Tuesday, June 30, 2015


2nd Edition

One of the topics that I am most frequently invited to address in articles and presentations is what electric utilities, especially electric distribution utilities, should be informed about, planning for, and implementing as the electric utility industry undergoes drastic, irreversible, revolutionary restructuring. This is my second edition of the Top Ten +1 Challenges.


The viability of the century old, legacy electric power grid has been declining and is expected to continue to do so at an accelerating rate. A dramatic 2009 report by the USDOE’s Electric Advisory Committee stated that:

" . . . the current electric power delivery system infrastructure . . . will be unable to ensure a reliable, cost-effective, secure, and environmentally sustainable supply of energy for the next two decades . . . is nearing the end of its useful life."

What a dramatic conclusion by a group of utility executives and professionals who are the ones who plan, construct, operate and manage the US electric grid! And that was 6 years ago. Only 14 to go?

The Existing Grid Is Wearing Out

The EAC arrived at this conclusion in part because the bulk power grid is simply wearing out. Depreciation exceeds new investment. New investment is not keeping up with grid deterioration because: 

(1) persistent exponential growth in electricity consumption slowed after the 1973  OPEC Oil Embargo and is now actually negative, 

(2) legislative and regulatory barriers based upon environmental and sustainability concerns constrain, even prevent, the siting, construction and operation of new grid facilities, 

(3) the cost of new generation, transmission and distribution plant is increasing and any significant new construction means higher rates to consumers in an increasingly competitive environment, and 

(4) utilities incur significant risk of not recovering all their costs, much less an adequate return, for new infrastructure investment.

As a result, the legacy bulk power grid, is showing its age and is increasingly operated in a “run to fail” mode. Consequently, during the past two decades, major outages (i.e., affecting 100MW or 50,000 customers) have essentially doubled every five years.

Climate Issues Further Erode Grid Adequacy

Grid adequacy is further threatened by climate issues. Aside from the hotly disputed linkage of climate change and utility use of carbon-based fuels, the number, duration and severity of weather events have been steadily growing. The adverse affect on grid reliability is undeniable even if the ultimate causes may be disputed. 

By the way, as to climate change, the general public increasingly opposes the use of carbon-based fuels in the belief that this is partly to blame for global warming. Further, the use of “dirty” or dangerous fuels increasingly pollute our air, land and water. The old adage, "perception is reality," applies here. Whether you believe or agree with it, you are affected by it. It limits not just deployment of new generation, but constrains the operation of existing generation.

Distribution Grid Reliability Is Inadequate

More customer service outages are caused by distribution system failures than by bulk power grid failures. The declining adequacy of the bulk power grid certainly makes this worse, but perfect bulk power grid reliability would not result in perfect distribution grid reliability. Is perfect distribution grid reliability desirable? Certainly. Is it possible? Not by conventional means. It will be increasingly essential in the digital future. 


As if there weren’t enough threats to grid adequacy and reliability, the electric grid infrastructure is insecure. While much of the dialogue in the industry has been about cyber security, that is not the only or even the most serious problem. As the grid becomes more digital, with greater automation, cyber security may eventually pose as great a threat to reliability as it now does to utilities’ and customers’ data. Perhaps more disturbingly, the grid is dramatically physically insecure. 

There is not a critical facility in the grid (e.g., generation, transmission, distribution) that is not readily approachable by pretty much anybody. If someone cannot easily climb or cut through the fence, they can easily get within throwing distance and certainly within rifle or RPG range. Physical attacks on the grid are on the rise, both for the bulk power grid and for electric distribution systems. Detecting and responding as well as anticipating and preventing physical attacks will be increasingly important. A digital society depends upon reliable electricity.  


As costs increase, reliability decreases, and sustainability becomes more important, customers seek alternatives to legacy grid service. They find an increasing variety of ways to buy less from their incumbent cost-plus monopoly utility. They can and do pursue conservation and energy efficiency, the simplest and surest alternatives. Utilities helped sensitize customers to their energy usage and alternatives with demand response and critical peak pricing initiatives. These were intended to change customers’ behaviors to prolong the viability of the legacy grid. Ultimately, though, customers are not motivated to change their behavior to help their electric utility remain viable. Instead, they are more interested in the most convenient and effective ways to obtain, manage and use electric energy for their own quality of life, productivity of business. 

There is only so much that customers are willing to sacrifice in terms of convenience in order to reduce their demand during the times when they want to use electricity the most. And they tend to reduce their consumption during times that utilities want most for the to purchase energy.

Customers are finding other alternatives on their side of the meter, notably distributed generation: conventional backup generators, rooftop solar arrays, combined heat and power facilities, even microgrids. Even the ways that customers utilize and manage their electric energy is changing drastically with the advent of electric vehicles, battery storage, smart homes / buildings, etc.

A growing number of states allow customers to shop for and purchase energy in competitive retail markets. Ultimately customers will all be able to purchase and sell electric energy in transactive energy markets. Don't know what transactive energy is? You should! You’ll be facilitating it sooner than you imagine.


Some 20,000 utility owned generation plants power the legacy grid. They are centrally dispatched to deliver power into transmission lines which carry it to load centers to be distributed through utility meters to customers.  This centralized, one-way model is being turned on its head by distributed generation, storage and management. There are now hundreds of thousands of energy generation units on the customers’ sides of the meters at the distribution edges of the grid. And the number is growing exponentially. Just the exploding penetration of distributed solar photovoltaic generation facilities is revolutionary. A new rooftop solar array is deployed every 3 or 4 minutes. It has been estimated that essentially all new generation capacity in the electric grid between now and 2030 will be customer owned, and operated, making up 30% of all capacity.


Underlying the developments described above is a rapidly growing array of new energy, electronics, information, and telecommunications technologies, devices and applications. Their performance versus cost improves exponentially for the same reasons that Moore’s Law holds for integrated circuits. That means that their prices steadily drop while their value steadily increases. This hastens the obsolescence of the traditional means of generation, transmission, distribution, sales, management and utilization of electricity, all of which have reached the limit of their value while they still increase in cost.

New technologies are not only revolutionizing the grid from the edges inward, they at the same time make it possible to meet the challenges of the new “Grid Edge.” Utilities must stay abreast of what they are, what they do, and how they can be best utilized to plan, operate and manage their increasingly complex and challenging business.


The relatively simple, vertically-integrated, centrally monitored and controlled, cost-plus monopoly franchise paradigm is on it’s way out. In it’s place a new, decentralized model is emerging involving orders of magnitude more components. If only 1% of the 145 million metered customers deploy distributed generation, storage, or management, that represents 1.5 million new variables in the grid. And these are not likely to be under central monitoring and control by electric utilities. They will be owned and operated independently by customers for their own benefit. They will be small, intermittent, even stochastic. They will not be operated primarily to maintain the reliability and efficiency of the legacy grid. 

Add to this an exponentially growing number of electric vehicles which represent roaming energy consumption, each comparable to the demand of a residence. And don’t forget Elon’s Tesla PowerWall. And Nest thermostats. And smart appliances. This is a "fractalization" of the electric energy business that belies traditional central monitoring and control. It will take new methods of sensing, analyzing and operating electric distribution systems in the presence of probabilistic rather than deterministic variables. More independent moving parts will require a truly smart distribution grid, not just so called “smart” meters and time of use pricing schemes.

This is often referred to as the "Grid Edge." The most important and impactful developments in the electric utility industry in the foreseeable future will be at the distribution edges of the grid, not in the bulk power grid. Many if not most of these developments will be on the customers' sides of the meters. This means tremendous challenges for electric distribution utilities, but at the same time fantastic opportunities to bring a new and better products and services to their consumers and communities.


Costs of generation, both fixed and variable are rising. Costs of transmission and distribution are rising. The costs of doing business are rising. On the other hand, utility revenues from energy sales are declining as a result of conservation, energy efficiency, distributed generation and competition. The traditional solution, raise rates to ensure recovery of costs plus a margin only further incentivizes customers to find alternatives.

Utilities generally collect a majority of their revenue through charges for energy usage, a variable quantity, yet the majority of their costs are due to capacity, a fixed quantity that doesn’t diminish with diminished energy consumption. In other words, their costs don’t drop as much as their revenues in the face of the Grid Edge. 

Electricity is provided in variable quantities from minute to minute and the costs of providing it vary by time of day and day of the week and season of the year. It is composed of the output of generating plants with varying kinds of fuels. Yet, customers are billed in a lump sum (sometimes with a largely inscrutable breakdown on their bill) a month or more in arrears. Consumers don’t buy groceries or gasoline or appliances or most other things in this way. Neither should they be required to buy electricity this way?

Traditional approaches to cost of service and rate design are no longer sufficient. And the ultimate objective cannot be ensuring recovery of costs and a reasonable profit. Instead it must be providing products and services at a price that is consistent with its value. Sometimes that will be will above cost, sometimes below. Utilities will be required to sell products and services base on what customers will pay for them in competitive markets while figuring out how to maintain financial viability of the enterprise through best business practices.


Just as every other busIness in the world, in order to stay competitive, utilities must transform themselves into fully digital enterprises. Only this allows full operations 24/7/365 with the optionality, customization and responsiveness that customers are already accustomed to with Amazon, Starbucks, Federal Express, StitchFix, Instacart, et. al.

This is so much more than a website, particularly the marginal ones that most electric utilities have! It’s a transformation into a virtual enterprise. This means being able to do any business online as well or better than in person. It means being on social media in a big way. New competitors will come into existence as digital enterprises, not constrained by the need to overcome an incumbent, non-digital business structure and culture. There is no way for a bricks and mortar culture to compete successfully with a digital one.

In addition to the business being digital, a modern, intelligent grid will be a digital grid. Information technology (IT) and operations technology (OT) must both expand and merge. In fact, the modern distribution grid will be a convergence of the electric grid with the Internet of Things. Do you know what this is? What the Enernet is? You must!


The basis for a digital enterprise (as well as for the best quality of life and productivity of business in your community) is the ubiquitous availability of high speed, two-way, digital communications. It means broadband Internet. It will be impossible to be a digital enterprise or have a modern, intelligent grid without it. It will not be possible to ensure integration and interoperability of all devices, applications, data and activities unless they all plug directly into the Internet. 

The profusion and complexity of the Grid Edge will require the monitoring, analysis and automation of the distribution lines and devices and of the Grid Edge components. It will not be possible to accomplish this through closed proprietary silos of devices, communications systems, data bases, and applications. It requires “3-D” integration and interoperability. Every device and application and communications channel must interoperate seamlessly with every other one. This transcends vendor specific protocols. Everything must be on the same platform. And that platform must be broadband Internet. 

It may eventually be possible for a distribution utility to do everything that it needs to do on the public Internet provided that it is ubiquitously available throughout. If it’s not, it should be the starting point for a utility’s technology plan to enable a successful business strategy.


The workforce challenge is threefold. First, the long time stability of the electric utility industry has enabled longevity of employment unparalleled in most other businesses. As a result, utilities find themselves with an aging workforce that has begun to rapidly dissipate. The retiring workers take with them decades of institutional knowledge and expertise. This leaves utilities with the challenge of reaching, recruiting, training and retaining new employees. 

At the same time, as described above, entirely new expertise and experience is needed for utilities to deal with the new components and complexities of the modern grid.

Oh, those dreaded Millennials! They will soon be the core of our workforce. It is essential to rethink the recruitment and management of utility staff given not just the the new realities of the grid but also the unique characteristics of the Millennials (not to mention their children!) who will be utility employees. Not only will they simply not do things the way that utilities are accustomed to and comfortable with, but they can and will do things that previous generations of workers would find difficult or impossible. And, actually, given the scope and depth of change that the industry faces, the industry badly needs their new thinking, skills and methods.


Who really knows what can and will happen next? Moore’s Law for electronic components is just a special case of a more universal truth (a la Wright's and Kurzweil's Laws): Disruptive, enabling technologies will improve in performance versus cost exponentially. And there will from time to time be new disruptive technologies and business models that represent quantum leaps, not just continuous albeit exponential change. Utilities will require unprecedented agility and innovation to face a rapidly changing future and largely unpredictable future. The only way to reduce the uncertainty and risk is to aggressively embrace and shape the future, not resist it. The most successful electric distribution utility will be the one that causes revolutionary change, not the one who ignores, much less resists it.


The industry's response, with a few shining exceptions, has been, shall we say, less than enthusiastic. By and large, because of their corporate culture and regulatory domain, electric utilities are at best incrementalists and at worst preservationists. The tendency is to preserve the status quo rather than endure the risk of new business models. 

In a way that is both humorous and sad, many electric utility executives, professionals and line employees tend to react to the challenges with something akin to the well known Kubler-Ross sequential stages of grief:

Denial and Isolation - Insist that grid restructuring isn’t necessary, that this is a passing fad, that the legacy grid just needs some tender loving care, maybe some CPR. “Educate” customers on how the legacy grid is still in good health. Avoid those who say otherwise and diss those who are aggressively engaging the new realities. Try to get out of the business or make it to retirement instead of facing the passing of the beloved legacy grid.

Anger and Resentment - Assert that the new realities are unreasonable and unfair. Protest that the problems are arbitrarily caused by others (e.g., customers, regulators, legislators, competitors) and that they should be barred. Seethe and sulk because business is so hard without the beloved legacy grid model.

Bargaining - Try for exemption from the future by lobbying for favorable legislation, petitioning for regulatory relief, or suing for judicial intervention. Try to persuade customers to change their behavior to make the problems go away and to accept higher costs with reduced quality of service.

Depression - Mourn for the old burnt out light bulb and find no joy in the new and better LED one. Take no joy or experience no enthusiasm for the opportunities posed by the future. Abandon all hope of successfully meeting the challenges. Hope for a miracle drug.

Acceptance - Move on. This stage is reached by only a few incumbents who realize that denying the passing of the old grid model only hinders finding peace and success in the present and future. More importantly, new industry participants (e.g., customers, competitors, entrepreneurs, innovators), who were never actually attached to the dearly departed, are grief free. They are free to embrace new and better things. Grieving incumbents will find that acceptance can be accelerated by associating with them as well as with those who have experienced and triumphed over a similar loss (i.e., a devastating industry restructuring).

To successfully meet the challenges, and, more importantly, to exploit the opportunities that they engender, they must be recognized, understood and accepted. Electric utilities, like Norman Bates, cannot prosper by trying to preserve the dearly departed in a back room while trying to eradicate newcomers.

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