of generation, microgrids, and clean energy alternatives, utilities can continue to preserve their relevance and influence in this changing industry. Depending on their regulatory regime, they may also be able to own and rate base some or all these types of assets.

Customers as Competitors
The progress toward decarbonization and decentralization is creating utility discomfort because it creates a disruption to the utility’s operating model and cracks in the status quo, prompting the need for change and adaptation. The old utility-centralized model of command and control of large generators, long transmission lines, and an expansive distribution network is transforming to a more sustainable, highly digitized, and dynamic energy system with multi-directional networks and two-way energy flows. This transformation is being aided by communities and companies acting as disruptors, putting pressure on utilities to adapt to this change. For example, utility customers with the means to do so may create microgrids within the utility grid that are much less reliant on central power generation or may exit the grid altogether. Municipalities may put in place a policy framework as well as incentives to encourage local electricity generation, local microgrids, smart homes, smart buildings, and smart street lighting, as well as EV charging stations.

Customer choice is evolving as the availability of new energy products and services increases. Utilities and regulators will need to respond to an expanding list of customer expectations which include:

• Sustainability: Clean and low carbon energy products and services
• Flexibility: Dynamic, intelligent, and connected energy solutions and infrastructure
• Autonomy: Local, distributed assets and democratized control over energy use
• Individualization: Highly personalized energy products and services catering to an assortment of customers[1]

Joining Forces
Utilities will need to decide how to respond to the impending transformation. There are three major tactics:

• Do nothing: Waiting for regulators to force the change
• Buck the trend: Actively lobbying and combating the regulator to adopt the utility’s strategy
• Embrace and encourage transformation: Co-creating the new utility industry with regulators, customers, and technology championing new entrants

The do-nothing option may be viable in certain situations in the short run and even longer, particularly where renewables are abundant or the regulatory environment is less conducive to investing in grid modernization, facilitating DER, or allowing the utility to take a more active role in deploying renewables, storage, demand response, or energy efficiency. Taking small, cost-effective steps over time toward decentralization may be more advantageous in such situations.

Bucking the trend may work in the short run, but it is likely to be more costly overall. Since utility customers are moving in a different direction—they want more choice, convenience, and at a lower cost—it will not be good for business to be at odds with customers over the long run.

Embracing and encouraging transformation will align the utility with its customers. Offering more customer choice through, for example, the bundling of certain services such as through subscription pricing or innovative pricing such as prices based on value, will help to keep the utility competitive and contribute to customer retention. Rather than viewing companies that offer technologies and services for utility customers only as competitors, there is business value in forging partnerships with them to accelerate decarbonization and grid transformation. Utilities may benefit from municipal partnerships that align utility offerings and services with helping their communities to achieve decarbonization targets.

Idea in Action
Pacific Gas and Electric (PG&E), California’s largest electric utility, is one of the first to embrace this new idea with its recent solicitation for bidders to install 20 microgrids in high wild-fire risk areas. The solicitation exemplifies the “go local” idea. PG&E’s solicitation is the state’s integrated resource planning effort to procure over 700 MW of additional resource adequacy, or responsive generation capacity, for the state. It also addresses the negative implications of fire protection measures the state is employing, given the extreme and persistent drought conditions due to climate change.

The areas served by these microgrids will be connected to the main grid, but will have the capability of islanding at times when PG&E is shutting off power to avoid ignition from power equipment during high risk events, as defined by California’s new public service power shutoff (PSPS) program. The requirement is that these microgrids can operate for up to 4-5 days independently of the grid, and thus reduce the number of customers impacted by the PSPS shut offs by nearly one-third. The rest of the time, these resources will be used to support the grid’s resource adequacy needs and bolster system resilience. 

The Time is Now
The utility business model will change as transformation occurs and may occur sooner rather than later. Tomorrow’s utility may end up looking more like a service company than a traditional “poles and wires” company. Branding, operations, customer service, and other practices of the utility will evolve to meet the new energy commerce.

Utilities that embrace and encourage the transformation now will likely be more sustainable and profitable in the long run. There will be opportunities for growth, which will promote the longer-term health of the organization. In short, utilities may find that moving up the value chain to become a service provider can also be more profitable, sustainable, and rewarding for customers and shareholders.

[1] Navigant, Energy Cloud 4.0 Capturing Business Value Through Disruptive Energy Platforms. 1 Q 2018. p. 5.