Emerging utility business models

This article is from our latest Energy Spectrum and the January 2022 issue of EEnergy Informer, a newsletter edited by Fereidoon Sioshansi of Menlo Energy Economics and editor of Variable Generation, Flexible Demand.

As numerous prior articles have pointed out, the traditional utility business model seems to be on its last leg in markets with competitive wholesale and/or retail. Moreover, as consumers discover and exercise options to migrate away from total reliance on upstream generators to produce electricity and on the delivery network for its transmission, the “utilities” – be they distributors or retailers – must go to Plan B. How would they find sufficient revenues to cover their fixed and variable costs as volumetric consumption declines when some consumers become prosumers – or go a step further and become prosumagers?

The debate about the future of net energy metering in California and similar debates in Australia and elsewhere with significant rooftop solar penetration is very much focused on this issue – namely how would the investor-owned utilities (IOUs) or the distribution companies survive as increasing numbers of customers self-generate and/or store some of the excess generation in batteries, electric vehicles (EVs), hot water tanks or other devices? What if they invest in more efficient buildings, appliances, lighting, HVACs, etc. – all compelling options – cutting down their net consumption and reliance on grid-supplied electricity? As this happens, the distribution utilities’ reliance on the volumetric bundled regulated tariffs will not suffice. And if they raise the retail rates to recover lost revenues more customers will flee, leading to the dreaded utility death spiral.

What if the 3mn solar customers in Australia double to 6mn by 2030 as projected? What if the 1.3mn solar customers in California double by 2030 – depending on what happens to the current net energy metering law?

If regulators decide to pay little for the excess solar power exported to the grid – as proposed in California – that would simply increase the motivation to invest in storage and save the excess generation for later use, or for filling up the EV batteries, or filling the water tank with hot or cold water or sharing it with the neighbour across the street?

There are other more exotic options. Consumers, prosumers and prosumagers can form semi-self-sufficient micro-grids and/or join energy communities. Moreover, a new generation of smart aggregators are emerging who can orchestrate how such micro-grids or energy communities can optimise the consumption, generation and storage of energy to maximise value while reducing the costs of energy services.

The traditional utilities do not seem to be active in any of these endeavours – occasionally throwing roadblocks to the inevitable, trying to slow down the eventual outcome. But these efforts are unlikely to succeed in the long run in places where the conditions are ripe for self-generation and storage – namely sunny places, with high proportion of dispatched households facing high retail tariffs.

In this context, the trend to invest more in the electricity delivery network may make matters even worse, accelerating the utility death spiral.

Let’s be clear. The networks are critical and will become even more so in an electrified future – even for die hard prosumagers – but who and how to pay for them remains to be decided. One approach may be to switch from exclusive or primary reliance on volumetric tariffs – prevalent in the US – to fixed network connection charges. The CPUC’s proposal to include a fixed monthly grid access charge of $8/kW, called the Grid Participation Charge, is an example of this trend for solar customers. It is an attempt to make sure they continue to pay for the maintenance of the grid when their volumetric consumption falls or totally vanishes. But there is no justification to limit such a charge to solar customers alone.

Fixed connection charges are common in water utilities – or garbage collection. For the former, customers pay a monthly fee based on the capacity – the diameter size of the pipe connection – plus a commodity charge for each gallon of water consumed. The same can be applied based on the size of the copper wire connecting a household to the network plus a fee for the number of kWhs used. 

As it happens, Tesla, in partnership with Octopus Energy Germany, is marketing retail utility services in two German states with a population of 24mn. The Tesla Energy Plan is available to households with a solar system and a Tesla Powerwall with a 13.5kWh battery. It is similar to a scheme offered by Octopus Energy in the UK.

Tesla’s CEO Elon Musk has been talking about entering the utility business for some time. While the details are sketchy, Musk’s scheme will most likely consist of interconnected localized renewable generation resources paired with short-duration Powerwall batteries as well as EV batteries, preferably the Tesla brand. Such a portfolio can be augmented with longer-term storage to accommodate utility-scale wind and solar generation. Would he be able to scale such a scheme to compete with traditional utilities remains to be seen.

Novel schemes such as Tesla’s are emerging. According to Albert Cheung, head of global analysis at BloombergNEF: “It is now quite common to see these types of companies gain significant market share without necessarily owning any of their own generation or network assets at all.”

“There are simply going to be more and different business models out there … There is going to be value in distributed energy resources at the customer’s home; Whether that is a battery, an EV charger, a heat pump or other forms of flexible load, and managing these in a way that provides value to the grid will create revenue opportunities.”

The UK-based Harmony Energy, for example, is building a new 4-acre battery storage facility outside London, its third. It already has a 34MW/68MWh storage facility comprised of 28 Tesla Megapack batteries. Harmony expects to grow to large scale in the next 3-4 yrs. It is working with the UK’s National Grid.

Both Octopus and Harmony depend on trading and energy network management software; the former has its own Kraken software while the latter uses Tesla’s Autobidder. Tesla is fully licensed to trade in the UK and is an approved utility.

Peter Kavanagh, Harmony’s CEO, says Tesla’s Autobidder charges the batteries when power is cheap and discharges them when there’s low wind and no sun, balancing the constant change of supply and demand while trading the residuals by bidding into the wholesale market. The bottom line is to aggregate a portfolio of distributed resources which can be monitored, managed and optimised as a virtual power plant. Kavanagh said: “Whether it’s batteries or some other energy storage technology, it is key to hitting net zero carbon emissions. Without it, you are not going to get there.”

Some established utilities including PG&E in California and RWE in Germany are investing in storage and at scale as are others across Europe. What is clear is that the consumers of the future will have multiples of options, no longer totally dependent on the “utility” to meet all their service needs at all times. Nor will they be passive, taking power from the grid, but potentially feeding into it at times and actively participating in how the distribution network is operated and how supply and demand are balanced.

This means that the traditional relationships between the customers and electricity service providers is changing, and the sooner the traditional “utilities” figure out what this means the better their chances of surviving.

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