During 2019, California will enact a wide-scale rollout of time of use (TOU) rates across 20 million customers. Pilot programs are ongoing across the US to determine the effectiveness of TOU.
Accelerating EV adoption will require going beyond incentivizing customers to buy cleaner cars. Rewarding energy companies for playing their role in driving the shift to electrified transport demands urgent policy updates, as seen in more forward-looking regions. In Arizona, policymakers now allow utilities to recover investment in EV charging infrastructure through rates.
Helping energy companies shift their business models from those purely based on selling as much electricity as possible requires new ways to reward performance. Regulators should consider revenue decoupling, which separates an energy company’s sales from its revenues and profits. Rates of return are aligned with revenue targets, and rates are adjusted accordingly to meet the target at the end of the adjustment period. This improves the case for deploying energy efficiency and distributed generation solutions, as the operating environment becomes less incentivized to expand traditional energy sales.
Performance-based regulation (PBR) must also be explored as a tool to better incentivize utility investment in distributed generation, energy efficiency and demand-side management solutions. Globally, the most common form of PBR is multiyear rate plans (MRPs), which feature a moratorium on rate cases for several years — frequent rate cases are associated with poorer performance and higher customer costs.
MRPs balance incentives for cost containment with incentives to strengthen performance in targeted areas, which may include utility conservation programs focused on smart grid innovation, distributed generation and energy efficiency. Prominent examples include the UK’s RIIO8 and New York’s Reforming the Energy Vision; but, we also see leading MRPs in Australia, Germany, the Netherlands and New Zealand, and discussions around PBRs are ongoing in several US states, including California, Hawaii, Illinois, Ohio and Pennsylvania.
3. New financing models must encourage investment in new energy solutions
The true innovation seen across the energy sector is yet to make much of an impact on the financing structure that funds it. But, as the energy transition amplifies the risk of diminishing returns to traditional investors, finding new sources, and models, of funding is critical.
Energy companies must explore new investment models that share risk and rewards and encourage collaboration. For example, shared risk ownership models allow technology developers or other third parties to own and operate assets in partnership with the local utility. Those with real foresight could offer 100% clean power to customers, including corporate buyers, taking on the complexities around price and supply risk.
Others may follow the lead of those energy companies that have already established venture capital funds to pursue innovation.
And, almost all must consider how to join forces with players within the wider energy ecosystem. Private equity and infrastructure funds have record levels of dry powder9 ready to deploy into the market. Funding the energy infrastructure and networks fit for the future will be a team effort.
4. Collaboration is necessary for innovation
All stakeholders in our energy system must realize that the challenges of the sector cannot be solved in isolation. When industry players, regulators, governments and companies in adjacent sectors work together, there is greater potential to unlock the innovation needed to address the most complex energy challenges.
- Partnering with technology companies can help utilities better leverage digital innovation — Southern California Edison has collaborated with Google Nest thermostats to roll out a residential demand response scheme that helps balance the grid on hot summer days.
- Working with automakers is a natural fit — Sweden’s Vattenfall has partnered with Volvo to deliver, install and service EV charging boxes.
- Better meeting the specific energy needs of corporate customers requires a sophisticated understanding of commercial and industrial energy management — Enel acquired US company EnerNOC to position Enel X as a leader in this space.
- Building smart, sustainable cities requires energy companies and governments to work hand in hand – Spanish renewable energy giant ACCIONA joined forces with the Madrid City Government to implement a city-wide energy management system across 400 municipal buildings.
But sector convergence and the digitization of energy open up almost endless opportunities for nontraditional collaborations. Energy companies must take an open-minded approach to partnerships, considering how best to combine knowledge, skills and customer bases to tap new revenue streams.
Embracing flexibility may be the best strategy
Will the tipping points move even closer when we next update our analysis? The answer is probably yes, given the faster than expected evolution of the energy sector so far, particularly regarding the decentralization of electricity generation. A compressed countdown to transformation amplifies pressure on energy companies, regulators and other stakeholders to be ready in time. Time is short to transform businesses, reform regulation, develop new financing models and build the cross-industry collaborations that will solve the most complex energy challenges.
But, while navigating the brave new energy world requires a robust strategy, perhaps the best approach is to embrace flexibility. Exploring different possible futures, the levers that influence them and the interactions that arise within a complex energy system is critical to survival.
The clock is ticking.