The Evolving Distribution Grid article
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The electric utility industry is undergoing a significant transformation towards a customer-driven model, leading to new business opportunities driven by changing expectations and technological innovations. Utilities in the U.S. are focusing on developing advanced customer and distribution platforms to enhance energy management options while ensuring reliability and cost-effectiveness. This evolution demands rethinking business models, enhancing customer service, and leveraging data analytics to facilitate a more distributed and resilient energy grid.
The Evolving Distribution Grid article
- 1. 34 E L E C T R I C P E R S P E C T I V E S | www.eei.org/ep34 E L E C T R I C P E R S P E C T I V E S | www.eei.org/ep34 E L E C T R I C P E R S P E C T I V E S | www.eei.org/ep The
- 2. As the distribution grid of the future evolves, new business opportunities for utilities will emerge— driven by changing customer expectations. T he electric utility industry is in the midst of a historical tran- sition toward a more customer-driven business powered by changing customer expectations and technology innovation. This change presents uncertainties and challenges for util- ities across the world, and requires utilities to re-think the business models and regulatory strategies needed to achieve success through this evolution. In response to this transition, utilities in the United States are focusing their strategies on building 21st-century customer and electric distribution platforms that create superior value. The overall objective is to enable customers to take advantage of new products and services in energy management and distributed generation. Ide- ally, these “utility of the future” business strategies will ensure that utilities remain attractive investments by transitioning successfully to a service-based world. JANUARY | FEBRUARY 2015 35 GRID DISTRIBUTIONDISTRIBUTION BY PAUL DE MARTINI
- 3. 36 E L E C T R I C P E R S P E C T I V E S | www.eei.org/ep Paul De Martini is the former chief technology & strategy officer for Cisco’s Energy Networks business and vice president of advanced technology at Southern California Edison. He is currently a visiting scholar at Caltech and an industry consultant. regulatory, and competitive risks,” ac- cording to a 2012 Ernst & Young sur- vey of 100 global corporations. Many residential customers have similar concerns about the impact of electric bills on their monthly budgets and service reliability, as noted by several recent national surveys. This follows Best Buy’s 2010 household survey that found 36 percent of customers were interested in buying products and services that enabled them to protect their home both financially and physically. Not surprisingly, the focus for successful residential home energy management, solar photovol- taic (PV) systems, and backup gen- eration marketing is to tap into this value proposition of lower bills and/ or improved power reliability.There is not one customer solution, but rather a need to offer differentiated, person- alized services designed for specific customer segments. Itisclearthatbusiness,government, and residential customers will seek to optimize their service between Evolving Customer Expectations Businesses across all sectors are fac- ing the challenge of responding to well-informed customers who have rising service expectations. As J.D. Power noted in 2014, “Consumers are becoming more familiar with a higher level of service in their daily activities with other service providers and, as a result, their expectations are rising.” Sometimes called the “ex- pectation economy,” these expecta- tions are fed by nearly unlimited and transparent information on the best, cheapest, most unique, and most rel- evant products and services via the Internet. (See Figure 1.) For the elec- tric utility industry, these increased expectations include reliability of service, lower cost, and eco-friendly supply options that embrace giving customers the control to make their own energy decisions. Business customers’ decisions on energy and related services “have be- come an integral aspect of managing key financial, energy security, brand, traditional utility services and emerging services in the market- place for active energy management, alternative energy supply, and reliability enhancement. Active Energy Management Customers are taking advantage of greater access to information and automation to manage their energy spending. New technology from tradi- tional building automation and con- sumer products firms, as well as new entrants, are empowering customers to manage their energy use. Security firm ADT reported that 70 percent of all new customers are choosing its Pulse service, which includes home automation. Also, Google’s Nest has reportedly sold more than 1 million learning thermostats. These auto- mated systems, combined with in- formation from more than 50 million utility smart meters and customer sys- tems, enable customers to see their usage dynamically in the context of projected monthly spending along F I G U R E 1 INTERNET USE, 1995-2014 (% of American adults who use the Internet, over time) Source: Pew Research Center surveys, 1995-2014. 100% 14% 46% 66% 79% 87% 50% 25% 0% 75% 1995 2000 2005 20142010
- 4. JANUARY | FEBRUARY 2015 37 with options for reducing costs to fit within their monthly budget. Alternative Energy Supply Customers are seeking alternative distributed generation supply op- tions based on retail costs, reliability, and environmental objectives. Total net-metered rooftop solar PV systems exceeded 5 gigawatts (GW) in 2014, according to the Energy Information Administration (EIA). Growth increasingly will be due to reaching un- subsidized retail rate par- ity through declines in both technology and in- stallation costs, as well as improvements in solar cell efficiency. While not a direct supply option, energy storage is being bundled with rooftop solar PV to create more effective and resilient customer sup- ply options. Over the past four years, energy storage technology advancement has benefited from global research and development initiatives total- ing more than $7 billion. Firms like SolarCity and Sunverge are incorpo- rating energy storage batteries into their commercial and residential solar offerings. Also, sustained low natural gas prices have spurred a renewed interest in combined heat and power (CHP), particularly as part of micro- grid systems. In 2012, the White House announced an initiative to ex- pand CHP by 50 percent, reaching 120 GW in the United States by 2020. The economics of alternatives do vary greatly by utility service area based on local service factors, including appli- cable tariffs, regulation, federal and state subsidies, and individual cus- tomers’ perception of value. Reliability Enhancement Superstorm Sandy and other recent weather events have highlighted that the value of electric service to customers, communities, and local economies grows exponentially over time. Businesses and residential customers are taking actions to enhance their resiliency and reliability. Generac, the market leader, reports 16 percent average an- nual growth over the past ten years in residential and small commercial There is not one customer solution, but rather a need to offer differentiated, personalized services designed for specific customer segments.
- 5. 38 E L E C T R I C P E R S P E C T I V E S | www.eei.org/ep sensors, actuators, and connectivity are becoming ubiquitous—what is often referred to as the “Internet of Everything.” Cisco estimates that more than 50 billion things will be connected to the Internet by 2020. Every energy consuming, produc- ing, or storing device is increasingly connected. Not only are they becom- ing smart nodes on the Internet— they are becoming smart nodes on the electric grid. This convergence is creating an energy network that re- quires significant operational data management and analyses. Accord- ing to Bit Stew Systems, “a utility with two million smart meters in the field is inundated with approximately 750 million data elements each day”— that’s almost twice the number of global tweets daily. This is no longer a significant chal- lenge due to analytics driven by pow- erful algorithmic engines. The pace of information and control technology advancement is staggering. Comput- ing power and telecom bandwidth have increased more than 1,000 times during the past 20 years. However, the real driver behind transforming mountains of data into actionable information is the advancement in algorithm efficiency, which has advanced by roughly 30,000 times be- tween 1991 and 2008. As exemplified stationary backup generators primarily fueled by natural gas. Gen- erac also estimates about 3 percent of U.S. homes now have stationary backup generators and another 12 percent have portable generators. Additionally, a growing number of customers are pursuing micro- grids that can integrate energy man- agement systems (such as build- ing automation and industrial controls), clean onsite distributed generation, and backup generation to create improved resiliency. These customer perceptions and invest- ments suggest an opportunity to consider differentiated reliability services. Utility Business Models and the Energy Internet of Things D e v e l o p m e n t o f u n i q u e c u s t o m e r insights and energy production/consumption optimization skill sets is essential to future business models. Solar PV and energy storage advancements are chang- ing the traditional electric utility industry value chain, but sustained value will come from their optimization. Low-cost Low-cost sensors, actuators, and connectivity are becoming ubiquitous—what is often referred to as the “Internet of Everything.”
- 6. JANUARY | FEBRUARY 2015 39 Utilities are considering several options to pursue with customers and growing distributed energy resources markets. It is import- ant to note that while growth rates have been strong, the distributed resource opportunity is still at an early stage. There remains signif- icant potential to benefit from a more distributed and customer- centric system. Two general business options are taking shape, facilitating customer choice and providing enabling distribution system services. Facilitating Customer Choice Customers increasingly expect a range of personalized services en- abled by innovative technology— including options from their utili- ties. A 2013 Swiss Re survey showed that more customers would rather buy renewable energy from utilities than generate their own. In addition, several state commissions recently have recognized market gaps and the enabling role that utilities can pro- vide. Existing utility relationships with their customers provide tangible franchise value that hasn’t been fully explored to mutual benefit. Expand- ing utility service offerings, on a level and non-discriminatory playing field, can enable choice for all customers. Customer service team members, by Amazon’s recommendation engine and Apple’s Genius selec- tions, these innovations are enabling operational efficiencies, as well as personalized services, for customers based on unique insights.This emerg- ing “algorithmic economy” is directly applicable to advanced grid manage- ment and personalized, differentiated customer services. Emerging Utility Business Opportunities Value creation in today’s digi- tized global economy requires cus- tomer-centric thinking—thinking focused on customers’ needs and pri- orities—and the identification of op- tions through which these needs and priorities can best be met. Custom- ers’ distributed resource adoption pathway is becoming clearer. Fun- damentally, more customers are self- optimizing their energy costs and reliability; becoming prosumers— both consuming and producing energy; and actively providing ser- vices to manage distribution and bulk power systems directly or through services firms. This evolution is mir- rored by opportunities to evolve the distribution system capability and utility operations to enable integra- tion, optimization, and market facil- itation services. processes, and technology represent the foundation for an effective plat- form for serving large numbers of di- verse customers. In fact, as recognized in the recent New York State Public Service Commission “Reforming the Energy Vision” (REV) proceeding, these capabilities represent a signifi- cant asset that have inherent econo- mies of scope and have already been paid for by customers. Utilities can become effective marketing channels and provide service support for a wide range of utility and third-party prod- ucts and services. This will, however, require partnerships with competitive technology and services firms. Retail banking, for example, has transitioned successfully to offer customers a wider range of services and provides an effective marketing channel for third- party products. The evolution of utilities as facil- itators of customer choice begins with enhancing customers’ decision- support capability and empowering their decisions about energy budget management and electric service reliability. This includes powerful an- alytics that leverage a combination of the customers’ data, utility oper- ational data, public data, and rele- vant commercially available data. These decision-support and budget- management tools would be available to customers on any computing plat- form, particularly mobile. And these services could be expanded through social media to create communities of interest and lay the foundation for digital business opportunities. Concurrently, a utility could of- fer customer-to-market facilitation services. This includes developing an Internet shopping portal to facil- itate customer access to third-party services firms—similar to what por- tals such as Expedia do for travel. A few utilities already are launching revenue-generating sites to facilitate customers’ ability to shop for and compare offers on retail energy pro- viders, distributed energy resources, and back-up generation. Also, the ability to originate financial services
- 7. 40 E L E C T R I C P E R S P E C T I V E S | www.eei.org/ep distribution operations, plus the re- latedtransactionmanagementservices. Providing Enabling Distribution System Services As a more distributed future unfolds, the distribution utility naturally can become a more valuable link between customers’ resources and bulk power markets. Utilities have an opportunity to profitably develop their existing single-purpose distribution systems into open platforms to enable seam- less integration of distributed energy resources (DER) and independent microgrids. Additional investments in more advanced grid and operational technology and related grid designs for distributed resource integration are needed, as well as new opera- tional responsibilities and market- and process any payments could be valuable to third-party providers and finance firms. Taking this further, utilities could become a marketing channel for third parties by leverag- ing existing workforce bandwidth to originate leads and sales—and bene- fit those customer segments that are too expensive for competitive firms to access profitably. For a number of utilities, develop- ment of distributed generation assets for customers through community solar or onsite resources is an attrac- tive option. Ultimately, a segment of customers will want an energy- optimization service offering. This could include managing customers’ distributed resources to achieve bud- get objectives and providing services back to the bulk power system or enabling services to facilitate distrib- uted resource services. The electric distribution system is a valuable asset that can be evolved into an enabling platform that cre- ates significant value for customers, services firms, and utilities. The in- dustry is currently investing to en- hance the electric power grid to meet the needs of our 21st-century econ- omy. PG&E, like other utilities, has incorporated changes in distribution infrastructure to improve safety and reliability, including investments in larger distribution wire sizes, trans- formers, and automation to help enable integration of distributed resource at scale. An open platform builds on these current investments through more advanced technology to evolve
- 8. from the traditional closed, single- purpose system to a more open, flexible, operationally visible, and resilient platform that can inte- grate distributed resource growth. Such a distribution platform may fully enable the synergies from electrification of transportation and convergence with water systems. Caltech estimates another $100-$200 billion in utility investment may be needed through 2030 to address this added capability. To provide enhanced reliability for select customers and/or commu- nities, utilities may offer expanded grid-based premium reliability services through premium grid reliability infrastructure, including utility microgrids. A segment of customers is clearly seeking, and willing to pay for, premium reliability services. Differentiated reliability services on the grid-side of the meter are an option for utilities to consider as an alternative for customers doing it themselves. Aside from traditional circuit reconfiguration, dual feeds, and undergrounding, utilities may develop distributed assets or micro- grids on the grid-side of the meter. The current microgrid market is highly fragmented and ill-defined— presenting an opportunity for utili- ties to take a lead in providing pre- mium grid-based reliability services to those customers willing to pay. Advanced distribution system operations capabilities will be required to manage the bi- directional power flows from large numbers of distributed resources across the distribu- tion system in a safe and reliable manner. In par- ticular, this will require additional functional responsibilities for utility distribution system opera- tors, and they will actively coordinate safe and reliable operation of the electric system with JANUARY | FEBRUARY 2015 41 The electric distribution business has tremendous business opportunities into the future based on becoming the platform for customer value maximization. transmission system operators and balancing authorities. As recognized in New York’s REV and California’s “769” proceedings, central aspects of the emerging distribution system operator are a natural and desirable extension of a utility’s core business. This will likely require state regula- tory operational standard-of-conduct protocols similar to Federal Energy Regulatory Commission standards. Ultimately, if distributed re- sources reach the scale envisioned in places like New York or California, there will be a need for transaction- management services to facili- tate a large number of multi-party micro-transactions across a dis- tribution system that interfaces with wholesale markets. The size of individual DER transactions will be very small and involve complex terms that standard billing systems don’t accommodate. This could result in many tens of millions of unique transactions annually, each worth less than a dollar. Back-end management of these transactions is needed to facilitate scheduling, settlement, and clearing among the parties based on the corresponding physical flows across the distribution to transmission system. These ser- vices are analogous to transaction- management services needed for online purchase of digital music or videos and the related royalty and jurisdictional tax settlements. The Distribution Grid of the Future Value creation in today’s digitized globaleconomystartswithcustomer- centric thinking—particularly in- sights into customers’ needs and priorities, as well as decision fac- tors. This is essential as customer interaction with the power system is becoming more active with dis- tributed resource adoption and energy management systems. This means that not only are cus- tomer insights desirable to deter- mine new business opportunities, they are necessary to manage the evolving grid. Utilities increasingly are leveraging these insights and using future scenarios to assess new business opportunities as well as potential exposure to stranded infrastructure investment. Migration from status quo to any future busi- ness model is accomplished in in- cremental steps through roadmaps. Each step on a roadmap represents a necessary evolution in business strategy, regulation, technology investments, and organizational capabilities. Investment plans will necessarily align with customer needs, regulation, and the pace of technological change. The electric distribution business has tremendous business opportuni- ties into the future based on becom- ing the platform for customer value maximization. Investment choices in the distribution platform business versus services to facilitate customer choice are not inherently mutually exclusive. There are important regu- latory questions to consider. But, as discussed in several states, these can be addressed in a manner that enables a level and fair playing field for utility and compet- itive services to the benefit of all customers. The elec- tric utility industry has an immediate opportunity to begin envisioning its business as an enabler of customer choice and public policy.