The Future State: Part II - Energy Central
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Electricity Matters
Paul A. DeCotis
The Future State: Part II
C
ommunications technology, smart end-to-end digital product solutions necessary
devices and controls, cloud hosting to improve operations and the customer and
and computing services, and grid-edge employee experience.
technologies are challenging the utility industry
business model as we know it today. Many The low-cost of market entry for competitors
utilities are considering merging information
offering electricity as a commodity or as a
technology (IT) and operations technology (OT)
service are challenging the industry’s business
departments recognizing that current siloed
organizational structures are not agile nor model and regulatory paradigm’s, creating
responsive enough to meet rapidly changing some confusion among constituents.
needs. Utilities experimented with running “IT
as a business” in support of business needs Cost-of-service rate regulation, concerns
over the last decade, but because of continued over energy affordability and equity, and
departmental and leadership separation, little aggressive climate and clean energy goals
changed. Separate budgets, priorities and give regulators pause when considering
governance of large transformational projects utility requests to invest billions of dollars
continues to impede implementation of the in capital to modernize the electric grid
and grid operations. Under current cost-of-
service regulatory paradigms, most all risk is
Paul A. DeCotis (pdecotis@westmonroepartners. transferred from investors to customers for
com) is senior partner of the East Coast Energy &
all prudently incurred investments and costs.
Utilities Practice for West Monroe LLC. Previously,
he oversaw the Long Island Power Authority’s (LI- Competitors offering commodity services shield
PA’s) market policy, including participation in the customers from some risks and expose them
NYISO, PJM, and ISO-NE regional transmission or-
to other risks. The low-cost of market entry for
ganizations and interactions with the Federal En-
ergy Regulatory Commission while vice president competitors offering electricity as a commodity
of power markets and managing director at LIPA. or as a service are challenging the industry’s
He also was a founding member of the Eastern In- business model and regulatory paradigm’s,
terconnection States Planning Council. Prior to this,
DeCotis was energy secretary and senior energy ad- creating some confusion among constituents.
visor for two New York governors. No market or industry model is perfect in
**The author would like to thank Simon allocating risks and returns but variations of
Weishaeupl, consultant at West Monroe for
research support and talking through aspects of the current cost-of-service paradigm might
this column. offer some advantages to both investors and
customers.
February 2022 Climate and Energy DOI 10.1002/gas / © 2022 Wiley Periodicals LLC 27Key to reimagining the industry business for regulators to approve or signal intentions
model and the art-of-the-possible include to approve prior to investment being made
end-to-end digitalization and visualization or as investments are staged. For example,
of data in utility IT/OT ecosystems, including when a utility is committing to building new
3-D digital twins, machine learning, and power generation, regulators will agree on
predictive and prescriptive analytics. Data the project need assuming all other cost-
integrators are pursuing a 360-degree effective alternatives were considered,
view of utility constituents, including signaling the utility will be allowed to recover
utility customers, communities they serve, all project costs. Close monitoring and auditing
suppliers, intermediaries, and contractor of investment records will then determine
and professional services. Data scientists the prudency of investment as the project
and engineers are transforming large, proceeds.
diverse data sets into valuable insights. And The same is the case for advanced
data strategists are bridging the “insights- metering infrastructure (AMI) investment
to-action” gap leading to faster and more with regulators agreeing on the need for
targeted leveraging of information and AMI and then closely monitoring costs for
physical assets. The industry is changing and determination of prudency. Utilities typically
in 20 years or more it will not look like it does submit rate filings to change rates charged
today. If mined and used to inform decision customers, with test-year forecasts of year-
making, data can speak volumes about how ahead sales and costs and investment
a business is operating and how to improve recovery. Rates are in effect for a specified
performance and the constituent experience. period often a year or longer and some
Industry should listen closely to what data is costs are adjusted annually throughout the
saying. term of the rate agreement if highly variable
and difficult to predict. Rates of return on
investment are trued-up to the allowed return,
Cost-of-service rate regulation, concerns over so that utilities do not earn more or less than
energy affordability and equity, and aggressive what the regulator had allowed.
climate and clean energy goals give regulators
pause when considering utility requests to Cost-of-service regulation guarantees that
invest billions of dollars in capital to modernize utilities recover all costs associated with
the electric grid and grid operations. providing service, including a return on
investment, for all investments and costs
deemed prudently incurred by regulators.
UTILITY INDUSTRY BUSINESS MODELS
Cost-of-Service Regulation In a very simplified way, this describes
Cost-of-service regulation guarantees how rates are determined today. Variations
that utilities recover all costs associated to this regulatory regime exist on a state-
with providing service, including a return on by-state basis, as the utility industry and
investment, for all investments and costs regulatory paradigms differ by regulatory
deemed prudently incurred by regulators. body. Over the past 30 years, regulators
Prudency has previously been determined have been experimenting with various
after the fact, but it is more common now forms of incentive or performance-based
28 © 2022 Wiley Periodicals LLC / DOI 10.1002/gas Climate and Energy February 2022regulation.1,2 Through these policy directives PBR enables regulators to reform hundred-
and recommendations and by the manner year-old regulatory structures to meet
through which costs and investments are the challenges of grid modernization and
allowed to be recovered, regulators define a transforming power sector. Innovative
the broad business model parameters technologies are transforming the way electricity
within which utilities design and run their is generated, delivered and consumed, and how
organizations. Most all risk under cost-of- customers are increasingly empowered and have
serve regulation is borne by customers. new ways to interact with the electric grid. These
changes in the electric energy system, coupled
PBR enables regulators to reform hundred- with new customer capabilities and increased
competition from third parties to serve loads,
year-old regulatory structures to meet
means there is a need to reform traditional cost-
the challenges of grid modernization and
of-service regulation, and PBR is a step in this
a transforming power sector. Innovative direction. PBR provides a regulatory framework
technologies are transforming the way to connect goals, targets and measures to utility
electricity is generated, delivered and performance, executive compensation and
consumed, and how customers are investor returns. For utilities of all types, it is
argued that PBR can strengthen the incentives
increasingly empowered and have new ways to
of utilities to deliver greater value to customers.
interact with the electric grid. PBR incentive mechanisms (PIMs) are a
component of a PBR that adopt specific metrics,
targets, or incentives to effect desired utility
Performance-Based Regulation
performance that represent the priorities of
Performance-based regulation (PBR)
the regulatory jurisdiction. PIMs can be specific
compensates utilities for their performance
performance metrics, targets, or incentives that
against a set of pre-determined and agreed to
lead to an increment or decrement of revenues
set of metrics and outcomes with regulators.
or earnings around an authorized rate of return
Certain fixed costs are allowed recovery under
to strengthen performance in target areas that
traditional cost-of-service regulation (e.g.,
represent the priorities of the jurisdiction.3,4 PBR
investment in and return on assets in-service and
regulation assures that risk is allocated more
for which investments were deemed prudent). As
proportionally across the utility and customers
advanced digital technologies and more grid-edge
compared to cost-of-service regulation.
distributed resources are added to the grid, some
not owned by the host utility, more operational
For utilities of all types, it is argued that PBR
and performance uncertainty and risks are
introduced. PBR is intended to reward utilities for can strengthen the incentives of utilities to
exceeding performance expectations and having deliver greater value to customers.
them bear the risk of underperformance. Many
utilities today are under some form of PBR.
3
Littell, D., & Shipley, J. (2017, July). Excerpted from performance-
based regulation options: White paper for the Michigan public
1
DeCotis, P. A. (1989, December). Balancing shareholder and service commission. The Regulatory Assistance Project. https://
customer interests in incentive ratemaking. Electricity Journal. 2, 10. bit.ly/3dCObft.
2
DeCotis, P. A. (1990, April). Incentive regulation and the process of 4
Also see Performance Based Regulation Study Group Work
strategic planning. DSM Bidding: Challenges and Opportunities. Products 2020 NC Energy Regulatory Process. https://bit.
Synergic Resources Corporation: Bala Cynwyd, Pennsylvania. ly/3pFwLo5.
February 2022 Climate and Energy DOI 10.1002/gas / © 2022 Wiley Periodicals LLC 29Energy as a Service energy infrastructure investments has also
Energy as a Service (EaaS) is a been tested.
subscription-based model for energy service Ameresco employed such a model at the US
and bill payment similar to how customers Marine Corps Recruit Depot Parris Island, where
pay for entertainment streaming services— every new Marine Corps recruit East of the
whereby a customer pays a flat monthly fee Mississippi river goes for training. The project
for energy services regardless of usage, be included 21 energy conservation measures, a
it electricity or natural gas. For EaaS to be 3.5 megawatt (MW) combined heat and power
economically and environmentally sound, as plant with 3.6 MW of diesel backup, 6.7 MW
defined herein, it requires that all customers of solar photovoltaic (PV) generation, and a 4
enrolled are as efficient and energy self- MW/8 MWh battery energy storage system.
reliant as economically feasible. All cost- These infrastructure investments were tied
effective energy efficiency (EE) measures, together with a microgrid capable of fast load
demand management (DM) and distributed shedding in response to system contingencies,
energy resources (DER) would be installed and coordinating dispatch of conventional,
in a building for a customer to be eligible for renewable, and storage assets to allow the site
subscription service. Enrolled customers’ to maintain efficient, cost effective, and reliable
monthly energy bill would be less than operations.
their current bill because all cost-effective
energy savings and generation measures
Energy efficiency as a service is a
have been installed. Customers pay back
tried-and-true model, in which energy
the initial cost of EE and DER to their service
provider through the monthly streaming efficiency improvements in buildings are
charge. To ensure fairness and equity with paid for upfront by an energy service
all customers having access to EaaS, cost- provider and repaid by customers from
effectiveness should be measured against energy savings over a specified contract
marginal energy costs not retail energy
period. Expanding this model to a full
costs—so no cross subsidization from non-
participating customers to participating
complement of energy infrastructure
customers exists. investments has also been tested.
While not a new concept but new to the
energy industry, challenges to implementation “In the event of loss of service from
might include lack of understanding of the the utility, or in advance of events such as
benefits to customers and service provider, tropical storms and hurricanes, the Depot
potential lack of retail providers or third parties can ‘island’ from the utility to self-supply
interested in offering EaaS, lack of sufficient its energy needs. Ameresco sourced all the
capital lending and financing, and DER siting capital for the project, the customer did
and permitting where applicable. Energy not have to make any payments until the
efficiency as a service is a tried-and-true model, system was up and running and achieving
in which energy efficiency improvements in the agreed upon performance indicators.
buildings are paid for upfront by an energy The payments were funded from the energy
service provider and repaid by customers from savings resulting from the project. At the
energy savings over a specified contract period. other end of the spectrum, Ameresco has
Expanding this model to a full complement of a project with the London District Catholic
30 © 2022 Wiley Periodicals LLC / DOI 10.1002/gas Climate and Energy February 2022School Board at their John Paul II secondary Anecdotally, the cost of preventing severe
school in Ontario, Canada, installing damage to the electric grid and operations is
around 800 kilowatts (kW) of solar PV, a 2 lower than the cost of recovery, as many utility
MWh battery storage system, and a large grid modernization business cases across the
geothermal heating and cooling system. This country demonstrate. Technologies that are
is tied together with a microgrid controller, changing and have the potential to further
which allows the school to isolate from the disrupt the industry include and are not
utility during outages. Ameresco owns and limited to:
operates the assets, and the school buys the • Battery storage operating as a load
output from Ameresco over the course of the modifier, demand response resource and
service agreement.” 5 Expanding this model generation resource
to a flat fixed monthly payment regardless of • Electric vehicles with two-way power
energy use, since a facility is as efficient and flows drawing power when charging, operating
self-reliant as it can be is not a far stretch. as a load modifier or demand response
There are many complications to this model resource as necessary, and selling power back
that can be addressed through contract to the grid when called upon
terms and conditions to fairly allocate risk, • Fuel cells used to electrify buildings and
that go beyond the intention of this column. for use in long-haul and heavy-duty trucking as
EaaS shifts certain risks away from the utility a competitor to electric vehicles
to the third-party provider and customer. • Heat pumps to electrify buildings
This is similar to the Texas ERCOT market • Microgrids with stand-alone electric
model in which utilities are not the provider generation resources and controls to manage
of last resort. Instead this obligation rests resources and loads, and island from a host
with the third-party service provider and the utility, and or supply power to a region or
utility simply maintains and operates the industrial park independent of a host utility
transmission and distribution grid. with no connection at all
• Distributed energy resources located
DISRUPTIVE TECHNOLOGIES closer to load including renewable energy
TRANSFORMING AN INDUSTRY resources like terrestrial and offshore wind,
Innovations in technology and commercial solar, small modular nuclear reactors, and tidal
scaling in size and market penetration are power to name a few.
creating new revenue opportunities for As an example, over the last few months,
utilities and third parties and presenting OVO Energy has been running a nationwide
greater risk to utility operations to the extent vehicle to grid (V2G) pilot funded by the
they are not able to control the resources. Office for Low Emission Vehicles (OLEV) and
First and foremost, utilities are charged with the Department for Business Energy and
providing reliable power at fair and reasonable Industrial Strategy (BEIS), in partnership
costs. Resiliency is now taking center stage with Innovate UK. OVO Energy installed
as well, as weather events become more 320 bi-directional electric vehicle chargers,
frequent, severe, and costly to recover from. manufactured in the UK by Indra Renewable
Technologies. With OVO’s V2G tariff, EV
drivers have saved up to £800 a year on their
5
Ali, Y. (2020, November 16). Excerpted from Transfer the Risk
with Energy as a Service; Microgrid Knowledge. https://bit. bills selling power back to the grid—a decent
ly/3oEi4SL. return on investment for just letting your car
February 2022 Climate and Energy DOI 10.1002/gas / © 2022 Wiley Periodicals LLC 31sit idle.6 Examples like this are available for Rethinking the role of utilities and third
each of the technologies listed above. parties, and the role of utilities as the provider
of last resort having the legal obligation to
Rethinking existing business models and serve customer power needs is important.
Take Texas for example and the ERCOT market
regulatory paradigms given the plethora of new
where no such requirement on utilities exists
and emerging disruptive technologies, aggressive
to be the electricity provider of last resort.
clean energy and decarbonization goals, and But utilities do retain the wire connection to
the digital revolution and possibilities they bring buildings to ensure everyone has access to
about, warrants a serious consideration of better electric service. California has a regulatory
alternatives than we have today. proceeding underway to consider this same
issue and role of utilities in this new market
construct.
CONCLUSION
Disruptive technologies are becoming Rethinking existing business models and
increasingly competitive as technological regulatory paradigms given the plethora of
innovations are discovered and market new and emerging disruptive technologies,
penetrations increase. State and federal clean
aggressive clean energy and decarbonization
energy and decarbonization goals when
coupled with the available technologies to meet
goals, and the digital revolution and
these goals makes for an interesting market and possibilities they bring about, warrants a
regulatory dynamic challenging the status quo. serious consideration of better alternatives
New market entrants challenge the utility business than we have today.
model and regulatory paradigms. Whether
regulars subscribe to the cost-of-service, PBR, or In the new world of energy services
EaaS model for cost recovery and risk allocation, provision, we will see a convergence of IT and
they are being challenged to meet statewide and OT systems more as a necessity to speed
federal clean energy and decarbonization goals. service delivery and time to market for
technology and service innovations.
In the new world of energy services provision, Convergence will break down siloed IT and OT
we will see a convergence of IT and OT systems departments, improve efficiencies by reducing
development and operational costs, and
more as a necessity to speed service delivery
improve compliance reporting. Cyber security
and time to market for technology and service
concerns and safeguards will require more
innovations. Convergence will break down siloed focus with attention paid to systems
IT and OT departments, improve efficiencies by segmentation and isolation to mitigate
reducing development and operational costs, damages from a security breach. Improved
and improve compliance reporting. automation and data analytics from
convergence will improve visibility into
operations and compliance with service
standards. Several progressive utilities are
6
Topping, C. (2021, February 15). Vehicle-to-grid (V2G)
explained: What it is and how it works; OVO Energy. https:// already moving in this direction albeit
bit.ly/3y92amI. cautiously.
32 © 2022 Wiley Periodicals LLC / DOI 10.1002/gas Climate and Energy February 2022You can also read
