From integrating more distributed generation to pushing electric vehicle chargers and home energy advising, 2014 has seen a number of utilities making big changes to their business models. 

Now a new report from a storied environmental and economic development think tank warns that in coming years, if power companies do not do more to change their business models, they could go the way of the land line phone provider.

The core principles that are key to the utility of the future “do not align with current financial incentives for most investor-owned utilities (or the typical business practices of most utilities; private, public, or cooperative),” according to "Beyond Utility 2.0 to Energy Democracy," a report by John Farrell of the Institute for Local Self-Reliance.

But, the report goes on, “the principles are indifferent to the economic opportunity. That is, they can be implemented with utility control of the grid and its benefits or with a massively decentralized and democratized electricity economy.” In other words, utilities don’t have to go away if they understand what is coming and respond to it.

The grid and Utility 2.0

“The grid is a valuable network,” Farrell said. A veteran of regulatory proceedings in Minnesota, Farrell was the driving force behind a stakeholder process that included Xcel Energy and produced that state’s Value of Solar methodology. One of solar’s key values is to grid operations, the methodology shows.

The dilemma utilities find themselves in is not entirely of their own making, the paper reports. Much of the cause is the 130-year-old system. Policymakers send “mixed incentives” that ask utilities to meet increasing mandates for renewable energy and energy efficiency through a business model that only rewards increased electricity sales and rate based transmission and generation infrastructure. Regulators who judge utility planning often do so with inadequate information about alternatives. Yet utility executives who fail to navigate through all this to a profit are condemned and dismissed.

“Utility 2.0 is designed to solve many of these problems, properly aligning financial incentives with the outcomes most participants want from the electricity system,” the paper promises.

The 4 core Utility 2.0 principles of the paper are:

1. Reduced energy consumption through energy efficiencies
2. Reduced carbon emissions through a transition from fossil fuels to renewables
3. Grid efficiency via a two-way, networked smart grid that uses demand response, local generation, and local resources
4. Grid flexibility to integrate large quantities of distributed and utility-scale renewables

This can mean a lot of different things, Farrell said. It depends on a utility’s ability to innovate and adapt. “For some utilities, it is a funeral dirge. The way they have operated for 100 years won’t make sense anymore. It they can’t adapt,” Farrell said, “this will be a land line-cell phone problem for them.”

The opportunity for utilities

“$364 billion in annual U.S. electricity sales is up for grabs, Farrell added. “It is available to utilities who make the transition and provide the services people will need.”

Farrell mentioned things like smart phone apps to manage energy services and other ways to process and manage energy system information. He also mentioned distribution system advances that make it more of a 2-way, networked, transactional system. ”There are so many ways utilities could profit from this,” he said.

One vertically integrated utility might sell off its transmission system and just sell energy services. Another might sell off its power generation assets and operate a distribution system “and be the ultimate smart grid.”

The goal of the paper is to describe this moment of transformation, Farrell said, not to dictate to utility execs how to take advantage of it.

The are 2 common themes in the structural changes needed:

1. Planning for generation or a transmission/distribution system that recognizes the potentials of local and regional level resources like rooftop solar, energy storage, electric vehicles, and non-capital measures like controllable, smart appliances.
2. Independent, neutral operation of the distribution system so that informed but unbiased planning can be done.

Early expressions

The paper provides analysis of early expressions of the Utility 2.0 idea in New York, Hawaii, Maine, and Vermont.

The New York REV process is "an excellent articulation of what the grid should look like to accomplish those principles," Farrell said. Where the process falls short is "the recognition of the economic opportunity."

Vermont is closest to having in place principles of integrated planning and rules for distributed generation and energy efficiency. "What they haven’t done strikingly is adopt any of the structural change in the New York REV process," he explained.

“They have made a lot of big steps but they don’t have a distribution marketplace where anybody could participate,” Farrell said, “where it is all transactional and transparent, like an eBay for electricity. You shop for the services you need and bid and everybody sees the numbers.”

The shift to Energy Democracy

Utilities have to think about making the grid useful for 21st century technology because there are two more principles that make the next utility business model into a model of "Energy Democracy," Farrell said. Because local communities have carried the burden of the old model, “we want a semblance of local control and equitable access. ” The report explains that "Energy Democracy" shares the four tenets of the Utility 2.0 model — reduced energy consumption, reduced carbon pollution, grid efficiency and grid flexibility — but adds those two values to the mix:

1. Local control: Individual communities should have the authority to make their own decisions about energy production and consumption, "with weight given to economic benefits not just energy costs."
2. Equitable access: Ownership and authority over the grid should be open to all, regardless of material wealth. "Since the resources of a 21st century electricity system (wind and sun) belong to everyone, all residents of a community should share in the wealth generated from them," the report concludes.

What is coming, Farrell said, is “an interconnected and distributed technology opportunity between smart phones and electric cars and energy storage and super cheap solar 20 years from now that is inevitable,” he said. Whether utilities are dragged kicking and screaming or seize the moment, communities deserve the same opportunity.

This transition is being driven not just by electricity technologies but also computing technologies, Farrell said. “Revolutions come from the convergence of technologies in a sector and communications technologies. That is what happening here. And there is $364 billion a year at stake.”