New Business Models For The Evolving Utility

New York’s Reforming the Energy Vision proposes the new utility business model should be based on market-based earnings opportunities.
Published: Thu 27 Aug 2015

With declining revenues with a shift towards distributed generation prosumers, what is the prospect for utilities in the future energy system?

In a new white paper on utility business models and ratemaking under the new paradigm of the utility as a ‘distributed system platform provider’, New York’s Department of Public Service (DPS) offers some positive direction with a new and diversified business model in a discussion which also takes forward the state’s Reforming the Energy Vision (REV) initiative to reform its energy system. [Engerati-Distributed Energy Resource Markets Coming To New York]

Under this model the utilities will serve as the platform for interface among their customers, third party product and service providers and the distribution system.

Market-based earning opportunities

In the white paper, the DPS envisages a radical shift in the balance of the utility business model from traditional regulatory incentives to market-based earnings opportunities as the utility shifts to the new platform paradigm.

According to the white paper, new market-based earnings can come in several forms. Potential examples include customer origination via the online portal, data analysis, co-branding, transaction and/or platform access fees, optimization or scheduling services that add value to DERs, and advertising. Examples of customer enhancement and adjacent value-added synergies include energy services financing, engineering, services for microgrids, and enhanced power quality services.

A primary vehicle anticipated for utility market-based earnings will be ‘platform service revenues’ (PSRs), which utilities, in their capacity as distributed system platform providers, will earn from market participants.

The white paper notes that alternative revenue streams are not new for regulated utilities in the US. For example, Georgia Power offers bundled communication services, and Con Edison and Pacific Gas & Electric offer co-location with wireless facilities. Green Mountain Power offers a number of advanced energy options including heat pump services. These innovative types of revenue streams allow utilities to use their assets for the benefits of both shareholders and customers.

What will be new in REV, the white paper states, is the diversity and scale of revenues potentially available from market based earnings, and the way in which these support the policy goals of REV. Utilities will be able to diversify their business and protect against the concern of lost sales from, and potentially stranded investments in, conventional business units as more third-party investment enters the system. Platform services can aggregate services from otherwise separate industries, such as electricity and home security, while connecting customers to the product options that are best suited for them.

Pricing and revenue sharing

The white paper goes on to note that establishing both the right level and application of service charges is critical for market-based earnings opportunities to gaining market success.

Demonstration projects are suggested to offer “a particularly rich opportunity” to explore the opportunities and challenges surrounding market-based earnings and to provide real-world experience to inform their design. Regulatory flexibility also will be necessary.

Notably the proposals also note that the shift to market-based earnings will also focus the role of regulators away from determining incentive levels to supervising markets – marking an evolving and lighter touch role for regulators.

Further reading

New York Department of Public Service: Staff White Paper on Ratemaking and Utility Business Models