New Utility Business Models:
Response to a High Penetration
Renewables Future
ACORE Northeast Roundtable
Ron Binz, Public Policy Consulting
June 24, 2013 • New York City
• Thesis: Utilities are under great pressure
to change
– Aging plant
• Brattle Group: $2 trillion investment over next 20 years
– Tougher environmental requirements
• Criteria pollutants
• Greenhouse gases
• Coal ash
• Water restrictions
– Flat to declining sales of electricity
– New technologies
• Smarter grid
• Distributed generation: solar, CHP, micro turbines
• Electric vehicles
– Changing consumer requirements
• Disintermediation by third parties
– Weakened industry financial metrics
US Electric IOUs Rating History
1970 – 2010
4%
AA
AA
AA
A
22%
BBB
46%
BBB-
27%
A
AA
A
A
A
BBB
BBB
BBB
1%
Source: Standard & Poor’s, Macquarie Capital
• Thesis: Regulation may not be up to the task
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May not reward utilities for desired behavior
Society’s goals for utilities are changing; regulation is not
Progress on demand side, not so much on supply side
Lack of incentives for
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firm efficiency
clean energy investment
energy efficiency
innovation
– Rate structures need revision
– Balky process
– Examples of “poisoned” relationship
– Entire orientation is based on utility as seller of a commodity
Renewable Electricity
Futures Study (REF)
Exploration of High-Penetration
Renewable Electricity Futures
Available at NREL.gov
EPRI’s 2009 View
NREL’s REF Findings
•
Renewable electricity generation is more than adequate to supply 80% of total
U.S. electricity generation in 2050 while meeting electricity demand on an hourly
basis in every region of the country.
•
Increased electric system flexibility can come from a portfolio of supply- and
demand-side options, like flexible conventional generation, grid storage, new
transmission, more responsive loads, and changes in power system operations.
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The are multiple paths using renewables that result in deep reductions in electric
sector greenhouse gas emissions and water use.
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The direct incremental cost with high renewable generation is comparable to
costs of other clean energy scenarios.
Helpful fact:
The US summer peak electrical
use is around 800 GW.
Baseline Case
REF ITI Case
How does the assumption of an
HREF affect the business model?
 Much higher levels of variable generation at the bulk
power scale (affects utility organization, operations)
 Greater penetration of distributed energy resources
at the distribution scale (affects utility revenues, services)
 Greater need for flexibility in the grid components,
operations, and architecture (affects utility investment, operations)
 Much higher levels of energy efficiency (sufficient to
eliminate load growth) (affects utility role, services)
Utilities 2020
• Foundation funded
• Run by two former state regulators
named Ron
• Advised by board of experts
• Goal: to explore new business models
and advocate new regulatory models to
enable new utility business models to
evolve.
Advisory Council Members
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John Bohn
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– GlobalNet Partners, LLC
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Paul Bonavia
– Rocky Mountain Institute
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– Tucson Electric Power
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Ashley Brown
Ralph Cavanagh
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Sonny Popowsky
– PA Office of Consumer Advocate
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– NRDC
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John Nielsen
– Western Resource Advocates
– Harvard Electricity Policy Group
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James Newcomb and Lena Hansen
John Quackenbush
– Michigan Public Service Commission
Richard Cortright
– Standard and Poor’s
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Peter Fox-Penner
– The Brattle Group
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Lisa Schwartz
– Regulatory Assistance Project
V. John White
– CEERT
• Methods:
– Interviews with utility CEOs and leading states
regulators
– Evaluations of other systems here and abroad
– Dialogues with utility execs and commissioners
Interviews
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Paul Bonavia
– Tuscon Electric Power
David Eves
– Xcel Energy Colorado
Greg Abel
– MidAmerican Energy
Susan Story
– Southern Company Energy Services
Michael Yackira (five senior staff)
– NV Energy
Bob Rowe
– Northwestern Energy
Lewis Hay
– NextEra Energy
Ralph Izzo
– PSE&G
Tom King
– National Grid
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Colette Honorable
– Arkansas PSC
Susan Ackerman
– Oregon PUC
Phyllis Reha
– Minnesota PUC
Ellen Anderson
– Minnesota PUC
Joshua Epel
– Colorado PUC
John Quackenbush
– Michigan PSC
John Savage
– Oregon PUC
Jim Tarpey
– Colorado PUC
Ann Berwick
– Massachusetts DPU
Note: Organizational affiliations are shown for identification purposes only
What we’ve heard from utility CEOs:
• CEOs want a clearer, more consistent direction
from state energy policies
• Utilities have little incentive for innovation, firm
level efficiency
• Commissions need a better understanding of the
utility business and its needs
• Utilities want certainty on climate policy
• Utilities want healthier working relationships with
commissioners and staff
What we’ve heard from commissioners:
• A primary concern is with increasing utility rates
• Regulators are open to modifying the regulatory
model; looking for ideas
• Some commissioners are dissatisfied with the
adversarial process
• Many commissioners face severe barriers to
communications with stakeholders, and even
fellow commissioners
• Commissions have inadequate resources
December meeting of the “Tribal Elders”
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Peter Fox-Penner
Tom King
Ralph Cavanagh
Lisa Wood
Richard Sedano
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Ron Lehr
Ron Binz
Ashley Brown*
Jim Kerr*
Sue Tierney*
*Old enough, but unable to attend
Findings from the Elders
• The clean/efficient future is inevitable; utilities will need to adapt
business models to accommodate the transformation.
• Regulation must be reinvented to allow and induce utilities to
change.
• Load will likely be flat or declining in the future, but costs will not.
Need to move away from consumption-based models toward
service- and performance-based models.
• This transition is best done as a partnership, not a system that
attempts to bypass (leave behind) the utility.
Findings from the Elders, cont’d.
• There is an irreducible role for the utility as an “orchestra
leader,” a role very similar to the “smart integrator” role in Smart
Power. The UK has gone too far with industry disaggregation.
• Regulation needs to move toward “output” regulation that
rewards firms for outcomes, efficiency and innovation. The
group coalesced around a “revenue cap” model with incentives
for various outputs. (E.g., the UK RIIO model with decoupling)
• These recommendations should be robust across different
scenarios with/without wholesale or retail competition,
IOU/public utility structure, etc.
Motivations for a new regulatory model
“We need to align regulatory incentives so that healthy utilities
can pursue society’s broader policy goals in ways that also
benefit customers and shareholders.”
“Regulation has become confrontational, is often mired in
judicial process, and exists amid a charged political setting. It’s
hard to imagine a worse recipe for managing the transformation
of the utility industry.”
“A threshold question is whether state utility regulation will
evolve to enable the necessary industry changes, or merely
follow them, or worst, stand in the way.”
UK regulation focus:
Are we getting what we are paying for?
US regulation focus:
Did we pay the correct amount for what we got?
Three Potential Regulatory Models
• The UK “RIIO” model
– Price cap built on RPI-X
– Output regulation
• Reliability, Environmental, Innovation, Price, Efficiency,
Social Responsibility
• The “Iowa Model”
– Seventeen years of constant rates, settlements
• The “Grand Bargain”
– Comprehensive multi-year output-oriented deal
– Regulator led
Thanks for the invitation
I look forward to your questions.