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Distributed Generation and Implications for the Utility Industry

By: , Posted on: February 10, 2015

Why write a book on distributed generation?

Distributed Generation and its Implications for the Utility IndustryRapid changes taking place mostly on the customer-side of the meter, including distributed generation (DG) from rooftop PVs and storage in the form of EVs, are affecting the upstream utility infrastructure, revenues, operations and ultimately the utility business model.

The most significant change, of course, is the new reality that in some sunny, high retail tariff jurisdictions with supportive regulatory policies, such as California, Hawaii or Australia, consumers can now meet some or virtually all their electricity service needs from distributed self-generation at costs that are on par or lower than what utilities offer.

This development, which is expected to be further enhanced as the cost of storage technologies declines over time, are among the changes that are eroding utility revenues, putting upward pressure on retail tariffs for non-solar customers while creating havoc for distribution companies whose network are over-extended as increasing numbers of consumers become “prosumers,” as has already happened in Hawaii, Australia and Japan, to name a few.

A recent study by Accenture estimates that US utilities may lose some $48 billion of revenues by 2025 due to energy efficiency investments coupled with distributed self generation. That is roughly 1/6th their current annual revenues. California’s 3 large private utilities claim that they are already losing an estimated $1 billion annually to DG, a figure that is expected to quadruple by the end of the decade if current trends continue. Clearly, there is a lot at stake, not just financially but in terms of the operations, investments ad the reliability of the distribution network.

This book explains, in simple terms, what is changing, what are the implications  of these changes and describes how electric utilities, regulators and policy makers should respond to the fundamental changes taking place in the electric industry.

What does this book cover?

Distributed Generation & its Implications for Utility Industry describes how the “traditional” utility paradigm with its centralized, thermal generation and a massive one-way transmission and distribution network delivering undifferentiated bulk kWhrs to customers’ premises is becoming unsustainable for a number of fundamental reasons. More important, it describes how utilities and the regulatory environment must respond to the rapid changes taking place.

For example, in December 2014, E.ON, Germany’s biggest energy company announced that it was essentially abandoning its money losing centralized thermal generation business in favor of a new customer-centric business model focused on serving customers’ energy service needs by enabling them to generate, store or trade electrons on their side of the meter, mostly from renewable sources.

E.ON has announced it is getting out of generation business, focusing on “new energy world.”

Getting rid of toxic assets?

image 1
Source: E.ON

Also in December 2014, NextEra Energy announced that it would acquire the parent of Hawaii Electric Co (HECO). According to NextEra’s CEO, the intention is to turn Hawaii into a test laboratory to determine how a utility can meet the energy needs of its customers with increased amounts of renewable energy, much of it generated on customers’ own premises.

While E.ON’s strategic about face or NextEra’s decision to change the business and operations of HECO in Hawaii may be unique or extreme, other utilities everywhere have to think hard and fast about what they intend to do and how they wish to position themselves in the face of rapid technological change and disruptive technologies that are increasingly eating into their core business and, more important, their revenues.

How is this book different than others?

This book is different – in fact unique – for at least three reasons:

  • First, it is an edited volume with contributions from a number of experts and scholars from the top academic, research and consulting institutions from around the world;
  • Second, its 24 chapters with over 500 pages of explanatory text including informative graphs, visuals and tables cover a broad range of topics and issues on all important aspects of the electric poweer sector; and
  • Third, it is focused on a timely and topical issue, namely rapid developments fundamentally changing utility business models

No competing book offers such a breadth and depth of coverage.                   

What would I learn/how would I gain by reading this book?

This book explains how utilities, regulators and policy makers should identify & evaluate the economic, technological and policy forces that are reshaping electricity business and examines the impact of these forces on all aspects of utility business but particularly the distribution systems.

This is precisely what the New York Public Service Commission (NYPSC), the California Public Utilities Commission (CPUC) and Hawaii Public Service Commission (HPSC) are currently engaged in, namely to define what the distribution business of the future entails, how it might be regulated, what types of services and functions are required in the future, and how customers will pay for these services.

Map of solar grid parity: Technical solar PV potential from unsubsidized $3/W commercial solar; Capacity and % of Sales

image 2
Source: Commercial Rooftop Revolution, Institute for Local Self-Reliance (ILSR), Dec 2012

It is fair to say that both utilities and regulators are surprised by the fast pace of developments, particularly the rapid uptake of rooftop solar PVs, supported by generous net energy metering (NEM) laws in some 43 states as well as high retail tariffs. Customers who self generate, not only save by avoiding the high retail tariffs, but receive a credit for any excess generation that is fed into the grid.

The dilemma facing the regulators in this context is that they are placed in a rather awkward position for having to take sides.

  • On the one side are millions of solar or aspiring solar customers who love the ability to become empowered by generating some or all of their electric needs, while reducing or eliminating their utility bills.
  • On the other side are utilities and distribution companies who are experiencing revenue erosion without commensurate reduction in costs, especially fixed costs, which are paramount especially in the distribution business.
  • Making matters more vexing are non-solar customers whose retail rates tend to rise when significant numbers of customers go solar. This leads to a reverse Robin Hood syndrome, where low-income customers are effectively subsidizing the more affluent ones.

In few states where such decisions have come before the regulators, have proved to be controversial and complex.

Fereidoon’s book Distributed Generation and its Implications for the Utility Industry is available for purchase on the Elsevier Store. Use discount code “STC215” at checkout to save 30% on your own copy!

About the author

Fereidoon_SioshansiDr. Sioshansi is President of Menlo Energy Economics, a consulting firm in San Francisco and the editor and publisher of EEnergy Informer, a monthly newsletter with international circulation. He has degrees in Engineering and Economics, including an MS and Ph.D. in Economics from Purdue University.

His professional experience includes Southern California Edison Company (SCE) from 1979 to 1989, the Electric Power Research Institute (EPRI) from 1989 to 1996, National Economic Research Associates (NERA) 1996-1997, and most recently, Henwood Energy, which became Global Energy Decisions, acquired by Ventyx, now part of ABB. He has been the president of Menlo Energy Economics since 2002.

He has edited the following 8 books published by Academic Press:

  1. Electricity Market Reform: An International Perspective (2006),
  2. Competitive Electricity Markets: Design, Implementation, Performance (2008),
  3. Generating Electricity in a Carbon Constrained World (2009),
  4. Energy Sustainability and the Environment: Technology, Incentives, Behavior (2011),
  5. Smart Grid: Integrating Renewable, Distributed & Efficient Energy (2011),
  6. Energy Efficiency: Towards the End of Electricity Demand Growth, 2013;
  7. Evolution of Global Electricity Markets, New Paradigms, New Challenges, New Approaches, June 2013
  8. Distributed Generation and its Implications for the Utility Industry, July 2014.

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