Incorporating these new approaches today will help utilities tackle the industry’s biggest challenges: modernizing the grid, promoting efficient grid use, and building a healthy ecosystem of universal-scale and distributed energy resources. All of this should be accomplished while still delivering more value to customers and shareholders in the short run.
For instance, one priority should be to use smart-city initiatives to develop new approaches to create shareholder value. These include various public-private partnerships that leverage the efficiencies from, among other things, smart meters and smart grid infrastructure to provide services to other utilities and municipalities.
While there has been considerable interest related to such initiatives from individual utilities and the Edison Electric Institute, most proposals to capture additional shareholder value focus solely on targeted initiatives, such as those related to more efficient and advanced streetlight technology. So far, many of the campaigns seem aimed at improving brand equity for utilities rather than affecting real financial gains for shareholders.
However, to create shareholder value from smart-city initiatives, electric utilities should take a page from their gas utility cousins’ playbooks. Many local gas distribution companies in the United States have gas storage programs that allow the regulated utility to hedge and trade gas and share the profits among customers and shareholders.
Regulators permit shareholders to retain some of the profits – distinct and additive to the return on equity (ROE) from the rate base – to compensate for the utility’s necessary expertise and potential risk from these activities. Customers, at the same time, benefit from more efficient operations that keep rates down.
Extending this regulatory model to smart-city initiatives might enable customers and cities to partake in the savings from sharing the smart meter and grid communications infrastructure. And it should also allow part of the benefit to be passed along to shareholders.
Sharing the smart meter and communications infrastructure, including a fee or profit divided between customers and shareholders, is a more economic option on a societal level. It provides an overall lower cost than funding a separate communications infrastructure to support municipal services or other utilities.
Another example of extending a regulatory model from one part of the value chain to another is associated with the charging of electric vehicles. Studies performed by our firm and the National Renewable Energy Laboratory highlight the probability that allowing people to
charge electric vehicles whenever they want – typically plugging in cars as they arrive home from work – will lead to substantial strain on the grid and necessitate substantial investment in transformer and network capacity.
Some of that added operational cost and capital expense may be avoided if the utility attempts to coordinate the charging. While time-of-use pricing can influence customer decisions on when to use power, it doesn’t necessarily guarantee they will choose wisely.
A more direct and perhaps more effective approach might be instituting a two-tier pricing structure that imposes higher rates for customers who do not let the utility coordinate or manage their vehicle charging. The strategy should elicit more adoption by consumers and thus require less new investment.
Elsewhere in the value chain, some utilities already charge an additional opt-out monthly fee when customers refuse to install a smart meter. Why not extend this two-tier pricing model to those who refuse to allow the utility to manage their charging schedule? Extending this metering model to vehicle charging allows the utility to better reflect its cost to serve customers and target investment for higher value needs.
A last example of extending the regulatory model is associated with expanding the services provided by regulated utilities. Economies of scale matter in the utility industry and are becoming more important.