The utility industry has already been undergoing significant change over the past 25 years, with the rise of independent grid operators and competitive energy markets and the split of a once-monolithic, vertically integrated business model into retail energy providers, independent power producers, and transmission and distribution grid operators.
But the rise of distributed energy is creating more turmoil for the utility industry than even these epochal changes. And because these changes are being driven by fundamental advances in technology, not by regulatory fiat, they’re happening at a pace and scale that’s increasingly outside the utility’s control.
These underlying trends — or “megatrends,” if you will — have created a world in which utilities are increasingly moving into unfamiliar markets and business models, according to experts at Greentech Media’s Grid Edge World Forum 2017 conference in San Jose.
“There are two no-regret decisions for utilities — renewable energy and anything that gets them closer to customers,” Andrew Bennett, senior vice president and “Internet of Things Evangelist” for Schneider Electric North America, said during a Wednesday panel session. “Look at all the acquisitions that are taking place on the commercial side of utilities, both European and in the U.S. over the last year.”
Large-scale renewables have long been a part of many utilities’ portfolios, but this trend has been accelerating over the past few years. Notable examples include Duke Energy Renewables, the utility giant’s new business created by the acquisition of California solar installer REC Solar and energy management company Phoenix Energy Technologies. Other utility moves into commercial solar include NextEra's acquisition of Smart Energy Capital and Edison International's purchase of SoCore.
As for getting closer to customers, utility acquisitions on this front range from established energy services providers to startups on the cutting edge of the distributed energy revolution. Some of the biggest U.S. examples of this trend include Southern Company’s $431 million purchase of PowerSecure and its 1.5-gigawatt fleet of backup power systems, Edison International’s creation of its Energy Services business through the acquisition of a roster of energy service providers and renewable power developers.
European utilities have been following suit. France’s EDF formed its Distributed Electricity and Storage business unit earlier this year, building on its 2016 acquisition of groSolar. French utility Engie bought U.S. energy services provider Ecova and OpTerra Energy Services, as well as behind-the-meter battery startup Green Charge Networks. And Italian utility Enel’s U.S. subsidiary has joined the fray with its purchase of behind-the-meter energy storage project developer Demand Energy, and most recently, demand response market leader EnerNOC.
All of these acquisitions share several common characteristics, Bennett said. First, they’re bringing utilities opportunities in territories outside their core regulated services territories. After all, “you’re not going to self-cannibalize your steady income,” he said.
Second, they’re aimed at capturing the growing share of large commercial and industrial customers that are looking for more control of their energy usage. “They’re going to take those high-end customers, because the customers want it.”
These two trends are mutually reinforcing, he noted. The defection of C&I customers from traditional utility relationships is already happening, “and at a scale that’s pretty large,” he said, pointing to high-profile examples like MGM’s Nevada casinos paying $87 million to drop service from utility NV Energy and take up with retail power provider Tenaska.
It doesn’t take too many of these losses to have a significant impact on a utility, he noted. “You don’t need to lose 10 percent of your customers. You just have to lose a few percentage points of your top customers that are subsidizing major portions of your grid costs.”
Regulatory efforts are underway to enable distributed energy to play a role in utility operations, as with California’s DRP proceeding and New York’s REV initiative, as well as to play a role in energy markets run by transmission system operators such as California ISO or PJM. But “regulator-driven change hasn’t…been particularly successful” in this industry, Michael Carlson, president of Siemens Digital Grid, noted, citing the experience of California’s abortive deregulation in the late 1990s and early 2000s.
Regulatory changes can also take too long to keep pace with changes being wrought by technology, noted Todd Glass, a partner with law firm Wilson Sonsini Goodrich & Rosati. Still, despite the vanguard role being played by such upstart contenders as Tesla and SolarCity, the utilities’ deep pockets and central role as energy provider for the majority of the country could put them in pole position to offer the complete package of products and services that many customers are looking for, he said.
“I don’t know who the ultimate competitors or providers of services will be in the future,” he said, but added, “You’re going to have larger companies offering bundled services.” Smaller companies that can’t pull together this complete suite are “going to be acquired, largely, I think — or evolve into much bigger companies.”