Investor-Owned Utilities and the Distribution Revolution � Between the Ends of the Spectrum

To bring positive environmental change to the manner in which America powers itself, a debate rages over whether investor-owned utilities should be moved out of the way or should instead be the primary driver.  As a lawyer, fundamentally we are trained to look toward the middle ground.

In 2013, the electric utilities industry group Edison Electric Institute described distributed generation, which refers to small-scale cogeneration or electricity generation systems installed behind the customer’s utility meter, as the most significant threat to utilities’ business models and financial health.   Between demand side management (DSM), demand response, energy storage, and behind the meter generation from small scale systems, the question has been posed whether the fundamental business model of the regulated, investor-owned, monopolistic public utility is threatened.  The future, however, is already here.

On one hand, many critical thinkers and entrepreneurs welcome our new, distributed overlords – the freedom where homes and businesses may “cut the cord”.  On the other hand, economists and industrialists fret the disruption to a core sector of the economy, and one from which all other business flows (i.e. who keeps the lights on?).

When Forbes magazine describes the “death spiral”, its concern is the utilities’ ability to secure financing for capital investments.  I don’t share this concern.  In volatile markets, there remains no steadier business model than a company who may calculate its revenue “requirement” and include within it a set rate of return based on the explicit premise of attracting sufficient capital.  

When folks like Elon Musk describe Tesla’s plans of a proposed “gigafactory” to produce the batteries needed to make more affordable electric vehicles, they conceive of a significant increase in electricity that can be stored on a distributed scale.  To wit, building on fundamental changes to California’s energy system driven by closed nuclear plants and widespread solar adoption, that state last year adopted a procurement requirement of investor-owned utilities to acquire more than 1,300 Megawatts (MW) of mostly distribution-level energy storage technologies.   

Here in Colorado, the Public Utilities Commission has considered this year the fundamental success of energy efficiency programs, which by the standard measure of performance have precluded (or avoided) the necessity to build at least one, and likely several, new power plants since 2008.  As solar penetration increases in Colorado, the Commission is now considering the extent to which solar generation will receive support from the utility in the form of net metering and renewable energy production payments, or RECs, because of the runaway success that industry is experiencing.

While the traditional utility model has already been disrupted by demand side management and the solutions provided on a meter-by-meter basis, there is room for growth.  It will take time to integrate the widespread, small storage possibilities that EVs and batteries bring to the table of grid management.  In the near term, these technologies should be boons to the traditional revenue model of utilities, not only because of increased sales, but also because electrification of the transportation sector is the fastest way to reduce overall carbon emissions in Colorado and other states with renewable energy standards in place.  Additionally, small scale technologies cannot match the economic and environmental heft brought on by 100+ MW tranches of wind, solar, and hydro technologies.  Other clients of this firm have big plans for carbon sequestration and storage which can only be leveraged economically when 3 million plus customers are footing the bill.

In other words, news of the utilities demise has been exaggerated.  And I posit that the large investor- owned utility model has inherent value in its ability to leverage millions of customers’ buying power.  When the public wants to tackle climate change, as we loudly have proclaimed in Colorado, the investor-owned utility can invest a billion dollars in over 3 gigawatts of wind.  That wind in turn has already sounded a death knell for large fossil fuel plants that must run at a high capacity factor to break even.    

It is also true that solar, DSM, demand response, and other behind the meter technologies are not only here to stay, but that they will become ever-more sophisticated and affordable.   The utility model that seeks to fight this change is a losing proposition, as well it should be.  Controlling load growth and producing large amounts of clean energy are the future.  The utilities must learn to live in that world, and absorb the concepts of storage and distributed generation as part of that reality.