Racking up returns

Stalwarts weigh in on ROI for industry

Published In: Intelligent Utility Magazine May/June 2010

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GETTING CONSUMERS TO LEARN HOW electricity is priced is a good thing. That could lead to efficiency and conservation, resulting in lower rates. That's understood. But do those benefits outweigh the costs and will investors step up?

The issue is now before a multitude of state regulators who must decide how the assets that make up the intelligent utility will get financed. Utilities oftentimes are making the investments after getting regulatory approval to pass the cost of them along to consumers-just as power plants are handled. Indeed, constructing a grid that allows utilities and consumers to talk with one another might possibly cut down on peak energy consumption and thereby avoid the build-out of expensive infrastructure.

Regulatory cost recovery on assets

''The bottom line on energy efficiency is that return on investment comes through as we work with regulators to get good incentives in place,'' said Chris King, chief regulatory officer of eMeter in San Mateo, Calif. ''We see the bigger returns in smart meters and demand response. Utilities are asking for cost recovery of these assets and they are putting together business cases to show both the costs and benefits.''

Some utilities are presenting compelling evidence to illustrate that their operational savings have the potential to exceed their cost of deployment, he says. But the majority of them are demonstrating the benefits by discussing the reduction in harmful emissions and the reduced cost of power to consumers over the long run. Using such an analysis, he says that the investment will bear fruit over a 15- to 20-year time frame.

Utilities must then be able to put the cost of that investment into their rate base, King noted, so that they can grow their earnings base and attract new shareholders. Most regulators comprehend this and are supportive, although most of them do maintain a healthy skepticism and want to see concrete proof that it works as advertised.

Rising demand a force

Multiple factors are at play here that most notably include an expectation that the demand for electricity will steadily rise in the decades to come. That demand would push prices higher unless the supply of generation grows correspondingly-or utilities are motivated to encourage their customers to use less of their product. With such forces at work, it would tend to encourage investment in two-way communications and demand response that provide both greater reliability and real-time pricing.

''The new business model for electric utilities must consider the advanced needs of the consumer, the ability to make the grid smarter and more responsive and at the same time build value for the shareholders,'' said Gregg Edeson, a manager of PA Consulting Group's Global Energy Consulting practice.

Building value

Perhaps the great unknown is the time it will take consumers to acclimate to the new energy marketplace and to understand that they would have more control when it comes to their electricity bills. On the one extreme are the ones who install micro-fuel cells at their homes or businesses to avoid buying from the grid. On the other are the majority who have little interest in dealing with the issue.

For their part, utilities are taking different approaches. Some are making investments in ''smarter'' lines that are able to redirect power flows when congestion is about to occur. Others are investing in meters that reach inside consumers' homes to enable the curtailment of consumption. In all cases, they are asking state regulators to put their capital cost into the rate base.

 ''The smart grid is not only about peak shaving or peak shifting,'' said Joel Gilbert, founder of Apogee Interactive in Atlanta. ''It is also about providing information to customers so they can measure and manage their energy efficiency efforts.'' Automating thermostats in office buildings, for example, adds up to pretty easy savings.

The meter itself is merely a snapshot of how consumers use energy. To increase its value, the device must have the ability to communicate with customers so they can learn how electricity is priced and thus reduce their bills. As such, government support, whether it is from direct investments, subsidies, or through cost recovery, is critical to these technologies moving forward, say advocates.

''The future of controlling those electricity rates is dependent on managing peak windows,'' said Gary Fromer, chief executive of CPower. ''With the right incentives and the right tools, we can manage this. As we eat into that, demand response not only becomes a reliability tool but also an economic one.''

Reallocation of capital

But if utilities sell less electricity does that not hurt their profits? Yes, but the demand for power is expected to rise. And if utilities have a regulatory motive to invest in the intelligent utility that encourages conservation and efficiency, then it becomes advantageous for them to do so. While they will also have to build more power plants, they can avoid some of that by allocating capital to the smart grid.

Consider that a new generation unit may run close to $1 billion or a retrofit for an older one could cost hundreds of millions. If that is flowed through to end users, it then pits shareholders who expect fair returns against consumers who dislike huge rate hikes. ''The smart grid with demand-response functions is the perfect hedge for utilities,'' said Sandy Williams, partner with Foley & Lardner.

The transition to a society that uses electricity more wisely won't occur overnight, and as such, the payback will take a while. But those benefits will come, which is why most state regulators are incorporating incentives. Investments in the intelligent utility are already resulting in greater reliability. Over time, they will also lead to greater energy efficiency as consumers adapt.

 

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