New Utility Business Models Are Key to Energy Transition, New Report Says

Advancing efficient and equitable approaches to update the utility business model—motivated by emerging technological, policy and market conditions in the electric power sector—is crucial to the grid’s transition to a more secure, clean and affordable customer-centric system, according to a new report released this week. Five case studies illustrating various business model reforms in action accompany the report.

In identifying, evaluating and encouraging innovation in business models, the report, Navigating Utility Business Model Reform: A Practical Guide to Regulatory Design, offers a menu of regulatory options for policymakers, utilities and electric customers to best support and manage the maturation of a 21st-century grid. The report was produced in a joint collaboration between Rocky Mountain Institute, America’s Power Plan and Advanced Energy Economy Institute.

Powerful trends are affecting the contours of the electric system, including growing policy demands for improved environmental performance, the increasingly widespread availability of distributed energy resources like rooftop solar and storage, more customer demand for energy choice and the need for strengthened resilience in the face of more extreme weather across the country. Navigating Utility Business Model Reform offers electricity system leaders and stakeholders 10 reform options to best respond to these pressures and support policy and regulatory decision-making.

To do so, Navigating Utility Business Model Reform seeks to establish foundational elements of different reform options, poses key questions to explore their applicability, identifies illustrative experiences for ideas and concepts and explores policy implementation options to help spur action.

“The grid is experiencing rapid changes in its shift to a 21st-century system, and electric utilities have a fundamental role to play in ensuring this transition strengthens resilience, improves environmental performance and protects the interests of customers while maintaining essential features of affordability and reliability,” Dan Cross-Call, a manager at RMI and one of the report’s authors, said. “This report offers a practical guide to industry leaders—regulators, utilities, grid operators, policymakers and policy influencers—on how to best engage with an increasingly decarbonized and distributed energy system, shepherding and managing this transition to maintain the fundamental role of utilities and achieve new policy objectives.”

The 10 reform options the report examines include revenue decoupling, platform revenues, performance-incentive mechanisms and multiyear rate plans, among others.

In addition to Navigating Utility Business Model Reform, the three groups released a set of case studies providing current examples of utility business model reforms and the regulatory constructs that make them work. The five case studies examine:

• Oklahoma’s Energy Efficiency Incentives—How Public Service Co. of Oklahoma and Oklahoma Gas & Electric are responding to shared savings and lost revenue adjustment mechanisms intended to remove the utilities’ financial disincentive to maximize customer energy efficiency opportunities.
• Maryland’s Behavioral Demand Response Program—How Baltimore Gas & Electric (BGE) lowered summertime demand driven by air-conditioning use through customer rebates for reducing consumption during peak-demand days, with BGE able to sell the energy and peak-demand reductions directly into the PJM wholesale market.
• Regulatory Accounting of Cloud Computing—How Illinois and New York are trying to level the playing field for service-based alternatives to traditional capital investments through the regulatory accounting treatment of software-as-a-service.
• Brooklyn Queens Demand Management Program—How Con Edison is deferring distribution infrastructure upgrades in an area of rising demand by deploying nontraditional methods of customer- and utility-side demand reduction, with the utility rewarded with performance incentives and accelerated depreciation. 
• United Kingdom’s RIIO Performance-Based Framework for Driving Innovation and Delivering Value—How the UK’s Office of Gas and Electricity Markets (Ofgem) created RIIO (Revenue = Incentives + Innovation + Outputs), the most comprehensive performance-based regulatory system yet developed to reflect changing market conditions. RIIO allows utilities to take advantage of the growing service economy and rewards utilities for achieving desired outcomes. 

“As regulators and utilities think about new business models for a changing electric power sector, there is a lot to be learned from what's being done already,” said Lisa Frantzis, senior vice president of Advanced Energy Economy, of which AEE Institute is the nonprofit educational affiliate. “These case studies shine a light on ways that utilities can better align their business goals with customer preferences and public policy objectives. As the electricity system becomes more distributed, meets evolving customer needs, and serves to power vehicles as well as homes and businesses, we need to build on examples of business model and regulatory reform like those discussed in our case studies.”

“With so many utilities launching new grid modernization initiatives, now is the time to address utility regulation and business model shortcomings. Energy is now extremely cheap if solar and wind power are the backbone of our electricity system,” said Mike O’Boyle, director of America’s Power Plan. “To succeed, utilities must be intrinsically motivated to invest in modern technologies that make the grid more efficient, flexible, affordable and resilient. Navigating Utility Business Model Reform is a toolbox for policymakers, utilities and key stakeholders to do just that.”