The journey through the energy transition just got a new roadmap.

Regulatory disputes across the country continue to stifle innovation and impede the emergence of new utility business models. But a new paper offers best practices from a variety of utility pilot projects to help regulators and stakeholders sort through the noise and make evidence-based decisions.

“Utility innovation to the changing system has generally been slow and many utility pilots and demonstrations have not produced significant results at scale or in a timely fashion,” Mike Henchen, electricity policy manager at the Rocky Mountain Institute (RMI), said.

RMI’s recent report, “The Role of Pilots and Demonstrations in Reinventing the Utility Business Model,” offers recommendations for utilities, regulators, and DER technology providers that “support meaningful and transformative progress,” Henchen said.

The skyrocketing growth of utility-scale renewables and distributed energy resources (DER) is stoking a need to develop new grid technologies, business models and customer programs. As a result, utilities face crucial decisions about investing shareholder and ratepayer money.

In the first quarter of 2017, five new pilot program actions on DER policy were brought to regulators across the country, adding to the six that commissions took up in the second half of 2016. It is indicative of an emerging trend toward the use of real world trials of innovations in policy, rate design, and technology, according to a separate report from the NC Clean Energy Technology center.

Pilots “are being used mainly to test time-varying rates, residential demand charges, and community solar,” said Autumn Proudlove, lead author of the report, "Q1 2017 Solar Policy Update."

“Many are related to high-profile proceedings, so the impact is significant," she said. Utilities are also using regulator-approved pilots to lay the groundwork for anticipated growth in demand response and demand-side management.

For the new pilot report, RMI partnered with Consolidated Edison (ConEd), Avista Utilities, and Arizona Public Service (APS).

ConEd Director Jamie Brennan agrees trial projects could help resolve policy disputes.

“It is always easier to have a debate about real data,” he said. “The debate is less ideological, more analytical, and enables stakeholder engagement that might not otherwise be likely.”

Today’s pilots and demonstrations, RMI argues, “will test utilities’ ability to meaningfully advance a new set of solutions." The best cases will be cost-effective, collaborative explorations of “innovative approaches to integrating new technology for the benefit of customers, utilities, and the environment.”

But if the pilots and demonstrations are poorly designed, the think tank warns innovation will be “bogged down by contentious disputes between utilities and technology providers.”

The RMI roadmap

The RMI paper offers recommendations for pilot projects based on five themes. They are a synthesis of input from regulators, utilities, technology providers and advocates on “best practices for utility innovation and the design, execution, and evaluation of utility pilot and demonstration projects.”

The strategy

RMI’s first theme involves strategic planning. “Embrace a strategy for energy system transformation and craft a complementary roadmap for innovation,” the report urges.

DER and energy efficiency are cutting utility revenues, but utilities still must finance system modernization and maintenance, RMI reports. The rise of third-party energy resources is increasing uncertainty as it drives  utilities further from their traditional business model.

The first response to this situation is to devise a roadmap with strategic goals that regulators can support. Private DER providers can partner with utilities if they offer effective solutions within the framework. Pilots and demonstrations that are not part of the roadmap’s “transformative strategy” will not have a “meaningful impact,” Henchen said. And the plan should not be focused on specific technologies, but capabilities and needs to “transform and evolve” the company.

Definitions

The second theme identifies a design shortcoming in many trials: the failure to define which projects are scalable. Pilots projects explore “technical feasibility,” but demonstrations “test business models, customer adoption, and other elements” and should be designed to be scaled, RMI argues.

Regulators can support the design of scalable demonstrations by approving financial incentives that compensate for DER-driven revenue losses. They allow utilities to pursue DER innovation instead of traditional rate-based infrastructure investments.

If the design does not include how to evaluate a trial’s performance and scale its success, “it can lead to an ambiguous state where the utility does not act on the results,” Henchen said. Regulators may then not see the potential innovation and participating technology providers may lose a proven business opportunity.

Silos

The third theme is an operational solution to a longstanding utility organizational obstacle. To move beyond company silos, RMI recommends clearly designated leadership and accountability. To take a demonstration to scale, those accountable need the utility’s wide-ranging resources.

“Innovation teams must engage business units across the utility in the design, execution, evaluation, and scaling of demonstration projects to design better projects and ensure the impact sticks,” RMI adds.

The failure of those responsible for a successful pilot to hand it off for wider implementation “may be the most common problem,” Henchen said. “Few organizations have any formalized process to advance from one step to the next, leaving even a successful trial project neglected.”

When the initial pilot project is designed, plans should be made to move it through the demonstration stage to full-scale implementation, he said.

Utilities need to be aware of the pilot, demonstration, and full-scale stages of a project and “design with the objective of satisfying all the open questions that are required to scale,” he added. Those accountable should be “deliberate and intentional” about a project’s stage and know whether it will need to go through each stage.

Stakeholder collaborations

Some design pitfalls can be avoided by identifying early the common ground for utilities, technology providers, regulators, customers, and advocates, RMI reports. This can avoid “contentious and unproductive disputes” when stakeholders see deployment of unproven technologies.

Regulators can press for this collaboration. They can also impose requirements for competitive solicitations that open collaboration between utilities and technology providers. Utility requests for proposals should require that solutions address system and customer needs, but not be so prescriptive they “limit the solution space,” RMI recommends.  

Some recent pilots became controversial because "they were developed inside the walls of the utility,” Henchen said. Examples were Xcel Energy Minnesota’s Belle Plaine solar-plus-storage pilot and the Pacific Gas and Electric EV charging pilot.

DER providers stopped Xcel by arguing they could do the project more cost-effectively. Stakeholder pressure forced PG&E to revise its proposal. The utilities might have achieved better outcomes by engaging technology providers and advocates at the design stage, Henchen said.

There is also a utility side to collaboration, according to Leia Guccione, RMI Electricity Practice Principal and paper co-author.

“There is room for innovation in how the utility’s reliability and safety risks can be shared in pilot and demonstration projects with non-utility parties,” she said. The burden is inevitably the utility's but technology providers could at least take on some of the financial risk. “It frustrates utilities when vendors offer only a new widget and not the business model innovation or capital to make it work.”

Regulators can play a key role in this, Guccione said.

“How you create the right revenue, cost recovery, and business model are things the commission definitely owns,” she said. “If regulators want utilities to experiment, they need to provide that guidance. The New York Public Service Commission (NYPSC) rulings in its Reforming the Energy Vision (REV) proceeding are a model.”

Inter-utility collaborations

RMI’s last theme is about a different kind of collaboration. The paper argues that sharing “best practices and lessons learned” between utilities will accelerate innovation. Regulators, RMI adds, can structure rules on utility collaboration to make this easier.

Collaboration should be possible because regulated utilities don’t compete with each other. But the flood of information on pilots demonstrations is largely unorganized and best practices are hidden in databases, Henchen said. “Ideally utilities could build on each other’s learning to skip steps and advance more rapidly toward the roll out of scale programs."

Utility reactions

In response to the NYPSC’s REV proceeding, ConEd has multiple demonstration projects in the works.

“Philosophically we are aligned with RMI,” said ConEd's Brennan. “It’s just a matter of going through the next 12 to 18 months to make sure we are learning what we should.”

RMI’s five themes are an “elegant construct,” he added. “The strategic planning and organizational sections are probably the most important.”

ConEd’s Josh Gould, who manages its Utility of the Future project, said pilots and demonstrations are “core” to the emerging utility business model for two reasons. First, they require working with technology and advocacy partners. “That is critical to customer enablement,” he said.

“Second, demo projects are about retiring commercial and technical risks,” he said. “That allows us to avoid stranded assets and move more rapidly to scale.”

Brennan called pilots “asset-based research and development.” But the New York PSC “was very specific that demonstrations are designed to leverage technology proven to create value for customers and to retire commercial risk.”

The NYPSC’s seven guiding principles for developing demonstrations offer three unique advantages, Brennan said.

First, if the project is designed to address the principles, the utility can immediately begin working with commission staff, he said. Second, the utility can obtain REV funding. And the guidelines are not overly prescriptive, allowing utilities to be innovative in the areas most important to them.

Demonstrations also drive innovation because they require utilities to engage with technology providers, Brennan said.

Utilities can define a system problem and issue a call for third party solutions. ConEd is now working on demonstrations of “storage as a service” and “storage on demand,” two concepts the utility did not see until they were brought to the utility by private providers.

Avista Technology Strategist Curt Kirkeby uses similar definitions of pilots and demonstrations to RMI.

“A pilot tests an approach or technology on a small scale and shows if it will work, but not how it would be deployed, operated, or maintained,” Kirkeby said. “A demonstration is designed to scale up.”

For that reason, he agrees that designing a demonstration raises questions about scale logistics and automated dispatch and how to market and deploy across the entire utility service. But, he said, “even in pilots, you think about scale because you aren’t going to test something that you think has no chance to scale. Only the level of design detail is different.”

Avista’s recent smart water heater demand response demonstration was tested on 18,600 customers and "we built to be able to handle those customers," he said. "But we designed to be able to handle the entire service territory and we are now expanding the program.”

Kirkeby likes distinguishing between pilots and demonstrations because “if you had to plan to scale every technology test, you could get overwhelmed and not be innovative.”

But designing to scale is important, he added. “The last thing you want is to do a pilot and not do something with the result.”

Pilots and demonstrations are vital because “the one thing we know is the future will not be what it is today,” Kirkeby said.

Economics are moving the utility resource mix from traditional generation to central station and distributed renewables. That will lead to a new way of operating the system and to a new utility business model. “But we don’t know what that will look like and pilots and demonstrations allow us to proactively develop a road map to it.”