The electric utility industry is currently undergoing the greatest period of transformation in its history. Utilities are facing new challenges, and these challenges present opportunities for them to reevaluate business processes that have remained unchanged for decades. This blog series delves into six of what we consider to be the most impactful challenges, dissects them, and hypothesizes how they will shape the future of the utility industry. This blog post explores the types of partnerships utilities form with third party vendors.
In a previous post in this series, we talked about demand response (DR) programs and how DR providers can bid capacity reserves into the wholesale market. What we did not mention is that these DR providers could be utilizing energy storage systems, and a pilot project in the California Independent System Operator (CAISO) energy market did just that. In 2015, Stem Inc, a provider of distributed storage system solutions, successfully bid aggregated storage from multiple customers as a demand response resource into the wholesale market, a first for the state of California. This feat was the result of a partnership between a utility within CAISO jurisdiction, Stem Inc, and Olivine – the company behind the software that handled the bidding transaction. During times of peak load, the energy storage facilities of many different customers act together to discharge electricity, and during periods of over-generation, the excess electricity can be distributed to each storage system. The utility benefits from the large-scale flexible load, and Stem’s customers benefits from the additional revenue of providing their storage systems as demand response resources.
This story is just one example of a utility partnering with third-party vendors to provide value to the customer. Partnerships can be as simple as power purchase agreements (PPA), in which a utility signs a contract to purchase power from a third-party generator, or as complex as multi-year implementations of smart grid equipment and software. These partnerships can emerge as a result of necessary upgrades to aging infrastructure, grants from governments or organizations for pilot projects, or as a response to customer influence. Utilities can no longer afford to have a one-size-fits-all mentality towards their offered services, but many of their legacy systems were not designed for this shift.
Red Clay works with many utilities that have homegrown legacy systems. They internally developed these systems decades ago when rate offerings and billing processes were simpler and universal. Over the years, the legacy base functionality had to undergo countless customizations to keep up with new rates and customer programs, and each iteration has unintended consequences, which often results in work-around fixes. For instance, a legacy billing system might be built on the assumption that a rate schedule only has two seasons, summer and winter. The utility’s Public Utilities Commission (PUC) requires them to implement a new rate with a new season, spring. The utility must make the decision to either do the calculations outside of their customer information system (CIS) and import the results to produce the bills, or find a workaround that “tricks” the system into calculating three seasons. Whether they choose Solution A or Solution B, either will have many downstream effects and considerations, because the CIS is the center of the utility’s operations. For a utility, this example is one decision out of many that they face, and all these new requirements layer on top of a base functionality to produce a system that is hardly recognizable. Furthermore, the employees who coded these systems are nearing retirement age, and new employees face steep learning curves and dependence on experienced employees to become competent with a system that has undergone so many changes that it is hard to tell where one patch fix ends and another begins.
For many utilities faced with aging information and management systems, retiring the legacy system becomes an opportunity to upgrade to third-party software solutions that can provide the functionality their changing business model requires. Opening the upgrade to a vendor vetting process gives the utilities more solution options and ensures solutions will be competitively priced. Vendors expose the utilities to best practices learned from many implementations and to knowledge sharing from vendor specializations and expertise that are difficult for utilities to capture in-house. Each topic we have focused on in past blog posts and will cover in future posts have benefited from companies that specialize in them. To help utilities find reliable vendors, Green Mountain Power has compiled a database of vendors in nine markets (many of which we touch on in our blog series): AMI, Communications, Demand-Side management, Distribution Automation, Energy Storage, Electric Vehicle integration, Micro-grids, Network Operations, and Soft Grid efforts.
These nine industries are sometimes referred to as the “grid edge,” the increasingly elusive boundary between customer and utility. Vendors can connect utilities to behind-the-meter services to aid utilities in not only forecasting energy use, but also in exploring potential service offerings for their customers. To adapt to the future, utilities must focus their attention on their endpoints and away from a centralized mentality. Third-party vendors are helping them do this by providing everything from data analytics and the sensors to provide the data to automatic controls and the management software to deploy them. For instance, just within the demand response realm, many types of third party vendors exist. Nest produces a smart thermostat that can be controlled from a smartphone, which allows residential customers to respond remotely to price signals or calls for power reduction from the utility. EnerNoc installs control equipment that enables demand response at customer sites, while also acts as a demand response provider by aggregating customer demand response reserves, managing curtailments, and bidding capacity reserves into the wholesale markets. AutoGrid is a data analytics software company that can help utilities identify demand response potential and implement a demand response management system – even connecting to the customer’s own devices and control equipment. Each of these companies has helped utilities navigate through new demand response initiatives to establish robust programs beneficial to everyone involved.
When a utility faces uncertainty about a new revenue stream or how to integrate new service offerings into their current business model, they often reach out to companies already making headway in the industry. When Utility Dive asked 500 electric utility executives what they believe their business model should be for distributed energy resources (DER), 60% of respondents thought partnering with third-party vendors to deploy DERs was the preferred approach. This statistic aligns with what we see in the industry. Most DER systems, like rooftop solar panels, have been installed by vendors, who provide finance options to the customer. Furthermore, partnering with third-party vendors can be a way for utilities to avoid any uncertainty due to regulatory restrictions on rate-based investments. Instead of providing utility-owned rooftop solar to customers, a utility could partner with a company like SolarCity to provide community solar. The community benefits from the shared output of the panels, enabling many customers who cannot afford the upfront investment of solar or do not have a suitable location for panels to participate, and the utility benefits from having more control over the location and operation of the solar panels.
Some vendors have even gone as far as offering smart-grid-as-a-service packages, that allows utilities to bypass large upfront costs associated with implementing an Advanced Metering Infrastructure (AMI) program. The third-party vendor could implement and host the software, or even host and operate the network. In line with this thinking, other vendors propose infrastructure-as-a-service, a method of deferring the construction of new power plants by partnering with third-party DER providers. The DER provider agrees to provide enough electricity to offset the need for a new power plant at a significantly cheaper cost than it would take to build the plant. Regulations would need to be in place to ensure the contract stipulates a similar return on investment that the stakeholders would receive from traditional infrastructure investments. Both concepts challenge utilities to reimagine their business models. Third-party vendors are helping utilities get to the edge of innovation and explore the idea of becoming distribution system operators.
About the Author
As a consultant at Red Clay Consulting, Megan Milam has comprehensive training and functional experience with Oracle Utilities Application Framework software and Oracle Utilities Lodestar software. Furthermore, her Bachelor of Science degree in electrical engineering, with an emphasis in power systems and smart grid technology, and her previous work experience at a transmission System Operator give her a technical background with a firm understanding of industry best practices and an ability to implement optimal solutions.