Charles Darwin is attributed as having said, “It is not the strongest or the most intelligent who will survive, but those who can best manage change.” Electricity systems around the world are rapidly changing. Renewable energy sources (primarily, wind, water, and solar) and storage systems (in the forms of batteries and hydrogen) are disrupting the traditional utility model that has operated for over 100 years.
By 2040, renewable energy sources will account for 30% of world electrical supply, according to BP Energy Outlook 2019. Economically disruptive, new energy sources include flexible demand, distributed energy generation, energy storage, and smart-grid, digital-control technologies. These factors collectively create new options for the provision and consumption of electricity services, regardless of jurisdiction. They cause utilities and distribution companies, large and small, in Canada and internationally, to reconsider their entire business model, which is historically predicated on economies of scale rather than on economies of scope and wider competition.
The right strategy to pursue depends on multiple factors relevant to jurisdiction. For example, those with primarily fossil-fuel-based generation could be facing a devaluation of assets―coal-fired, especially. Those with aging and ‘past-due-date’ transmission and distribution infrastructure face the conundrum of choosing between lower cost ‘like-for-like’ replacement and higher capital cost, lower operating cost smart technology. These are game-changing decisions that could transform those with minimal generation capacity into distributed energy producers.
Germany, one of the leading economies to embrace renewable power generation, illustrates this challenge best. Two of the country’s largest integrated utilities completely changed their structures in 2016, due to the rapid deployment of renewable energy to mitigate the impact of Germany’s increasingly stranded fossil-fuel and nuclear-generation assets.
Similar effects, both positive and negative, are seen in North America, with utilities like NextEra Energy embracing renewables and NRG Energy retreating from them. In jurisdictions, such as Ontario, where local-distribution companies (LDCs) are mostly downstream of producers, they can now become producers―along with their customers with distributed-energy resources (DERs), such as rooftop solar systems. Whether such DERs are grid-tied or paired with battery storage, behind the customer’s meter, this challenges the traditional role of the LDC―both with its main supplier and its customer.
Utilities that do not embrace these changes run the risk of being seen as laggards or, worse, increasingly obsolete to their customers. However, those that do transform can achieve growth with innovation―new business models and strategies that adapt to rapidly changing customer and market needs.
As power increasingly shifts to consumers, utilities will need to face key challenges head-on.
1) Lowering the cost of electricity in the face of aging infrastructure and a changing supply mix:
a. Provide efficiency incentives and behind-the-meter measures to mitigate electricity demand and drive smarter consumption;
b. Improve asset utilization by recognizing ‘locational and time value’ of electricity services to offset stranded asset risks (where demand growth cannot) or extend asset life.
2) Improving access to clean, green, and distributed renewable energy sources:
a. Improve grid flexibility and resilience to seamlessly integrate DERs before-the-meter;
b. Enable consumer-flexible approaches to integrate DERs behind-the meter.
3) Attracting consumers with better choices, costs, convenience, and control:
a. Redesign customer interfaces with omni-channel communication that enables new services (e.g., billing, payment, and metering);
b. Embrace digital controls to enable new services (e.g., smart appliances, blockchain, batteries-as-a-service, vehicle-to-grid, cost-saving alternatives, etc.).
4) Improving the regulation of LDCs to enable rapid development of efficient business models:
a. Provide incentives for multi-year investments in cost-efficiency, innovation, flexibility, and quality;
b. Provide a level playing field between traditional generators, network providers, and DERs with a combination of financial independence and transparency to avoid market power abuses;
c. Reward innovation and performance to balance investments in traditional operations, transforming pilots and collaborating in new customer channels and technologies.
5) Structuring the utility industry to drive rapid change without conflict, security, and privacy issues:
a. Improve the wholesale market design to integrate DERs, reward flexibility, and create a technology-agnostic level playing field, (e.g., demand response and energy storage combined with traditional generation);
b. Support widespread introduction of DERs, smart appliances, and dynamic-transaction markets with robust standards for cybersecurity and privacy in regulated, integrated, digital power networks.
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