Tough Road Ahead for Utilities Working to Improve Grid: Q&A

By Richard Stubbe, BloombergNEF editor. This article first appeared on the Bloomberg Terminal.  

Power providers and regulators in the U.S. are facing major challenges as the electrical grid evolves, the leader of the Smart Electric Power Alliance said. Customers are demanding more from the grid, technology is often moving faster than state agencies, and thousands of utility employees are nearing retirement age.

The challenge for all is “getting the policy and the business construct to evolve and allow the technology to flourish,” said Julia Hamm, president and chief executive of the Washington-based group. “We need a sustainable business model for the utility.”

SEPA is a technology-agnostic organization with the goal of a clean, modern grid, Hamm said. Its members include power companies ranging from American Electric Power Co. and Duke Energy Corp. to rural co-ops, private suppliers including ABB Ltd., trade groups including the American Public Power Association, and agencies including the California Energy Commission and the Electric Reliability Council of Texas.

Hamm said SEPA’s four priorities are utility business models; regulatory innovation, specifically at the state level; grid integration and system operations; and electrification of transportation. She took questions from BloombergNEF in a January phone interview.

Q: There’s been an impressive amount of change for utilities in the past 10 years, and they’ve become an exciting sector and industry. How would you rate their adjustment?

A: We’ve seen a real shift in mentality as customers have adopted new technologies. It’s here now, and we’ve got to embrace it. The number of utility CEOs who have been willing to come out and say we have to move to a carbon-free future is to me another sign that we’re at the tipping point. Utilities are recognizing they have to do things differently, and it does make utilities exciting again.

Q: What might slow down this movement?

A: The utility workforce has a real aging issue. The U.S. Department of Energy says 25 percent of employees in electric and natural gas utilities will be ready to retire within five years, and the Department of Labor estimates that half the workforce will retire within 10 years. We’ve got to be able to attract young smart talent to drive this change. There’s more work to be done to get the right talent into the industry, but the opportunity exists today in a way that it didn’t five to 10 years ago.

Q: Here’s a list of items that are important as the grid modernizes: efficiency, demand response, solar, storage, time-of-use charges, microgrids, and electric vehicles. What’s at the top of that list right now?

A: EVs are bubbling to the top. Storage is probably there with EV charging. Solar is still an important part of what we do, but for the most part the industry has figured out utility-scale solar. The next frontier, where there’s a real need for education and solution development, is around electric-vehicle charging networks and batteries.

Q: It’s fairly easy to say that utilities should harvest wind and solar power when they’re cheap, store the power in batteries, and then tap the batteries when power is expensive. What are the obstacles to actually doing that?

A: One is decentralized decision-making. Utilities used to decide about generation and placement of resources. Now the customer, together with third parties, is making decisions about adding solar and batteries and EVs, which also have batteries that can be used as part of the grid. The utility does not have visibility into all of these customer-sited distributed resources, which makes it very challenging to manage and balance the system. So creating that visibility is a challenge.

Q: Can that be negotiated between a utility and a consumer?

A: It can be. We’re making progress. We now have smart meters and smart inverters. There is a lot more capability available to ensure that the utility will have access to the data it needs. But we’re not there yet.

Another obstacle is designing rates to motivate customer behavior that benefits the entire system and not only the customer’s individual interest. Managed charging programs are a great example of this. Can we get to a point at which customers are willing to sign up for managed charging programs that give the utilities the ability to control the charging of their cars within certain parameters?

Q: The idea would be to discourage EV owners from charging when demand is high?

Correct. It’s a very regional equation. In California, where they have this excess of solar generation in the middle of the day, you want people to be charging their vehicles then. Each place or region needs to think about how to design the right structures to motivate the right customer behavior.

Q: The community interest is a resilient, reliable, reasonably priced grid that encourages efficient use. How do you change that equation to get away from dependence on kilowatt-hours?

I’m not sure there’s one single answer to that question. How the rates are designed is at the root of the equation, but we also have to think about how utilities earn returns. A good example is software as a service. Utilities are motivated to have in-house hardware for their IT needs because they can’t earn on using software as a service. What they’re allowed to put into the rate base is a piece of it.

Q: It sounds like the technology is ahead of our ability to take advantage of it.

Absolutely. That’s often the case. That’s why the utility business model and regulatory innovation are two of SEPA’s priorities. Technology is well along its way. Now it’s a matter of getting the policy and the business construct to evolve and allow the technology to flourish. We need to ensure that utilities aren’t just making money based on kilowatt-hour sales. We need a sustainable business model for the utility.

Q: How ready are state regulators for this shift?

They have a big lift in front of them. It’s a very challenging job, especially for commissioners who regulate more than one sector.

Q: How heavy are these legacy regulations? Would it be better to just go in and throw out the whole book and start over?

It’s an evolution, not a revolution. There are many other challenges that start with the way commissions are structured. Some commissioners have an advisory role, some have a judiciary role, some are a combination. States have different rules about commissioners’ ability to speak to one another.

Q: What’s the biggest of those challenges?

A: It takes so long for commissions to act on projects that utilities want to bring to customers. There are cases in which the technology is outdated by the time it gets through the approval process. Regulation is designed to slow things down and make sure you’re thinking about all of the consequences, but we believe changes can be made to speed the process that do not have to harm the intended purpose of regulation.

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