Refocusing on the Consumer: Utilities regulation needs to prepare for the "prosumer" revolution.

• Author: Faruqui, Ahmad
• Position: ENERGY & NATURAL RESOURCES

Back in 2017, a man attending a Florida workshop on utility rate design stumped me by asking if I had traveled all the way from San Francisco just to tell the audience how utilities should modernize their rate designs. He was obviously unimpressed with what I had said. I asked him, "What were you expecting?" He said he thought I would talk about rate design in which electricity consumers were also producers--"prosumers"--and there was no grid or utility. I was inclined to tell him to go ask the bartender about that, but that would have been impolite. So, I told him that I was not looking that far out in the future, but focusing on market developments over the next two decades

In the years since, I have seen more and more of my neighbors turn into prosumers. I recently became one myself, with solar panels and a battery storage system installed in my house. I also drive an electric vehicle (EV). The distant future has arrived much sooner than I expected, at least in my neighborhood. And, while California continues to dominate the nation in the sheer number of prosumers and EVs, it is not difficult to imagine a not-so-distant future in which much of the nation will begin turning into Prosumer Land.

THE CONSUMER REVOLUTION

A revolution is underway in the electric utility industry. The signs of this were evident long before the Great Recession of 20082009 slowed load growth. I spoke at Goldman Sachs' Annual Power Conference in New York City soon after the recession ended and made that point. But the facial expressions of the investment analysts in the room told me they were not buying it. I was invited to speak at the same event two years later. I gave a similar message, saw a few people nodding their heads, but I've yet to be invited back there to speak again.

In 2014, I spoke at a conference on the outlook for electricity sales and peak demand. My message of flattening demand resonated with the technical audience. Two of the three other panelists agreed with me. (The fourth insisted an industrial renaissance was underway that would propel growth.) The only issue among those who agreed with me was which forces were driving this change. Some said the primary force was utility demand-side management programs. Some said it was governmental codes and standards. Some said it was the arrival of distributed energy resources. And some said that it was fuel switching away from electricity.

Today, as we stand at the cusp of the third decade of the 21st century, the trend is no longer being questioned, probably not even at Goldman Sachs. Over the past decade, consumers have decisively and irreversibly changed the way they think about electricity, how they consume electricity, and when they consume electricity. And some have turned into prosumers.

Of course, as we have discovered, no two customers are alike. Even within the same household, husband and wife often differ on how they want to live their lives. Children introduce more uncertainty into the energy decision-making. Of course, all customers want choice, but they only want what they want. Yet, utilities often offer just one product to all customers in a "rate class"--delivered electricity at a certain rate--thereby avoiding accusations of discrimination. A few offer some choices, but these are often marketed in a jargon that would politely be called obscure and they use communication channels that sometimes don't even reach the customer.

It's safe to say that diversity is the hallmark of customer preferences for consuming electricity, just as it is for any other product or service. Electricity is no exception. Utility consumers fall into several categories. Some want bill stability and are willing to pay more for it. Some want the lowest bill and are willing to shift and reduce load. And some have gone organic in every aspect of their lives and want to buy only green power to mitigate climate change. Yet, most utilities simply offer a single rate to all of them. Imagine what would happen to sales at retailers like Nordstrom's if they only sized their merchandise as "one size fits all."

I recently called my local utility's customer service number and asked which rate I should pick given that rooftop solar panels and battery storage were about to be installed in my house. I was told to pick such-and-such a rate as a starting point. My bill would now run 10 pages, but I should ignore all the pages except 1 and 3.1 asked if the recommended rate would be the best rate for me since I also have an EV. She said there was no easy answer to that question. It would be best if I waited for another year to figure out my best rate, which of course meant that I may end up paying more in the next 12 months.

THE TECHNOLOGY REVOLUTION

Concomitantly with the revolution in consumer tastes, an all-embracing technological revolution is underway, spurred by the advent of digital technologies. Just about all customers have smart phones today. Currently, about half of all customers have smart meters. But smart price signals are only rarely being transmitted through those meters.

More and more customers have energy-efficient appliances with digital chips embedded in them. In fact, you can no longer buy energy-hogging appliances even if you want to. Some customers live in highly energy-efficient dwellings, some with solar panels on their roofs and even batteries for storage. In Hawaii, which has very high electric rates, some 60% of new solar installations in Honolulu are being paired with batteries. In California, where planned power shutdowns are being carried out to prevent wildfires, the same can be expected. This has temporarily pushed up storage battery prices, but they are on a long-term declining trend. Finally, more and more customers are buying or leasing EVs despite their high prices and short range, and despite their especially high prices in California and Hawaii.

DISINTERMEDIATION OF UTILITIES

Disintermediation of utilities involves the entry of third parties that sell products and services to utility customers that reduce utility sales and revenues. This trend is well underway and appears to be unstoppable. Utilities may think they are regulatorily protected monopolies, but customers keep divining creative ways to manage their energy use outside of utility (and commission) directives. This should not surprise...