The power industry is changing. Everyone knows that. Utilities now must determine ways to alter their business models to keep up with those changes — or customers will take matters into their own hands. Advancements in solar and other distributed energy resources as well as an explosion of new technologies have resulted in more affordable prices and increased adoption. This leaves utilities to determine how to best serve a constantly changing, diverse customer base.
"Younger people in particular want to be energy independent and have more control," said Paul Zummo, director of policy analysis and research for the American Public Power Association. "So how do we meet the needs of those individuals who are cutting edge? How do you develop programs to accommodate them?"
Some public power utilities are exploring new ways to accommodate changing technologies and customer preferences such as battery storage programs, installing smart meters and analyzing the data they produce, solar leasing options and load control initiatives to deter use during peak times. Some entities are already using gamification and apps to engage customers.
The Association is helping its members prepare for a new era in electricity through its Public Power Forward strategic initiative. The initiative seeks to help members prepare for the future of the energy industry by helping them determine whether they should revise their rate structures, services and operations — as well as when and how to do so.
"Under our Public Power Forward initiative, we are researching industry innovations and educating community-owned utilities about new ways to continue meeting customer demands, including distributed energy resources, energy storage and energy efficiency," said Delia Patterson, vice president, regulatory affairs and general counsel for the Association. "The initiative includes a whole toolbox of business, policy and technology resources that utilities can use in their own business models. We also encourage communities to connect, collaborate and work together."
Indeed, public power utilities are already leveraging new technologies and making incremental changes toward cleaner, more efficient and flexible grid structures.
"Public power has longstanding experience in energy efficiency and demand response," Zummo said. "Many members have various programs to help customers cut down usage, and some have load control programs. Community solar is big in public power. One utility in San Antonio has a solar lease program. They install and own solar — through a third party — on customers' roofs. There also is some innovation in rate design."
The Association defined a Public Power Forward roadmap to highlight key milestones on the path to the future, the essentials for the journey, and the warning signs to look out for.
The roadmap was included in the Association's submission to the Smart Electric Power Alliance's 51st State Initiative, an effort to involve multiple industry stakeholders in creating equitable business models and integrating grid structures "to ensure that electricity is provided safely, reliably, efficiently, affordably, and cleanly."
Utility Business Models
In its roadmap to the future, the Association states that it expects many of its members will remain largely anchored in today's cost-of-service based utility business model, characterized by utility ownership and operation of electric power generation, transmission, and distribution assets. Customer relationships will remain largely one-way, with the utility providing the entire energy requirements of its customers, with little or no direct day-to-day interaction.
Along with today's business model, the Association's roadmap includes descriptions of three other models provided by the Sacramento Municipal Utility District:
One model envisions an evolution to a full distribution service provider that procures and sells distributed energy resources, as well as other customized services, to its customers.
Under a second model, the distribution utility becomes a platform provider and distribution system operator that facilitates connecting DER providers and other energy service providers to the customer.
A third model involves a pure poles and wires business with no relationships with end use customers.
The Association expects that its members will make a variety of choices along a continuum of alternatives. Some will also act as platform providers to facilitate customer access to high quality third party service providers.
The public power 51st state should retain key elements of current industry structure for production and delivery, with modifications to facilitate the development of modern, efficient energy resources — including distributed energy resources, utility and community-scale renewables, traditional supply resources, and customer-focused energy efficiency and demand-side management programs.
Individual communities will make very different choices, based on the available economic alternatives and the community's preferences, as well as state and federal regulatory directives, it said.
10-step Action Plan for Transition
How does the utility decide what to do and map out a strategy to get there? The roadmap points out that the transition to the future state requires recognizing the real economic costs and risks of alternatives — and reflecting them in utility rates and service offerings.
Customer interests must be aligned with those of the utility and third-party suppliers at the grid edge and wholesale/bulk power levels. Utilities must capture the benefits of DER integration and develop business and operational technology infrastructures to sustain offerings over time.
The Association is helping members consider modifications to the public power business model to adapt to the changes they face and provide the enhanced retail services their customers want, such as distributed generation — including rooftop and community solar — demand response, electric vehicle charging, energy storage, and energy efficiency, while ensuring that power remains reliable and affordable. The roadmap recommends a 10-step action plan for utilities to prepare for the future.
1. Scope Out External Forces
Consider the relative price of alternative power supply options and forecast load growth in the community. Identify national, state and local policy goals and requirements, such as Renewable Portfolio Standards and infrastructure security and resiliency.
2. Identify Customer and Community Preferences
Know what customers want. We all live in a Google/Amazon world, but Kansas is not California. Pocketbook issues weigh heavily on many public power communities, which may make their risk preferences and interests in electric restructuring quite different.
3. Manage Utility Risk
Assess utility strengths and weaknesses and develop a risk management strategy that manages the utility's cost curve, price competitiveness, and financial risks, including policy choices (e.g., commitments to serve low-income customers) and potential stranded costs that may limit options going forward.
4. Have a Plan for Enhancing Grid Infrastructure
Utilities must integrate external factors, community preferences, and risk management into a community-specific plan that enhances the grid for improved efficiency and flexibility.
5. Develop New Customer Services
Plan and evolve new customer services — a la carte "opt in" services such as conservation and load management, back-up power supply, power quality, and microgrids for reliability and integrated energy services. These services may be offered at no cost or on a fee for service basis.
6. Structure Business Partnerships
Develop new ground rules and relationships for behind the meter services integrated across the "grid interface" into utility operations and aligned with the interests of the customer, the utility, and the third-party service provider. Work with joint action agencies that may provide these services or help arrange third party contract support.
7. Leverage the Community Connection
Benchmark supply options, including community solar and private solar against utility-scale alternatives. Leverage the benefits and mind the challenges that come with being community-owned. Factor in the longer time for decision making as well as lower capital cost balanced by smaller scale and lower risk tolerance. Explore what community resources are exclusively accessible such as brown-field sites for solar development.
8. Distribution System Modeling, Planning and Operations
Explore the benefits and costs of integrating customer DER into real time utility operations. Customer-side DERs may avoid the need for some distribution system investments by reducing peak loads on certain circuits. However, a high customer DER future will require a technology plan to manage increased variability. Capturing benefits from a high DER future requires automation and moving to the smart grid.
9. Educate and Engage with Customers
Allow customers to engage when and how they need and want to — or to not engage if they so choose. Day-to-day outreach through customer service is the most effective. Find ways to engage them at key decision points such as installing new appliances, buying an electric vehicle or changing out a thermostat.
10. Rethink Rate Design
Ratemaking must ensure comparability and non-discrimination across customer classes, simplicity and economic efficiency, avoiding regulatory complexity and large unsustainable subsidies; stability, and proper risk allocation.
The key challenge in the future state is to determine how to bundle and unbundle a service that for most end-use customers is a very simple, homogeneous product — continuous electricity supply at 110 volts, 60 cycles per second. Supplemental services will be provided on an opt-in/fee-for-service basis. The Association anticipates that these new services could be a significant source of new revenues, but they will still be small relative to revenues from electricity sales.
Innovation in Action
Many public power utilities are well on their way to innovate and keep up with the changing power industry. Sterling Municipal Light Department in Massachusetts is a prime example. In 2012, it reviewed and streamlined rates and customer rate classes — reducing the number of rates from 32 to 11 and discontinuing rates that affected just a few customers. As a result, residential rates were reduced, but some commercial and industrial rates were increased.
"Because our overall C&I rate had declined between 2010 and 2012, the increase was still 15 percent to 18 percent less than what those customers paid in 2010, making the transition much easier," said SMLD Manager Sean Hamilton. "We made a great effort to get out and meet with customers — especially to those the change affected the most — to explain the rates. This led to very few, if any, complaints when the new rates were rolled out."
SMLD's new rates are in line with current technology, including net metering and off-peak rates — both of which are an effort to provide fair rates to all customers. Prior to implementing those rates, some rates were unfair because they credited solar customers back the full retail rate, which included energy, transmission and distribution. Now, it only credits the on-peak average energy rate for the previous month and the transmission.
"We do not credit the distribution cost because we still have to maintain the distribution system for that customer, and otherwise we shift costs to other rate payers. When I explain the reasoning to solar owners, they may not agree, but they understand," Hamilton said.
SMLD also implemented advanced metering infrastructure — smart meters — which reduces meter reading to 1.5 hours to read and bill two cycles. Previously, it took 23 days to manually read the meters, but automated meter reading brought that down to six days. AMI also allows the utility to be notified of outages immediately, and to identify peak-use periods and resolve complaints of high bills because it can identify usage patterns.
In 2011, Johnson City Power Board in Tennessee begin deploying smart meters as well, and it is now the top tool used for managing its distribution system. "Our board of directors had the foresight to understand the impact of the technology ahead of the curve," said Timothy Whaley, public relations and government affairs director for JCPB.
Smart meters allow JCPB to more accurately bill, as well as make long-term capital investment plans based on data received in real-time. Using that data, it knows where systems need upgrading, where demand is growing and which customers are generating that demand.
"It also allows us to analyze and develop strategies for customers that are placing the biggest demand on the system, while developing rate products that are truly fair to all customers based on their usage and demand," Whaley said. Smart meters also allow JCPB to do demand voltage reduction, which can help offset peak demand charges.
JCPB uses that data in conjunction with SmartHub, a mobile and desk application that allows the utility to graphically demonstrate customers' their usage trends and history. It also helps teach customers how to better manage their energy costs.
"From the average residential customer all the way up to industrials, it allows us to be more than just a local power company, but a trusted energy advisor," Whaley said. "We can do analyses now that we couldn't do in the past because we have the essential data in hand."
SMLD also is a leader in Massachusetts for battery storage. In 2016, it constructed a 2MW/3.9MWHR energy storage facility — the first energy storage facility in Massachusetts and the largest at the time in New England — with NEC Energy Solutions. The system will be able to isolate from the main grid during a power outage and provide 12 days of emergency backup power to the police station and dispatch center. The system will support SMLD's distribution system, and is expected to result in a cost payback in seven years.
The utility also works with the town of Sterling to bring efficiency to the broader community. SMLD installed 3.4 MW of solar in town, which resulted in Sterling being ranked first in the country for solar watts per customer in 2013 and seventh in 2015.
In addition, SMLD works with the Sterling water department to read meters, which saves the town scheduling conflicts and allows it to receive high-usage alerts. The utility also replaced all streetlight fixtures in town and is installing new LED fixtures in three of the municipal buildings.
JCPB is working with its community as well, but in different ways. It recently began educating the community and leadership in Johnson City about the need to evolve from a public power electric utility to an authority business model, which would allow it to better react to marketplace opportunities and challenges. That effort helped enact legislation last year that allowed for the home-rule public power electric system to convert to an authority business structure.
Begin the Transformation
JCPB and SMLD are just two examples of public power utilities around the country altering their business models to better serve customers and keep up with advancing technology.
"Public power is a unique community and we are stronger when we work together — members should reach out to the Association and each other as we create a clear path forward," Patterson said.
The change vectors and starting conditions in the Public Power Forward roadmap "lay the foundation for a public power community grid modernization plan that includes new customer services; third-party business partnerships; advanced resource planning; integration of new resources (including DER) into distribution system modeling, planning and operations; consumer and community education; and changes to rate design and regulatory practices," the Association said.
READ MORE: Find the American Public Power Association's responses to the 51st State Initiative, as well as other visions, at sepapower.org/our-focus/51-state-initiative/phase-1/