Utilities in the Modern Era: Embracing a New Business Model

Historically, electric utilities were large, publicly owned entities, operating in a highly regulated environment, whose main function was to ensure the consistent and regular delivery of electricity. Recent advancements in digitalisation, however, and an increase in renewable energy and distributed generation, are challenging the traditional utility business model.

Traditionally, multiple power generation assets would sell generation capacity on the wholesale market. A transmission system operator (TSO) then handles the transport via high-voltage power lines of the transmission grid. Because of the large capital investments and the impracticality of having multiple transmission grids in one country, a TSO often holds monopolies in the country they serve.

Recent decades have seen the rise of two transformational forces in the utility sector – market deregulation or privatisation, and distributed generation.

More and more countries are deregulating, or privatising, parts of the utility sector. While strict regulations with regard to power delivery are still upheld, many retail utilities have lost their protected, often monopolised position. Utilities now operate in highly competitive markets with dozens of players, where barriers for a consumer to switch to a different utility are very low.

Historically, a utility’s business was geared towards meeting power delivery regulations and measuring power meters to ensure customers pay their invoices. Now, customer retention has become a major focus, and many utilities struggle to convert their business focus from energy delivery with high operational efficiency to energy services with added value to their customers.

The rise of distributed generation poses similar challenges. A legacy electricity grid is linear with one-way power flow, built with the purpose to transmit power from large central power plants to the end-users. Today’s power grid no longer looks like this. Incentivised by regulators pushing energy efficiency and renewable energy with strong subsidies and new policies, more and more large scale renewable generation assets, like solar and wind, are being added. Energy storage systems are being installed, in front of and behind the meter, to help deal with the challenges that come from decarbonising the energy mix. These types of assets, collectively known as distributed energy resources (DERs), are transforming the complexity of power grids.

Power grids weren’t built with DERs in mind. Renewable energy’s intermittent nature can cause frequency or voltage destabilisation on the grid, requiring utilities to curtail renewable generation on a cloudy day with gusty wind, and use installed back-up generation capacity, like expensive natural gas peaker plants, to meet their mandated peak power demand.

Renewable generation assets added at the end-user (e.g. rooftop solar) adds further complexity, changing the one-way power flow mantra into one where electricity can now flow back into the distribution line from the consumer side, increasing the risk of damage to transformers due to reverse power flow. The expense of managing this growing grid complexity forces grid operators to install new equipment and upgrade power lines, raising their share on the end-user’s electricity bill.

Besides technical challenges, distributed generation affects power demand curves and poses a threat to incumbent utilities. As customers generate more of their own power behind the utility’s meter, they use less and less power from the central grid, eroding the utility’s primary revenue stream. This threat is aggravated by utilities facing increasingly stringent renewable mandates, changing regulations, and an increasingly complex grid to manage.

The outlined challenges have created a need for tools that optimise DERs to balance the diverse needs of their owners with those of the connected grid operators like TSOs, which need to adhere to strict regulations on power quality and reliability. These software tools are called Distributed Energy Resource Management System (DERMS). Their initial function was strictly to manage DERs on electrical grids, connecting equipment into an energy Internet-of-Things (IoT) system for central management and optimisation. As the technology matured, developers started adding further functionality for market participation.

DERMS can now aggregate multiple generation and storage assets into virtual power plants that can bid into wholesale power markets, offering energy management in multiple commercial buildings, or enabling consumers to use on-site generated power for peer-to-peer trading with neighbours.

The growing challenges of market deregulation and distributed generation create opportunities for utilities to deliver on the increasing need for grid services. By leveraging their experience in energy management, they can capitalise on DERs to tackle the challenges the grid is facing.

Rather than own generation capacity, the utility of the future will increasingly look to purchase renewable power and flexible DER capacity from companies able to construct and operate capital-intensive wind, solar, and energy storage farms, while shifting the utilities’ business model to energy management and services. While renewable generation will be a qualifier to enter the market, services will become the differentiator for the utility of the future.