Coming soon: The electric utility of the future

Markham interviews utility veteran Val Jensen about the electric utility of the future. New technologies, changing consumer needs, and climate policies are just some of the forces transforming the current utility business model.

What is Energi Talks?

Journalist Markham Hislop interviews leading energy experts from around the world about the energy transition and climate change.

Markham: 00:00

Of the interesting features of a network or a web is that it's inherently more resilient. You take out one node in that network and the rest of it can can work its way around. Things reroute. Whereas if you have this centralized system with 1 generator and one set of lines to a customer, you lose that generator, you lose that line, and you're in in big trouble. So I think one of the lessons of the wildfires in California of the Texas storm, of the hurricanes that we've seen in the US, is that modular networked systems enhance our ability to ride through these kind of events.

Val: 00:41

Welcome to another episode of Energy Talks, The podcast where we discuss global energy issues and trends with experts from around the world. On this episode, I'll be talking to Val Jensen, a utility industry veteran and senior fellow energy advisory policy and program implementation at the ICF. He's based in San Francisco. He recently authored a paper titled building the 22nd century utility. How a utility c CEO remakes her business to survive and even thrive into the future.

Val: 01:15

So we're gonna discuss the electric utility of the future with him. Welcome to Energy Talks, Bill.

Markham: 01:20

Thank you, Mark, and so much for having me. I can't wait to have the conversation.

Val: 01:24

Well, that makes 2 of us. And so let's start that conversation with a discussion of the status quo. Where are we now? What does it look like? The cost of service utility model has been around for more than a 100 years.

Val: 01:39

Maybe why don't you describe that for us?

Markham: 01:43

Yeah. So the status quo, as you say, is anything but status or quo. I think I think we're in the midst of a huge period of turmoil and transition, which will be from this this historic cost of service model to something we'll talk about perhaps a bit later. So this historic model was actually brilliant in its conception, and and hopefully, I can get to why that is. But but the model is actually pretty simple and based on just a couple of pieces.

Markham: 02:11

The first is that the business is a regulated monopoly. So, in exchange for being granted a monopoly to serve a particular set of geographic territories, the utility industry, at least the investor owned utility industry, agreed to be pervasively regulated with respect to both price and service. The way the price is regulated is fairly ingenious and was set up as a way to control utility profit. So essentially, a utility will invest a certain amount of capital and the regulator will allow it to earn a rate of return, a financial rate of return on that invested capital, which is known as the rate base. And then on top of that rate of return on rate base, the utility is allowed to recover its its operating expenses.

Markham: 03:00

That model then was paired with the second feature of the way the business worked, which was the unit of transaction being the kilowatt hour. So, you take that money that the utility is allowed to recover, the rate base plus expenses, and you spread it over all of the kilowatt hours that are sold to customers, and that equals your average price. It was, as I said, a brilliant model early in the industry because this was a time when the industry was rapidly expanding and what we call economies of scale were pervasive in the industry, which basically meant the bigger you are, the cheaper you are. So, what happened is utilities would invest lots of capital, earn a return on that capital, but the price kept falling because consumption was continuing to increase. So you got into this virtuous cycle, more investment, lower price.

Val: 03:55

And I gather one of the key features of that is the vertically integrated centralized form of generation distribution?

Markham: 04:05

Yeah. The the industry broadly described has a couple of different organizational forms, co ops and municipal utilities and so forth. But the predominant form throughout 20th 21st century was the integrated generation transmission distribution utility where one entity controlled the production all the way to the delivery at the customer's meter.

Val: 04:29

Is it fair to say, Val, that for a variety of reasons, and we'll get into those in just a moment, that model is being exploded. It's being reengineered. It's being it's evolving. It but it's a fairly a period of rapid change for the industry. Is it not?

Markham: 04:47

It is absolutely a period of rapid change. Although, if you spend any time with this industry, the last 40 years in many respects has just been a continuous series of rapid changes going from in the 19 seventies, the nuclear build era to the almost bankruptcy of the distributed energy resources and the falling apart of the integrated utility. There are a lot of utilities in the country. Probably half of the population of the United States is served by utilities that have been broken up into generation companies and distribution companies. And I think where we're really seeing the interesting change happening is with those distribution companies now who are trying to figure out what life is like in a distributed energy world.

Val: 05:41

Well, that's interesting. So what are the forces that are driving the change? We've got rapid technology change. We've got climate change as an issue, which means different policy framework, regulatory framework for the industry. Customers are changing their expectations.

Val: 05:59

We've got the wholesale market coming apart. Electricity pricing's a mess. Revenue models are wrong. And of course, I'm getting all this information from your paper. So, have I got most of the forces that are acting on utilities today, or are there others as well?

Markham: 06:18

No. You've captured most of them, but I think what I would do is go back to the the 2 fundamental, I think, drivers of change in the industry. Principle drivers are technology, which is But the 2 principal drivers are technology, which is getting continuously better, faster, smaller, cheaper, more interconnected, more powerful, and so forth, and customers. Now you suggest a change in customer expectations. I don't think customer expectations change at all.

Markham: 06:53

I think since we started walking on 2 legs and and learned to make fire, our expectations have always been pretty much what they are. What has changed is our ability to meet those expectations as technology gets better. So I think the fact that you see technology on both the generation and energy use side getting so much better, customers suddenly are able to do things they weren't able to do before, and they're demanding the ability to do that. And that's where a lot of the creative tension you see in the industry bubbling up comes from. The utilities are still operating largely in the mindset of the 21st century industrial centralized organization, And customers are going, hey.

Markham: 07:36

I, you know, I wanna put this stuff on my house and be my own power company. Why can't I do that unencumbered of of your business practices? I look at it a lot, Markham, like, and this example has been used to death, but but the smartphone. Most customers couldn't have told you they wanted a smartphone, but they wanted to do everything that a smartphone can do. Somebody finally came along with the technology to do it, and customers immediately gravitated to that.

Markham: 08:03

And I think that's what we're seeing in our business. Finally, the technology for production, management of of energy, storage of energy at the place where the energy is ultimately used in your home or your business has gotten to the point where you can do wonderful things as cheaply as you could if you if you did those things with the utility.

Val: 08:25

Is it fair to say, Val, that under the cost of service model, cost was the price was the main, I don't know, incentive for a customer. Now it's value. It's not just how cheaply you can get a kilowatt hour of of electricity. It's what are all the wonderful things you can do with it that add value to your business or value to your to your home. Is is that a good way to describe it?

Markham: 08:58

It's a it's a fascinating way to describe it, and I'm gonna disagree with you a little bit going back to my last answer. I think that customers have always wanted to do that. Value has always been the thing that you and I are interested in, but when you've got an industry that says, this is the only thing you can have, one plain vanilla white kilowatt hour just like every other one, then value doesn't really factor into it. You and I are concerned about, as they say, keeping the beer cold and and the dinner warm. We don't care about consuming electricity.

Markham: 09:33

We just use electricity to get those jobs done. And if we can get those jobs done in a cheaper, better, faster, more elegant way, we're gonna we're gonna do it. If you could run your podcast with a a couple of panels sitting on on your roof, you'd probably do that.

Val: 09:50

I probably would. And may yet.

Markham: 09:53

Yes.

Val: 09:54

Let's not rule that out. Okay. So we've got, there's another set of technologies at play here, that you mentioned in your paper, but don't get a lot of attention. And that, is sensors, artificial intelligence, automation. I mean, there's all of these digital technologies that are reengineering business models in other sectors.

Val: 10:18

And in the energy industry, oil and gas is the current one that's being, affected quite a bit. And what role are is that suite of technologies playing in this process?

Markham: 10:31

Another great question. And I think most of us think of technology and the utility business as a solar panel. But I think to your question, probably even more impactful than the local generating technologies are, is the suite of technologies, as you said, for sensing and control of how electricity is used. The energy efficiency business has wrought profound change within the utility industry over the last 30 to 40 years because they have realized that if you can control how and when energy is used, you can save people a lot of money and you can avoid building a lot of, infrastructure in the utility industry. The ability to do that, to control when and how electricity is used is so much easier and so cheaper now with the sensing and control technology that's available.

Markham: 11:25

Just, you know, think about the the the quintessential wall thermostat that I grew up with had, you know, a little bulb of mercury sitting in it and you would turn a knob to make it go higher or lower. Today's thermostat knows when your home knows what part of the house you're in, knows what temperature you like to to keep your home at. All of that due to to the advent of dirt cheap microprocessing and cloud based technology that runs all of that for us.

Val: 11:55

Well, let's talk about what the utility of the future might look like, and you've got some pretty interesting ideas. Not sure where to to start with this, so I'm just gonna plunge into 1 and and we'll we'll go from there. And that is that the that this, the utility system begins to look like a network. And the network begins to look like a cluster of smaller networks, all coordinated, balanced, and supported by the utility. So you mentioned co ops and you mentioned individuals, you know, generating power with solar, roof, rooftop so sorry, solar on your their rooftops, that sort of thing.

Val: 12:36

Is that maybe, could you elaborate on that, please?

Markham: 12:41

Yeah. Sure. And I think you're gonna say is that is that realistic or is that gonna happen? And it's happening now. But but to understand, let's just take a quick trip back to the industry as it generally looks to most people today, where you have a big generating power plant, whether it's a nuclear plant or a coal plant sitting somewhere out in the middle of nowhere generating 2,000 megawatts of power.

Markham: 13:06

You push that power over big transmission line. You step it down to a lower voltage and push it over distribution lines, and it runs through the meter into your house to light the light bulb. It's a one way flow of electricity from the big plant to the the light bulb. With the technology that has emerged over the last 20 to 30 years, both for on-site generation storage and control and management of energy, now every one of us produce power. We don't need a big power plant sitting in the middle of Manitoba or Saskatchewan doing that.

Markham: 13:38

We can just put it on our roof and generate our own. We can then run it into the battery in our garage and store it for when we're going to need it and the sun's not shining. We can use that same technology to control the amount of energy we use when the lights turn on and off and so forth. And we can sell spare power that we don't need to run our light bulbs back into the grid. So suddenly we've gone from this one way flow of electricity into a bidirectional and multidirectional flow of electricity.

Markham: 14:07

That changes what was called a radial electric system, a hub and spoke system, into one that's a web, a network, where lots of people have the ability to generate electricity and sell it to lots of other people. And so, what's also interesting, Markham, is that this is not just about electricity anymore. This web is about sharing electricity. It's about sharing information. It's about sharing money.

Markham: 14:32

So suddenly, you've got these flows going on in lots of different directions involving lots of different parties. Consumers are now producers, producers are now consumers, and the architecture of that looks much like a web where there is no central element that's controlling everything that goes on. The role of the utility in that world becomes simply to make sure this web continues to run and stay in balance. It's not to dictate who gets to use how much of what kind of energy.

Val: 15:04

Well, that's fascinating. And and when I hear descriptions of this future, like, utility as a platform, is that what we're talking about?

Markham: 15:13

Yes. It is. Much like the platforms we've grown accustomed to over the last decade with smartphone operating systems or Amazon as a platform for buying and selling, that's really what the utility industry, I think, will become is the place where people can transact around the energy services that they're trying to to produce and consume.

Val: 15:36

Now, I understand that if I'm thinking of a a platform that's owned by a single utility that controls generation transmission and distribution, what happens in many markets where you have a number of generators, a number of utilities, a number of many competitors in the retail, How does all of that get coordinated into a platform?

Markham: 16:05

Yeah. Well, the it's it's easier to conceive of conceive of the answer to that when you stop and think about what goes on today. I'm not deeply familiar with with all the provincial Canadian power systems and how they're regulated, but for example, in the state that I worked most of my time in Illinois, it was a restructured market. So, there were already hundreds of people who could build and operate power plants, sell all of that into a centralized wholesale market, which was managed by something called PJM in in our case. You would had 100 and thousands of buyers, mostly utilities, but it could be large industrial customers buying their own electricity from either the market or from specific suppliers.

Markham: 16:50

And then the grid is managed in a way such that all of that is able to balance out both electrically and financially. So we're already a platform. All we're talking about is giving more people and more technologies access to that platform and understanding that the business model needs to reflect the fact that we're a platform and we're not this, you know, manufacturing entity that produces a kilowatt hour at one end and sells it at the other end.

Val: 17:20

That's that's fascinating. Just to answer your question about what happens in Canada, we in fact, have a system that is still vertically integrated and regulated, and more often than not is owned by a provincial government. So in BC and Saskatchewan and Manitoba and Quebec and the maritime provinces, a gover they're government owned. And that impedes the kind of change that you're talking about because not only do they not only are they a utility, which is, you know, rather conservative and and not embracing change, but now they're owned by the government, that is pretty much the same. So my impression, Val, is that the US is this hotbed of change in the, in utility business, but everybody comes at it from a different angle because of, you know, their history and geography and the state policies and framework in which they operated.

Val: 18:19

Is that fair to say?

Markham: 18:21

It's absolutely fair to say. And as I was thinking of your description of the the Canadian system, I'm thinking take that and extend it to 50 separate states. One of the, you know, I guess the beauties of the American Federalist system is that you have these 50 separate laboratories. One of the problems of that federal system is that you get 50 different opinions on what the right way to do this is. And I'm sure you've been paying attention to what's been happening in Texas lately.

Markham: 18:49

That Texas solution is one that 49 other states said we don't really think we wanna be part of. And now you've got 49 other states pointing fingers at Texas going, this is why we didn't wanna be part of that. So there are lots of voices weighing in on this. Some of them, you know, are concerned for the public good and are articulating a climate protection platform. Others are in it for the money.

Markham: 19:15

You've got Elon Musk's hustling solar and batteries. You've got utilities with very entrenched longstanding interests. So everybody's got an opinion. Everybody's got a view of what the future's gonna look like, and it's very unclear how that's gonna sort itself out.

Val: 19:36

Well now, let's talk about Texas for a minute, because it seems to me, I mean, it's still early days. They haven't the the storm that created the problem there hasn't debated that long ago. But it seems like already there, you know, a lot of people are talking about, micro grids or rooftop solar or something to give their their own sis provides energy security to their home, their their community, their town, whatever it might be. And climate change and climate and weather related disasters like the one in Texas appear to me to be maybe something that will accelerate the change we're talking about. What what's your take on that?

Markham: 20:17

Yeah. I think so in a couple of ways. 1, just because people are concerned about the causes of that increasingly severe weather, folks wanna decarbonize, and that decarbonization push is driving a lot of change in technology. But on the other side, what you're talking about is this idea of resilience or lack thereof. And one of the interesting features, I don't ask me to do the math, but the math can be done.

Markham: 20:45

One of the interesting features of a network or a web is that it's inherently more resilient. You take out one node in that network and the rest of it can work its way around, things reroute. Whereas if you have this centralized system with 1 generator and one set of lines to a customer, you lose that generator, you lose that line, and you're in in big trouble. So I think one of the lessons of the wildfires in California of the Texas storm, of the hurricanes that we've seen in the US is that modular network systems enhance our ability to ride through these kind of events. So not to say we don't need to decarbonize and reduce the risk of it, but given that the risk is there, this sort of decentralization, distribution, democratization of energy is actually something that enhances the resilience of the system.

Val: 21:43

Now how are regulators dealing with this democratization and decentralization?

Markham: 21:49

Just, you know, the 50 state example, I think, is indicative. There are 50 sets of regulators, I think that's right, and plus a federal regulator, and they all have slightly different views of this. My view is that by and large, regulators are committed public servants. They want to do the right thing for for their constituents, for the public. The challenge is that they are in office typically for such a short time.

Markham: 22:17

They have short time horizons. It's hard for any policymaker to kind of fully grasp and deal with a problem that is decades long in terms of its ability to be solved. So there are some really, really committed regulators, really innovative folks. I've seen some in California, New York's got its share, Maryland, even Illinois where I worked. Pockets of great regulatory policy thinking everywhere.

Markham: 22:50

It's just that change takes time and you've gotta do it 50 times over in this country.

Val: 22:56

Well, let's also talk about wind and solar and batteries because that that is a big driver of change and a key part of the Biden administration's climate policy to move in that direction. A, I guess, what change will it rot in the in the new system, the utility of the future? And b, is it gonna be rapid change and and, you know, how disruptive is that going to be?

Markham: 23:25

Yeah. I I you know, I'm optimistic personally, with the new administration and its climate policy. But I I think I don't remember exactly how you framed your questions, but I'd say no to both of them. It's a change in degree. It's a qualitative change, not a quantitative overnight unless you, you know, take the whole system change overnight unless you, you know, take the whole system down and rebuild it as as a function of some disaster.

Markham: 23:59

So I think the signs point to an alignment of interests, finally, which we haven't had for the last 4 years in moving the industry ahead in a much cleaner, sustainable way. And everything helps, but it's not going to suddenly change everything overnight.

Val: 24:19

It's very, seldom that anything changes overnight. The iPhone the iPhone was adopted rather rapidly, but that's the exception, not the rule. And so Val, if you had to wrap this up and look out over the next 5 to 10 years, what kind of changes can we expect, in the American utility system?

Markham: 24:44

You know, Mark, if I can turn that question around a little bit, the whole point of writing the paper was I don't know how to look 5 or 10 years into the future. My job was doing that, and I was always wrong when I tried to predict what 5 or 10 years was gonna look like. So what I've tried to do with with the the paper that we're talking about is ask the question of what do we want the future to look like and how do we build toward it? Because one of my frustrations in this industry historically has been we assume that we don't have control over our fate. And in fact, I think we have lots of control over what this all looks like.

Markham: 25:25

So what do we want the utility system to look like? We want it to be cleaner. We want it to be more distributed. We want it to be more democratic in the sense that customers have more choice. We want it to be more resilient.

Markham: 25:38

Well, if you want those things, then then what can we do tomorrow to start building that? And there's an awful lot that that can be done.

Val: 25:46

Well, Val, thank you very much for this. Really appreciate it. You provided many valuable insights into where the electric system and the utility system in the US is going, and really appreciate

Markham: 25:58

it. Marco, my pleasure. Thanks for having me, and, this is a conversation we could have for another 10 years probably, and we'll still never know the answer.