(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON Feb 13 Electricity suppliers should be
paid according to the services they provide, including reliable
and environmentally friendly heat, light and power, rather than
the quantity of electricity they supply, according to green
groups and retailers themselves.
"The retail electricity distribution business should not be
viewed or regulated as if it were a commodity business," the
Edison Electric Institute (EEI) and Natural Resources Defense
Council (NRDC) said in a joint statement on Wednesday.
"Instead utility businesses should focus on meeting
customers' energy service needs."
Edison is an association that lobbies on behalf of
investor-owned power companies in the United States, while NRDC
is one of the country's most prominent green groups campaigning
for action to reduce global warming.
In their joint statement, EEI and NRDC called on regulators
to break the link between utility revenues and the amount of
electricity sold so suppliers have an incentive to provide heat,
light and power in the most efficient and environmentally
friendly way - even if that means selling less electricity.
NEW BUSINESS MODEL
There is a broad consensus that the power industry needs to
update its century-old business model. But achieving that shift
is proving unexpectedly difficult, as it runs into obstacles
from regulators and some of the power companies themselves.
In many instances, regulated tariffs still reward companies
for the amount of power they supply, and penalise them
financially if their customers take less power from the grid.
In others, utilities appear unenthusiastic about customers
generating their own power from micro wind turbines and rooftop
solar panels, or cutting consumption by investing in energy
Lack of enthusiasm among electricity suppliers prompted
Britain's energy minister to write to the country's utility
regulator on Feb 10 complaining that "energy suppliers still see
their role as selling gas and electricity rather than having a
different business model where the value proposition is to save
SAM INSULL'S INSIGHTS
The modern electricity business owes its form to Samuel
Insull, chief of Commonwealth Edison, who built the first
large-scale power distribution company in the U.S. Midwest more
than a century ago ("Smart power: climate change, the smart grid
and the future of electric utilities," Peter Fox-Penner, 2010).
Insull's crucial insight was that it was cheaper to provide
electric service by combining power plants and customers over a
grid rather than trying to supply different groups of users from
separate power stations.
He also recognised there were enormous economies of scale in
both power generation and distribution that made them natural
monopolies. The more power supplied the lower the unit costs.
And in an industry with some characteristics of a natural
monopoly and requirements for heavy capital investment, Insull
realised suppliers could benefit from accepting regulation in
exchange for restrictions on competition and guarantees they
would be able to recover their capital and operating costs from
For the last century, employing Insull's model, electric
utilities have generally offered multi-part tariffs and bulk
discounts to encourage their customers to use more power. The
more kilowatts a customer uses, the cheaper they are on average.
Regulators, too, have generally based rate rises on the
amount of electricity generated and transmitted over the
network. Utilities have been rewarded for investing in more
generation and transmission capacity to supply more power to
In the traditional model, there is no incentive to help
customers take less power from the grid. Customers who cut their
consumption or generate their own power depress revenues,
undermine the economies of scale inherent in central generation
and distribution, and leave utilities with under-used power
plants and transmission lines.
To cut greenhouse emissions, policymakers in most U.S.
states and other countries have required utilities to purchase a
certain quantity of their power from clean sources like wind,
solar, nuclear and hydro.
In addition, utilities have often been required or
encouraged to help their customers make homes and offices more
energy efficient by installing more insulation and weatherising.
Finally, many utilities have been required to allow
customers to generate their own power from rooftop turbines and
solar panels, and even sell surplus power back to the grid.
Instead of power flowing one way across the grid, from
central generating stations to homes and offices, it
increasingly flows in two directions, with customers sometimes
taking, and sometimes supplying, electricity to the network.
Bi-directional net meters record the time, direction and
amount of electricity flowing between the customer and the
network. Customers are charged only for the power they take, and
credited for power they supply, according to the time of day and
time of year.
"Micro-generation" or "distributed generation", as the
system is known, is popular among green groups, customers,
politicians and some utility regulators. Power retailers are
understandably less enthusiastic since it threatens every aspect
of their traditional business model.
RECOVERING GRID COSTS
Net metering is not a panacea. Even with micro-generation,
most customers still want a connection to the grid to even out
their electricity demand and production.
On a sunny or windy day, a home-generator may want to sell
excess power back to the grid. On a cold, overcast and still
day, a home generator may still need to take some power from the
The problem is how much to charge micro-generators for the
network services that they continue to rely on.
"Although (distributed) generation can reduce a grid's needs
for central station generation and other infrastructure, it
typically does not eliminate its owners' needs for grid
services," EEI and NRDC explained in their statement.
Grid services include everything from basic transmission to
voltage and frequency control and providing back up power when
the sun does not sunshine and the wind does not blow.
The question is how much to charge micro-generators for all
these services they continue to use even as they cut the number
of kilowatts they take from the network.
In many cases, early net metering programmes have been very
generous. If net metering was extended to a much larger group of
customers, as policymakers hope, on the same terms, utilities
would be left with lots of under-used power plants and
transmission lines and a "revenue adequacy" problem.
While some power plants and transmission lines could be
permanently closed, others would still be needed to provide
back-up and other grid services.
REDESIGNING POWER TARIFFS
There is a risk that customers who continue to rely on the
grid will end up subsidising micro-generators who produce most
of their own but still expect the grid to be available as
The same problem occurs with energy efficiency. Reducing
consumption cuts some but not all of the costs of supplying
customers. As less power is supplied, average unit costs tend to
rise because some costs are basically fixed.
In their declaration, EEI and NRDC agree there is a "vital
need for regulatory policies that will support fair and adequate
cost recovery for maintaining the evolving grid."
From the moment Thomas Edison opened the first power plant
at Pearl Street on Manhattan in 1882, cost recovery and tariff
design has been central to the development of the electricity
It is a technical subject which receives far less media and
public attention than smart metering and renewables. But no
issue is more important.
Updating cost recovery and tariff systems will be essential
to integrating more home-generation over the next 20 years while
ensuring electricity remains reliable and affordable for all
(Editing by Jason Neely)