The energy industry has a new buzzword – “Energy Transition” – and it encapsulates everything that is involved with the significant shift in transitioning from a fossil fuels-based global energy system to a more sustainably sourced system. This in essence is a complete changeover in the way the world today produces and consumes energy. This energy transition is driven by the need to decarbonize our energy footprint, as well as create a more sustainable and equitable energy ecosystem. It is also being pushed forward by the prioritization of both Government and Corporate entities, including the investors funding them, towards meeting Environmental, Social, and Governance (ESG) goals and mandates.
This energy transition though is not just a matter of replacing one source of energy with another. It requires a fundamental transformation of the entire energy system, including the way we generate, distribute, and consume energy. From the perspective of Electrical Energy, while this transition involves multiple stakeholders including generators, transmission owners and operators, market operators and regulators, and consumers of all shapes and sizes – we want to focus today on the distribution utility and its role in this energy transition.
What is a Distribution Utility?
A distribution utility is a company that operates the distribution network and is responsible for safely and reliably delivering electricity to the end user, such as our homes, offices, and so on. As this is the entity that sends us our electricity bill, they are the customer-facing entity and the front-line workers of the electrical industry. No matter where the fault is, when your power goes out, you call the local distribution company! Therefore, the distribution utility is a central player in this energy transition future. Distribution utilities can be owned by municipalities, private investors, or their customers, and can serve anywhere from a few thousand customers to over a million.
Technical, Financial & Social Challenges of Energy Transition for Distribution Utilities
The advent of Distributed Energy Resources (DERs) is decentralizing the electrical energy system. Instead of relying on large, centralized power plants, energy can now be generated at many different locations and fed into the distribution network. Coupled with the growth of Energy Storage and the Electrification of sectors such as Transportation and Heating, this energy transition is changing the way we generate and consume energy.
This presents a unique challenge for distribution utilities as the distribution network was designed to distribute electricity from a small number of centralized power plants to customers – it was built for one-way power flow and has operated as such since its inception.
While this technical challenge has been spoken about at length, something that hasn’t been talked about as much is the financial aspect of this transition.
As mentioned, the primary objective of the distribution utility is to deliver electricity to the end consumer. To meet this objective, the utility installs assets such as poles, wires, transformers, switches, etc., and is then allowed to earn a return on these assets to run its business. It does so by charging a distribution charge, which is approved by the electricity regulator or a similar governing body, as part of the electricity invoice to the end consumer.
To accommodate the increasing amount of renewable energy and electrification on their network, distribution utilities need to upgrade and modernize the distribution network. This includes installing new technologies such as smart meters, energy storage systems, and advanced control systems. These technologies will help to manage the flow of electricity on the network and balance supply and demand, thereby helping meet the technical challenge of two-way power flow – but they will come at a cost. The cost will then have to be passed down to the end consumer, and herein is the financial challenge!
In our conversations with distribution utilities, we’ve heard time and again that the two priorities for their customers are reliability (they want minimal outages) and cost (they want to keep electricity costs low). Utilities need new ways of generating revenue to meet the demands of this energy transition while ensuring the reliability and cost-effectiveness of the electrical grid.
Another aspect that is often overlooked is the social aspect of this energy transition. For one, as the customer-facing organization, distribution utilities play a central role in ensuring that changes that result from the transition are clearly communicated with the end customer and that there is buy-in from all stakeholders. Irrespective of which body in the Energy Food Chain is making the change – whether that be the Government, the Regulator, the Utility itself, or some other entity – it the up to the distribution utility to ensure customers understand the change, and any customer grievances are clearly accounted for in the plan. Without proper buy-in from customers, the best policies would fail. As an example, if a new time-of-use rate is being introduced to incentivize electric vehicles, it is up to the distribution utility to ensure its customers understand the rationale behind it and how the new rates work for them. This can be achieved if the utility has a clear implementation roadmap.
Then there is the huge skills shortage that the industry is facing for personnel both in the field and in the office. An industry that was not able to attract a lot of talent during the IT boom is suddenly in the spotlight of this energy transition, and it needs qualified people to make it work. Unfortunately, the technical aspects of electrical energy and the business model of the electrical utility were complex to being with – coupled with uncertainties of the energy transition, and you have no short-term solution to the manpower shortage!
Opportunities for a Distribution Utility in Energy Transition
While the challenges of the energy transition are significant for distribution utilities, there are also opportunities that can arise from this fundamental transformation of the energy system.
Firstly, with the decentralization of the energy system through the growth of DERs, distribution utilities can play a more active role in managing and balancing the flow of electricity on the network. This can be achieved through the installation of advanced control systems that can monitor and control the flow of electricity from various sources. By doing so, distribution utilities can improve the reliability of the grid and better manage any potential issues that arise, such as overloading or outages. There is a huge potential for non-wire alternatives to reduce costs, provide grid flexibility and reduce our carbon footprint.
Secondly, energy transition provides an opportunity to reimagine the role of distribution utilities and create new business models. This includes providing services such as energy storage and EV charging infrastructure, as well as creating and managing local distribution-level electricity markets that can provide new revenue streams for distribution utilities. These new business models would allow utilities to offset the costs associated with upgrading the system while simultaneously incentivizing electrification and the adoption of sustainable sources of electricity.
There is also an opportunity for distribution utilities to improve customer satisfaction and loyalty by introducing energy transition programs that are appropriately communicated and have buy-in from the end-user. At a time when grid defection and off-grid living are being actively talked about, it is imperative for utilities to maintain a competitive advantage and reconnect with the modern-day customer to showcase the expertise of utility personnel.
In conclusion, while energy transition poses significant challenges for distribution utilities, there are also numerous opportunities for these entities to adapt and thrive in this new energy landscape. By embracing new technologies, actively managing the flow of electricity on the grid, facilitating the electrification of various sectors, and engaging with their customers, distribution utilities can position themselves as key players in the energy transition and emerge as leaders in the new energy economy.
At Acumen, we have been working with our utility partners in helping them better understand this transition and how they can meet some of the challenges it presents. We’d love to hear from you on your plans to manage this new energy reality, and how we can help you take the right steps.