How Open Platforms And Demand Flexibility Offer Utilities New Revenue Opportunities
The fastest-growing companies in America generate billions from platform business models that match suppliers directly with customers, free from the debt burden of ownership of physical assets. In spite of the success of such models, most electric utilities are heading in the opposite direction and maximizing capital investment as a vehicle to maximize returns. In an era of declining sales and explosive growth of distributed energy resources (DERs), utilities should look to other industries—from transportation to hospitality to apps to music—to figure out what a platform-based future looks like. That future is likely to have less capital investment and more focus on revenue opportunities that provide connection and integration of services for customers.
The predominant utility market strategy is a result of the incumbent utility regulatory framework, leading utilities to overinvest in the grid capacity, and underutilize distributed resources. Most investor-owned utilities create shareholder value every time they make capital investments, regardless of the value of that investment to society or in the market. In other words: utilities build it, rate base it, and get a regulated return on it. Regulators authorized this system under the assumption that grid directly and indirectly powers the economy, keeping rates aligned with sales.
In several states, that assumption is now under fire. For decades, we’ve seen a steady decoupling of GDP with growth of the grid, with primary energy consumption per dollar consistently falling. Added to that, utility revenue is likely unable to keep pace with rising peak power capacity costs, the estimated $1.5 trillion in costs to maintain and upgrade aging infrastructure, and the looming costs of costs to retire coal plants approaching end of useful life. Neither have utilities kept pace with the rapid reductions in installed DER costs and DER financial models leading to exponential growth in interconnected assets on the customer side of the meter. Consequently, utilities will be forced to recover billions of dollars of increasing infrastructure costs from a declining sales base, indicating retail rates will likely rise for customers.
First-mover states such New York, Hawaii, and California, are tackling this problem by investigating how to align utility investments with a more-efficient grid that relies less on peak power from centralized assets, and more on integrating DERs into enhanced planning, grid operations, and market operations. New York is positioning its electric utilities to serve as distributed system platform providers, shifting from traditional wires (assets) companies to enabling and providing innovative services via a platform.