The technology revolution that moved solar, wind and other renewable energy resources into the mainstream — and introduced sophisticated digital grid-management tools — is shaking up old energy business models.
The rise of cheap, renewable resources distributed around communities coincides with questions about the long-term market viability of fossil fuels. Wind and solar are reaching grid parity in many places around the world.
The power industry is taking a long look at these changes in order to devise new ways to make money in an unconventional energy market.
It’s not a simple task, thanks to the many parts that make up the energy business. There are different kinds of electric utility companies, to start. These range from public local or state authorities, cooperatives, and investor- or shareholder-owned corporations to non-utility power producers.
The energy business has many parts
A common entity is the municipal utility, owned and operated by a city. The Sacramento Municipal Utility District is one example. Municipally owned utilities are nonprofit, operating on small revenue margins. About 14 percent of U.S. electricity customers are served by municipal utilities.
Cooperatives are often found in rural areas. They may generate their own power or purchase wholesale power for their customers. To keep costs down, co-ops often provide ancillary services — energy efficiency, load and demand-side management programs.
Investor- or shareholder-owned corporations, on the other hand, usually operate at a larger scale. They are competitive, and may corner the market in an area because they are vertically integrated — they own all components of their business: generation, transmission, delivery and sales.
Answerable to the customers
In the United States, because many utilities are monopolies in the areas they serve, they are carefully regulated to protect their customers. A public utility commission oversees utility companies by first determining the rate case, which is the total amount of money a utility needs to cover all costs and make a reasonable profit. The rate case includes the value of a company’s assets less depreciation, called the rate base, and operating expenses.
There is even a formula for it:
Rate base x allowed rate of return + expenses = total revenue requirement
Utility companies do not operate autonomously. In the United States they may be managed by independent systems operators or regional transmission organizations that control transmission systems and ensure reliability and fair access to electricity for customers.
With the entrance of non-utility power providers that today include individuals who own their own distributed energy resources — usually producing their own electricity from solar panels on their rooftops — the landscape is changing.
What is driving the change?
A few things are spurring utility companies to figure out new ways to earn money: Flat or declining revenues resulting from efficiency improvements; and the fact that utilities are now buying excess electricity from independent producers. Selling services, equipment and software that fit today’s customer-focused market is on the table.
And new grid-related businesses are springing up. Third-party aggregators are companies that are intermediaries between small-scale distributed energy resource owners, the power companies and end-users who benefit from the additional electricity offered. When aggregated into negotiating units, electricity from small-scale producers becomes more marketable and utility companies gain a new revenue stream.
Wheeling services are utilities that own transmission facilities and make third-party contracts to wheel, or transfer, electricity to retail or wholesale purchasers. Wheeling can assist power companies in load balancing and allow retail customers to choose a preferred electricity supplier while still using the local utility power lines.
Business is business, and the 21st century energy scenario is generating more opportunities for utilities ― and energy entrepreneurs ― to serve their customers.
This article is the last in a five-part series on power grid terminology.
By: Lea Terhune