By Estee Amana, MBA ’20
This article was written in response to a presentation given by Hannah Polikov, Director, Public Utility Commission Program, Advanced Energy Economy in an EDGE Seminar on Nov. 4, 2018 at Duke University’s Fuqua School of Business. This article voices one student’s perspective and does not necessarily represent the views of either Duke University or the seminar speaker.
Hannah Polikov, the Director of the Public Utility Commission Program for Advanced Energy Economy (AEE), was a recent guest at the EDGE Seminar speaking on “The Intersection of Energy & Environment Policy and Business.” An intriguing part of her presentation focused on the traditional utility rate formula and the impact this business model has had on technological advancement and service procurement in power utilities. With the traditional model, utilities earn money based on capital expenditure while other expenses, such as services, are pass-through. This model encouraged investment in capital-intensive projects and discouraged investment in services which do not benefit the bottom line. In response to this issue, some states have employed creative policies to encourage utilities to choose cheaper “non-wire” solutions (NWS) over capital projects, ultimately saving the customer money through lower rates. These policies allow the utilities to earn a profit on non-CAPEX solutions such as IT software and Distributed Energy Resources (DER) solutions1. Polikov used Con Edison’s NYC Brooklyn Queens Demand Management (BQDM) program as an example of this policy reform; similar programs are used in states like Illinois and California. As a former Electrical Engineer at a large engineering, procurement and construction (EPC) company that was heavily involved in the power industry, I began to wonder who were the winners and losers of this type of policy reform.
Technology: The policy reform encourages utilities to explore creative solutions to their problems outside of investment in infrastructure. The opportunity to adopt new technology while remaining profitable has the potential to transform an industry known for its reluctance to change. The reform also creates an opportunity for other industries to interact and serve utilities. This opportunity encourages innovation because the service providers know they will have a market for their expertise. For example, Con Edison’s website regularly posts RFPs for Non-Wire Solutions.
The Utility: Policy regulation gives utilities an alternative to the traditional approach of new construction; creating a more flexible, scalable and efficient environment. Utilities also now have the opportunity to use services that increase customer engagement. For example, they can now offer service contracts for Demand Side Management programs that will encourage customers to modify energy consumption habits, potentially reducing peak loads and preventing expensive expansions. Although these programs have existed in the past, policy reform allows the companies that are best at deploying such programs to do so while allowing the utility to reap part of the financial benefits.
The Customer: Ultimately, the cost of investment in CAPEX by utilities is borne by the customer. The decision to implement a more efficient, lower cost service reduces the rate paid by the customer. In addition to lower costs, the Demand Side Management programs will also enable customers to better manage their energy consumption, leading to further savings.
The Environment: NWS allows for the adoption of Distributed Energy Resources (DER) into the utility ecosystem – introducing clean energy solutions and storage into the grid. Rather than investing in expensive transmission line projects to transmit power from centrally located plants, utilities can rely on green DERs to meet capacity needs. An example of this is the Bonneville Power Administration (BPA) forgoing a $1 billion, 80-mile transmission line in favor of battery storage, flow control devices, and demand response.
Construction: As utilities become more efficient and choose service contracts over capital investments in new power plants, substations, and the grid, the construction industry suffers. Just like the power companies, many traditional construction companies were not prepared for the disruption of technology and are yet to adapt. Their bread and butter have been big infrastructure projects with their large margins. While some have tried to play in the new energy space, they have not been nimble enough to be competitive.
Security: The digitization, decentralization, and interconnection of smart devices increases the resilience of the grid, but also opens it up to cyber-attacks. We have seen cyber-attacks on businesses and government agencies and an attack on the grid could be devastating. Utilities need to ensure that with the adoption of technological solutions, the accompanying risks are addressed accordingly.
Economics: Some detractors of NWS believe that these solutions are just a deferment of eventual capital investment. In the article “Burning Questions for the Brooklyn-Queens Demand Management Program,” Benjamin Pickard suggests that although the project has saved New Yorkers money in the short run, rates will skyrocket after the 10-year term. As such, it is imperative that decisions made by the utilities today make economic sense, and are not just band-aids on a gaping wound that would eventually require surgery.
Policy reform is transforming the way the power utility industry does business. Decisions can no longer be made solely on an archaic equation that leads to unnecessary investments, but rather decisions should be dictated by market forces. Regulation should be expanded to support NWS to encourage efficient, cost-effective solutions that benefit not only the customer but also rewards the utilities. Utilities that are not considering NWS as part of their future planning process will be left behind and are sure to be losers.
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