For the last three years, conversations in Europe, then in North America, has been about the need for new revenue streams for utilities. Utilities are facing decline in consumption, yet need to make capital investments to maintain grid reliability and integrate renewables while satisfying customers who are demanding more options and shareholders who are expecting returns. The first all-women panel, New Revenue Streams for Electric Utilities, at Distributech, provided attendees a glimpse into how the regulated businesses of PG&E, National Grid, KCPL and Duke Energy are testing out new products and services as a way to tap new revenue streams.
Generating New Revenues or Something Else?
A utility can have many objectives in the development of a new product or service – building customer loyalty, enhancing a green image, meeting government mandates, and providing rate relief for customers. Today what is different is that utilities need new revenue streams to make up for flat or declining revenues. It is not about offering products for free or as mandated by the regulators (demand response, energy efficiency).
Creating sustainable, profitable products and services requires a different mindset – one more familiar to competitive retail. A rigorous product development process, revenue model and a fair assessment of risks are needed. Take the example of Electric Vehicle (EV) charging. In assessing that opportunity, utilities need a clear picture of the costs of developing, deploying and maintaining the EV charging system, a forecast of the penetration of EVs in the service territory, estimates about patterns of usage, etc. Creative utilities will work to structure rates to encourage charging during periods when there is overcapacity on the grid, such as when solar produces during the day.
It’s Not Easy Being Regulated
Offering new products and services through a regulated entity is tricky; regulation constrains what can be offered. Utilities that have ventured into new products and services are doing so through their deregulated business units. So how does a regulated utility pay for development of new products and services and how do these products and services generate net new revenues? The panel participants, as representatives of regulated entities, discussed how regulation impacts their approaches.
Duke Energy’s regulated business development group recognized that product development would be different from the unregulated commercial group. Duke needed to look at ways to offer services in the context of regulation related to return on assets. The good news is that South Carolina’s solar leasing law allows utilities to make earnings on solar services. Investments in combined heat and power (CHP) can also fit into an integrated resource plan (IRP).
For PG&E, California regulation allows a utility to offer non-tariffed (unregulated) products and services that utilize existing utility assets that support non-tariff (regulated) products (electricity, gas, etc.). However, products and services cannot have a negative effect on cost, quality and reliability of the regulated products. The utility can make only “minimal” investment of ratepayer capital in marketing and incur “minimal business risk” to the ratepayers. The regulatory structure determines how often revenues get allocated, whether the allocation is based on actual or forecast revenues, how revenue is split between ratepayers and shareholders and how incentives/penalties are allocated based on over/under expected performance.
National Grid’s main focus has been on opportunities for third parties, solar, grid resiliency and energy efficiency, not necessarily new revenue streams for the utility. The company operates in Massachusetts, New York and Rhode Island so has to conform to what is being driven by regulators in each state. For example, in the current phase of Reforming Energy Vision (REV) in New York, demonstration projects are being proposed to “demonstrate new business models, i.e. new revenue stream opportunities for third parties and the electric utilities”.
Getting to New Products and Services
The panelists touched on how their utilities organized to develop new products and services. PG&E created a new revenue development group to extract additional value from rate base assets. The group involves 65 employees with a goal of achieving $65 million in annual revenue and delivering $42 million to the bottom line. Duke Energy created a distributed energy resources (DER) group to look at developing new products and services. National Grid created a New Energy Solutions group that reports to the Chief Customer Officer, focusing on “innovations and technologies that drive cleaner energy, improved efficiency, affordability and choice for the customer”. KCPL embarked on an initiative to implement EV charging.
Although several recent surveys have indicated that facilities energy management services are high on the list for utility offerings, the panel also touched on services to telecommunication companies, solar, microgrids (MG), energy storage, EV charging, utility infrastructure management and combined heat and power (CHP). Table 1 displays a sampling of current offerings along with those planned or under consideration.
Notably absent are services to the wholesale or distribution markets. For example, energy storage could provide ancillary services to ISOs/RTOs. The distribution service operator/provider being envisioned in Europe and in the NY REV are still on the horizon, so it is not surprising that products and services for distribution have not made it to the drawing board.
Advice to Utilities
At the end of the day, the real challenge for utilities will be whether new revenue streams can make up for stagnant revenues. The mega-session offered food for thought on how best to get to realizing new revenue streams.
Organize for Success
Innovative ideas can come from anywhere in an organization – grassroots to the executive suite. Companies that are committed to innovation have an innovation strategy, but strategy is not enough. Organizations need to dedicate resources research and development, product development, execution, sales and marketing and financing. These organizations define metrics for success, measure products and make continuous adjustments. Utilities covering multiple regulatory jurisdictions can overlay a company vision for the future. For example, National Grid launched Connect21, a framework for a new energy network in 2011.
Success depends in large part on developing understanding the ecosystem and developing partnerships. KCPL’s Clean Charge Program provides a good example of how partnerships can work to create and sustain an offering. A national grant from Nissan pays for the first two years of energy charging at Level 3 (quick charge) stations – the stations are owned by KCPL. This is a win all around. The market gets accustomed to EV charging. Nissan has a way to tame range anxiety and encourage sales. Retail stores hosting the stations get shoppers who are waiting for their EVs to charge. KCPL builds the program brand and gets the revenue.
Understand Your Market
PG&E has done foundational work to segment markets. Residential customers are characterized by personas (eco-active, heart and home, gadget family, style seekers, etc.), purchase motivation (high tech, cost focused, market driven) and organizational usage of gas and electricity (hospitals, government, professional services, industries, hospitality, etc.). Knowing the market is essential for building a business case for a product and service. It is a must for successfully targeting customers at a time when customers are inundated with messages.
About the Author: Jill Feblowitz is founder of Feblowitz Energy Consulting and an internationally recognized expert in innovation in the energy industry. With over 30 years of experience leading research and delivering consulting projects, Jill has provided advice to energy companies in the areas of energy markets, business models, operations, policy, regulation and technologies.