TODAY’S STUDY: How To Prove New Energy Works

Pathways For Innovation; The Role Of Pilots And Demonstrations In Reinventing The Utility Business Model

Courtney Fairbrother, Leia Guccione, Mike Henchen, And Anthony Teixeira

Executive Summary

The rapid growth of distributed energy resources (DERs) and large-scale renewable energy is driving utilities to develop and test a wide range of new technologies, business models, and customer programs. These DERs are starting to impact the U.S. electric power system at significant scale—for instance, 2016 saw a record 2.5 GW of residential solar installation and 159,000 electric vehicles sold,1 up 19 percent and 37 percent, respectively, from 2015. Energy efciency programs are lowering energy use at homes and businesses to the extent that many areas no longer see growing demand for electricity.

These changes pose new challenges for utilities. As energy efciency and self-generation erode customer electricity demand, utilities must determine how to fund needed investment in the grid with declining sales volumes. The proliferation of third-party energy devices on the grid creates new uncertainty for utilities in grid operation, as they move away from a traditional model in which the utility controlled all grid assets. In this era, utilities must develop new capabilities to integrate these new devices and manage two-way flows of energy on local distribution grids. Making the transition to a DER-rich future requires piloting new approaches to operating the electricity system, to engaging customers, to working with third-party DER providers, and to the utility business model itself.

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We partnered with three leading utilities—Arizona Public Service (APS), Avista Utilities, and Con Edison— to explore best practices for utility innovation and the design, execution, and evaluation of utility pilot and demonstration projects. We interviewed industry stakeholders representing regulatory bodies, utilities, technology providers, and advocates to gather broad input on what works well, what does not, and how to improve.

At its best, the U.S. electricity industry can test a range of promising and innovative approaches to integrating new technology for the benefit of customers, utilities, and the environment. This can happen efciently, with little wasted efort and efective cross-industry learning; and collaboratively, with utilities and technology providers working together with aligned incentives to achieve shared outcomes.

At its worst, innovation can get bogged down by contentious disputes between utilities and technology providers, low-value pilots that produce little in the way of results, inefective pilots hampered by organizational disconnects and poor design, and redundant programs that fail to learn from results elsewhere in the industry.

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Purpose Of This Report

This report explores challenges to efective innovation at U.S. electric utilities, with a focus on pilot and demonstration projects. We ofer recommendations for utilities, regulators, and DER technology providers to support more efective and meaningful electricity innovation. Arizona Public Service, Avista Utilities, and Con Edison hired RMI as a consultant to perform assessments of their innovation programs, which informed many of the conclusions in this report. Additional insight came from members of RMI’s Electricity Innovation Lab (eLab).

In this report, we provide recommendations for utilities, regulators, and DER providers, centered around five primary themes that emerged when we investigated the state of utility demonstration programs in the U.S.:

1. Strategic planning: embrace a strategy for energy system transformation and craft a complementary road map for innovation. Utilities must recognize the imperative for change in their corporate strategies and develop innovation road maps that complement strategic goals. Regulators owe utilities clear and consistent messaging around their own strategic priorities for innovation. Successful DER providers will need to understand the varied utility business models and regulatory environments around the country in order to ofer efective solutions.

2. Designing to scale: design pilots and demonstrations to maximize learning and prepare for full-scale deployment. Create a distinction between exploratory pilots that only test technical feasibility and scalable demonstrations, and those that also test business models, customer adoption, and other elements necessary for scaling. When possible, utilities should conduct demonstrations that put all these pieces together. Regulators can help by creating the financial incentives for utilities to pursue innovative solutions for customers in a DER-rich energy system, as opposed to the typical incentive to increase capital spending to grow the rate base.

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3. Organization: create leadership support and accountability, dedicated resources, and cross-functional collaboration within the utility for efective innovation. To overcome silos and competing priorities, utilities should formalize responsibility for innovation within their organizations, with an accountable senior leader and formal role definitions for employees. Innovation teams must also engage business units across the utility in the design, execution, evaluation, and scaling of demonstration projects to design better projects and ensure the impact sticks.

4. Stakeholder engagement: collaborate efectively across industry stakeholder groups to design and execute meaningful projects. Utilities, technology providers, regulators, customers, and advocates all must engage collaboratively on new concepts to build common ground and avoid contentious and unproductive disputes in the pursuit of cutting-edge demonstration projects. Regulators should express support for multistakeholder collaboration outside of formal proceedings. Utilities can also seek broad and creative solutions from vendors through solicitations structured around addressing system and customer needs and avoiding overly prescriptive request for proposals that arbitrarily limit the solution space.

5. Cross-utility collaboration: share best practices and lessons learned among utilities to accelerate efective innovation. The utility industry can segment itself into groups with similar motivations or challenges, synthesize the important learnings and best practices among the broad array of information and reports, and share publicly their own lessons learned for the benefit of the industry. Regulators can ensure that utility pilots build on lessons from other states, where possible, and that utilities publicly share meaningful evaluations of their own pilots and demonstrations…

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Conclusion

The need for utilities to innovate will only continue to grow as low-cost distributed technologies evolve, customer demands for new solutions grow, and regulators launch more market transformation eforts. Utilities that fail to innovate meaningfully risk disruption at the hands of new market entrants. And all stakeholders rely on utilities to test the most innovative, comprehensive, and integrated solutions. Today’s wave of pilots and demonstrations, covering ground from virtual power plants and DER dispatch optimization to new utility business models and transactive energy, will test utilities’ ability to meaningfully advance a new set of solutions. If early innovators are successful in designing efective projects in support of their strategic road maps, they can set the course for industry transformation. If they fall into pitfalls with incomplete demonstrations, lack of strategic clarity, and unproductive stakeholder disputes, the pace of energy system transformation will sufer.

Utilities, regulators, and technology providers around the country aspiring to innovate for an afordable, reliable, low-carbon energy system should deliberately plan their approach to innovation, adhering to best practices across the five themes highlighted throughout this report:

1. Strategic planning: Embrace a strategy for energy system transformation and craft a complementary road map for innovation.

2. Designing to scale: Design pilots and demonstrations to maximize learning and prepare for full-scale deployment.

3. Organization: Create leadership support and accountability, dedicated resources, and crossfunctional collaboration within the utility for efective innovation.

4. Stakeholder engagement: Collaborate efectively across industry stakeholders to design and execute meaningful projects.

5. Cross-utility collaboration: Share best practices and lessons learned among utilities to accelerate efective innovation.

RMI’s vision is for a clean, prosperous, and secure low-carbon future. Achieving this vision will require increased adoption of leading technologies, new approaches to operating the energy system, and a significant shift in the nature of energy infrastructure investments. These all require transformative change and innovation in the utility industry and evolution of the utility business model. Leading utilities are now embracing this transformation, and today’s meaningful pilots and demonstrations will bear new models for our future energy system.

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