The Grand Technological Shift of the Power Sector & How Free Electricity Markets Are Best Poised to Capture Them

Innovation and the rapid pace of change in digital technology and the Internet of Things, is moving the electricity sector toward dispatchable resources and demand-side management that is best left to the domain of the free market

Technological innovation and the rapid pace of change offered via digital technologies and the Internet of Things (IoT) is prompting wide-scale shifts across the economy. These transformative technologies weren’t created by or exclusively for the electricity industry, but their wide availability and rapidly falling costs have allowed them to be applied in the production, delivery and management of power. For consumers, that means a movement toward dispatchable energy resources (DERs), demand-side management, smart grids, and other innovative products and services.

These types of offerings are creating a utility industry that looks nothing like your father’s power company. And the progress is allowing for some pressing complementary shifts: clean energy, customer-centric models, reliable but affordable power systems, and more.

To truly unlock the possibilities of this power sector of tomorrow, though, the dominant business model of utilities needs change. The status quo finds too many customers still locked into a single monopoly utility provider that controls the market from generation to distribution without competition. The dominance of a single company in the marketplace has strangled innovation and resisted the adoption of new technologies. There’s an alternative market design that would solve this issue. Customer choice on power providers via freer energy markets would allow these digital and technological advancements to have a wider and more beneficial impact for all.

Major Technology Trends to Watch

Technological innovation has made possible myriad new opportunities in the electricity sector, directly empowering customers like never before. On a broad level, the trend taking over the power sector is digitalization. This idea encompasses many different opportunities: drones for monitoring and maintenance, artificial intelligence and machine learning to predict and prepare for power demand patterns, blockchain being used to track where energy is generated and to whom it’s sold, cloud-based data tracking, and so much more.

A unifying factor of these various digital technologies for entrepreneurial companies is the opportunities they create. Because these various technologies are becoming more affordable and scalable, it means the IoT can be implemented in all aspects of the power industry. All of a sudden, collecting, analyzing, and using massive troves of data from customers and assets is possible. Tracking the source and use of energy is available in real-time and from any location, a far cry from the days of monthly meter readers past. Today’s smart meter can call in and rely energy-use data in a matter of seconds – and it can take calls from the energy supplier, too.

Digitalization and the ability to have two-way communication with nearly every energy-using device is a gamechanger for the power sector that is making demand-side management a reality. Now that providers can track customer power use on a second-by-second basis and use smart grid technology to communicate that information directly to the customer, demand-side management (DSM) can allow for far greater flexibility in responding to fluctuations in energy use.

Demand-side management (DSM) allows providers to work with customers to curb energy use at times of peak demand and to encourage them to plan their energy use to times of low demand, like overnight. This flexibility makes renewable energy DERs like rooftop solar and battery storage far easier to integrate into the existing power grid.

The Performance of These Trends in Monopoly Environments vs. Free Markets

These modern, digital technologies at utilities create a perfect complement with free-market competition that is designed to bring customers new services and greater control over their energy use. The availability of smart meters and DSM programs empower customer to reduce their energy bills without effecting reliability. Data on household power use, meanwhile, can directly feed into efficiency programs to educate customers on how to reduce their energy usage, offer rebates, or even provide home energy reports.

The adoption of DSMs, energy analytics, and other advanced technologies in monopoly markets compared with states with competitive energy markets, the difference in can be stark. Monopolies too often view new technology offerings as an opening to charge additional fees on consumers. Rather than accelerating adoption of new technologies, incumbent utilities erected market barriers to reduce the forces of competition and maintain their grip on ratepayers.

Another advancement made possible by the arrival of new technologies in competitive markets, but that is unfortunately being kept out of regions with monopoly utilities, is the creation of the “prosumer.”

DOE defines the prosumer as “someone who both produces and consumers energy – a shift made possible, in part, due to the rise of new connected technologies and the steady increase of more renewable power like solar and wind onto our electric grid.”

This opportunity for customers to generate their own power, even sell excess generation back onto the grid, is empowering in a way that monopoly utilities consider a direct threat to their business model.

A customer who installs solar panels on their roof and a battery storage system can charge up their battery in the middle of the day when demand is low but solar resources are readily available. They can then use that stored power at night when the sun is down and sell any excess electrons back to the grid – a policy called “net-metering.”

Incumbent utilities have defended their turf by pushing for artificially low net-metering rates or charging customers fees to hook up home solar systems to the distribution network – or both. These moves diminish the value of renewable energy from customer-owned rooftop solar and other dispatchable resources. That outcome should be the antithesis of what today’s energy sector strives toward and is counter to what customers want.

The question is whether consumers will be able to products and services they want or will they have to continue to take what’s on offer from the local utility. The monopoly system has outlived its usefulness and has now become an impediment to progress.

Advances in technology and digitalization are driving a revolution in the electricity sector that is putting the power to choose into the hands of consumers – and delivering a cleaner, more reliable grid as well.

Growing demand for power previously signaled the need to build additional large-scale generating facilities, usually coal or gas-fired power plants. Today, growing demand can be met by adding solar and storage to consumers’ homes and connecting whole neighborhoods in microgrids that can be effectively managed to be more reliable than traditional power plants. 

The outcome will be a smarter, more flexible, and more agile electricity systems — but technology is just one part of it — the type of market in which it operates makes a significant difference.

Transforming the Status Quo

Residential customers are increasingly choosing renewable energy when offered the choice. The technology developments discussed above are pushing the industry to consider new business models, policymakers to consider alternative regulatory and electricity market structures, and customers to pursue self-generation, storage, or responsive demand capabilities.

These digital technologies are prompting rapid changes in both regulatory institutions and the overall utility business models. From the regulatory side, it’s important to note that the key to achieving decarbonization of the power sector is accountability and the correct alignment of incentives.

Too often, the regulations governing monopoly utilities are toothless because they are considered too big to fail. Regulated utilities have spent decades and millions of dollars on lobbyists to build up cozy relationships with the policymakers that regulate them. The result is that rate hikes are automatically approved and anti-competitive bills like Ohio’s HB 6 are adopted at ratepayers’ expense.

But proper adjustment in regulatory structures can open the current monopoly utility model to competition that allows new entrants into state markets. The natural pressure of competition would turn up the heat on incumbent utilities to change their ways.

Current regulations maintain the traditional obstacles to competition, often outright suppressing it especially in areas where the political pull of monopoly utilities is greatest. But regulatory changes could embrace the change that digital technologies are bringing to truly open it up and hasten the next transformation: the evolution of the industry’s core business model.

Policymakers should be careful not to erect barriers to consumer-owned distributed clean energy sources. It’s time to recognize that monopoly utilities’ returns are paid for by taxpayers who support the publicly funded infrastructure. If utilities are not making the best use of the technology available, they’re simply a burden on taxpayers.

The existing patchwork of state and local policies can be difficult to navigate, and they inherently restrict competitors from entering the market – indeed, fully regulated states prohibit competition. The rise of independent renewable energy suppliers and service companies made possible in states that have reorganized their electricity markets is a regulatory reform that should be applied nationally. A strong competitive market provides customers with far more options for products and services while naturally keeping pressure on prices to remain low.

Regulation is just half the battle, though. Changes to the business model of power suppliers are just as important. Incumbent utilities that are able to maintain their hold on generation and distribution have inherent economic power in the market to deter competition. Because regulated utilities set their prices based on what the government will allow and not on the actual price of production in real time, they have an incentive to game the system by influencing regulators – while ignoring ratepayers, who are captive in the monopoly system.  

Market-based signals have proven to be the key to innovation and customer-centric focus in every other sector of the economy. Regulators should embrace competitive reforms that lead to the unbundling or disaggregation of the utility sector that’s historically been vertically integrated. As that unraveling happens, it will open the door to more competition and opportunities that will ultimately benefit the consumer and all of society.

No matter the sector, market participants in competitive markets are more responsive to their customers, provide better services and optimized products, and are directly incentivized to listen to their customers. Without competitive markets, incumbent utilities will continue to drag their feet on providing innovative and cleaner solutions to the nation’s power needs.

Conclusion

For consumers and regulators alike, the goals of the energy transition are well aligned, and they encompass the principles of energy that is reliable, affordable and clean.

Incumbent utilities may agree with the pursuit of those principles theoretically, but they are simultaneously prioritizing shareholder profits by doing whatever they can to keep out competitors. Requiring vertically integrated monopolies to stick to managing the poles and wires of distribution and leave generation and other services to the private sector is the most effective strategy to achieving the energy transition in a way that most benefits consumers.

Harnessing the power of the markets is crucial to meeting growing energy demand while reducing pollution and carbon intensity in the most efficient manner possible.