Although involving utilities in customer-side electricity management could reduce competition in the market for managing customer energy use, RFF scholar Tim Brennan notes that the idea may prompt positive outcomes as well.
To prevent climate change from intensifying, carbon dioxide emissions from energy use have to be drastically reduced, if not eliminated—a process called decarbonization. Because so much of those emissions come from the direct burning of gasoline in motor vehicles, natural gas in home heating, and other residential and industrial uses, a critical component of decarbonization will be replacing as much of that direct burning with the use of electricity. This solution, however, promotes decarbonization only if electricity is generated without burning coal or natural gas. Not only will we need to produce more electricity, but we also will need increasing amounts of that electricity to come from wind and solar generators.
What does all this have to do with how individuals manage their energy use? Wind and solar generation challenge traditional grid operation in two significant ways. One is that these types of renewable energy can lead to huge fluctuations in the cost of producing electricity over the course of a day. When and where sunshine is abundant, the price of electricity may be essentially free compared to when it is cloudy or dark. Similarly, when winds are strong, the supply of electricity from windmills may be enough to depress the price to zero. Making the most of renewables will entail managing the timing of electricity use so that people can charge cars, run appliances, and heat water when prices are low.
The second, and more significant, challenge is that the amount of electricity that both solar and wind generators can produce is highly variable. Wind speeds can change; clouds can block the sun. Unless battery storage becomes cheap, addressing decarbonization by expanding renewable energy generation means that this moment-by-moment variability of supply has to be matched with moment-by-moment variability in demand. Since the variation is so rapid, prices alone are not likely to do the job. Moreover (and energy geeks to the contrary), the general public—which doesn’t think about electricity except when paying their monthly bill or when the power goes out—is not likely to view managing their electricity use as an opportunity.
So, some kind of automation that can match electricity use with its availability, known as “customer-side electricity management” (CSEM), is likely necessary. CSEM entails the following four major components: devices that can remotely control appliance access to the grid, a software interface on the devices, communications between the managers and the software, and information that managers can use (e.g., price or supply) to control appliance participation in the grid. Entrepreneurs currently are coming up with business models that provide a service with some or all of these components.
The question then becomes whether utilities should participate in contributing solutions to these challenges. Normally, the more in a business the merrier, but regulated utilities present some special problems. Because of regulation, utilities cannot charge prices for electricity distribution that reflect the market power they have. This constraint creates an incentive for these utilities to get into other forms of business—perhaps including CSEM—so they can profit in ways that regulation prevents. But concerns exist over regulated firms in unregulated markets, and these concerns are not merely theoretical: such concerns formed the basis for the antitrust case that broke up the AT&T telephone monopoly in the 1980s, and they provide the rationale for federal regulations that limit generator control over regulated transmission facilities.
Do these concerns warrant keeping utilities out of CSEM? One potential problem that could arise from allowing utility involvement would be if a utility creates a CSEM affiliate that sells its services back to the utility at an inflated price, leading to higher electricity prices. A second potential problem would be if a utility providing CSEM claims that the costs associated with CSEM—such as the funds required for equipment, personnel, or capital—also go toward providing its regulated distribution service, which could lead to higher electricity prices. Third, a utility in the CSEM business might deny CSEM rivals access to its grid or useful information on customer use patterns, creating an artificial and anticompetitive advantage that the utility could then exploit to gain more profits. These tactics also could prevent more efficient or more innovative rivals from accessing the CSEM market.
While concerns about anticompetitiveness have justified the breakup of the dominant phone company and regulations that promote the non-discriminatory operation of transmission grids, these kinds of apprehensions probably are negligible or easily mitigated through regulatory oversight in the utility-CSEM context. For instance, the likelihood is low that a utility’s distribution rates will change if the utility overcharges itself for CSEM service or misallocates its costs, especially if regulators are aware of the potential problem. And other than the potential for a utility to restrict access to customer use data, a utility is not likely to be able to discriminate against unaffiliated CSEM providers in terms of access to the distribution grid. Moreover, attempts to provide CSEM directly to consumers may not be successful, because claims of energy savings will be difficult (if not impossible) to verify; retail competition in electricity overall has encountered the same difficulty.
Many entrepreneurs are planning to offer CSEM capability to utilities, which would then provide the service to electricity users. If entrepreneurs offer CSEM options via utilities, then promoting decarbonization through the expansion of renewable energy generation may require standardization across different CSEM platforms, so that utilities can manage electricity effectively. Customer appliances—such as vehicle chargers, hot water heaters, and refrigerators—may need to be compatible with CSEM. As decarbonization gains momentum, and unless the costs of storage fall considerably (as they might), the definition of “electricity distribution” may come to include not just supplying electricity, but also managing the appliances and devices that use it.