Future Utilities May Get Out Of The kWh Business And Focus On Infrastructure


Hurricane Sandy is proving to have a durable impact on the minds of many energy planners. Not only is it referenced in the desirability for residential and commercial storage systems for providing emergency backup power – ideally in connection with solar generation – it now features in an ambitious plan to remake the grid.

The New York Public Service Commission has embarked on its Reforming the Energy Vision (REV) program that seeks to reorganize the state's energy industry and regulatory policies to produce a more resilient grid. Essentially, the culmination for the effort is creating a network of microgrids that would have the effect of putting distributed generation (DG) solar power on an equal competitive footing with centralized power plants.

James Tong, vice president of strategy and government affairs at Clean Power Finance in San Francisco, says a network of microgrids would function like the Internet in that the whole system would be more survivable. The idea is not to have a bunch of stand-alone islands, but to integrate them into the larger grid as well. While some system may go down in an emergency, other systems would continue to function, enabling power to be rerouted around trouble spots in a dynamic way.
‘What you are going to need is coordination within the microgrid itself and then coordination across the microgrids,’ Tong says.

Under the REV plan as it currently stands, utilities are the go-to actors for making this transformation happen. Tong says that while he appreciates the expediency of employing utilities in this role, he nevertheless has some issues from a public policy perspective.

‘Not only would the utilities favor their monopoly assets, New York is also thinking of allowing the utilities to rate base distributed resources, including rooftop solar,’ Tong says. ‘And you can see now a huge conflict of interest in that.’

Necessity and hurricanes may be mothers of invention in this regard, which is why New York is out in front nationally on this concept. However, Tong says the opportunities for creating energy markets at the distribution level extend far beyond disaster recovery and grid resiliency. ‘In the context of what is happening in New York, there is recognition that we want to use these distributed energy resources – whether it's rooftop solar, battery, electric vehicles – and be able to coordinate them in a way that maximizes the benefits to the grid,’ he says.

As Tong sees it, the challenge is in trying to coordinate all of these technologies. As he told a panel audience at the recent Solar Power International conference, without coordination, many of the new DG and energy-efficiency technologies will produce chaos on the grid. The idea there is to create a new role in which somebody coordinates the planning, deployment and real-time dispatching of the different resources. The question is, who gets to fill that role?

In a paper he co-wrote with Jon Wellinghoff, former chair of the U.S. Federal Energy Regulatory Commission and now a partner at Stoel Rives LLP, Tong proposes that the model used at the transmission level in the form of regional transmission operators and the independent system operators working under the supervision of the federal regulators be replicated at the distribution level with state regulators in the overwatch position.

Under this concept, a distribution system provider (DSP) – also called a distribution system platform provider – would be the independent entity that would fill the role of microgrid network coordinator. Looking about the industry, however, the utilities again seem to be the only parties placed to assume the DSP mantle. The key to making this work would be to disconnect the utility's power generation function from its transmission and distribution (T&D) infrastructure planning, maintenance and operations function.

The fact that utilities operate as a natural monopoly in the public interest is what makes them useful potential candidates as DSPs. As T&D forms a significant portion of a utility's existing expertise and responsibilities, it is well equipped to handle the physical requirements of the DSP. Also, public utilities are already subject to state regulation and, thus, are structured to have their earnings subjected to regulatory discipline in lieu of market discipline.

‘In the current system, the only way the utilities recover costs is through selling kWh,’ Tong says. ‘This is essentially a taxing mechanism. What we're saying is, 'Don't worry about how you recover the costs. Worry about how you make investments, because the regulatory body will ensure that you are able to recover the costs.'’

Tong says the goal is to not necessarily to get utilities to divest from power generation assets – though this could be helpful. The goal is to make sure the grid operator is a neutral party that truly serves the public and not just the incumbent utility. The issue, as Tong sees it, is whether the owner of the T&D infrastructure – really, in this case, the distribution infrastructure – can use its monopoly power to favor its assets over those of third parties.

One argument says the removal of generating assets from a utility's portfolio could be a blessing in disguise. While T&D assets remain functionally the same, except where they may be modernized by improved technology and intelligence, Tong points out that the power generation fleet is apt to be ‘ravaged’ by new DG technology coming online, with more to come as national priorities change.

But the blessings are not all due to avoidance of bad outcomes. Tong says in their new incarnation as DSPs, utilities will be able to reinvent their business models along the lines of Apple Computer and its App Store for portable devices, such as iPhones and iPads.

Under this analogy, the utilities would enable a marketplace of energy providers – central and DG – and energy-efficiency technologies that all make use of the hardware platform. The DSP would have the ability to vet the generators and technologies using the T&D infrastructure while receiving revenue through transaction and access fees.

‘If you use the iPhone analogy, what I'm saying is that at the end of the day, the T&D infrastructure is a piece of hardware,’ Tong says. ‘It's a big piece of hardware, but it is hardware. That hardware can host a marketplace of different providers.’

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