The Utility Revenue Model Restrains Distributed Energy Development

Utilities and Their Revenue Model

Advocates for clean, renewable, and sustainable energy sources are often unaware of the reasons for utility industry opposition to renewable and distributed energy. It is useful to explore some of the factors affecting rate issues in the regulated utility industry, and to begin to formulate approaches that deal with utility opposition to distributed energy generation.

Utilities and the Regulatory Compact

The Regulatory Compact (RC) is an agreement by the utility to provide service on demand, with fines imposed for failure to maintain adequate service. Under the RC, the utilities are granted a monopoly by state regulators to supply electricity and natural gas to clients in their service area. The utilities also agree to build and maintain generation facilities and a distribution network and to pay for all initial invested capital costs (CAPEX). The utility is then allowed to operate the utility for an ‘all costs in’ operating expense (OPEX) – plus a return to investors.

The problem is with the current model for utility revenue generation

Utilities generally only make money for selling gas and kilowatts. Conservation in the present model actually encourages the utilities to raise rates because they do not earn any revenue on kilowatts and therms of gas that never get sold, and the remaining service base (CAPEX) of utility customers carries a proportionately larger percentage of CAPEX. Conservation does help reduce additional CAPEX in generation, but reducing consumption for existing generation facilities means that under current regulations, the utility is allowed to recover CAPEX across fewer units sold, which translates into a higher cost for service.

Stranded Costs & Grid Connection Fees

Not only do remaining ratepayers pay higher costs, but the utilities believe that they should be able charge distributed energy generators using renewables charges for stranded costs, i.e., the costs of plants and distribution who have costs that are not being defrayed via the normal rate structure, and connection fees related to being connected to the grid, even though they customer may be net neutral or even adding power to the grid.

The RC extends to the effect on CAPEX of mandating a percentage of generation from wind and solar power. Until a reliable and cost effective means of storing electrical power is developed, the usefulness of these two prominent, renewable, but intermittent, energy sources will be limited.

Why?

The regulatory compact requires the utility to provide power even when supplies of wind and solar are not available, and forces the utility to build redundant generation capacity that would not be required without the mandate. For example, if 20% renewables is required by legislative mandate, then the utility builds the renewable facilities equal to 20% of their demand, plus 100% normal capacity, for a total CAPEX build out of 120%. Combining reduced demand through conservation with a declining base of ratepayers due to distributed generation, means the remaining ratepayers are required to pay for the entire 120% of capital construction, according to current regulations.

Utilities, and the developers of distributed generation, need proposals regarding updating the utility revenue model to reflect conservation and distributed generation. The current iteration of the utility revenue model is a major obstacle in the path of adoption of sustainable, renewable energy.