The increase in renewable energy development presents a number of challenges, risks and possible rewards for load-serving electric utilities. Higher Renewable Portfolio Standards (RPS), the potential for new greenhouse gas regulation, and consumer preferences are all requiring utilities to consider the place of renewable power in their business planning and supply portfolio. Depending on the prevailing regulatory structure and business model, renewable energy will impact utilities in different ways.
For vertically integrated utilities holding generation (or those that may wish to return to the generation business), bringing larger amounts of renewables into their resource portfolio presents challenges. To date, most of the development of renewable energy has been undertaken by non-utility Independent Power Producers (IPPs), and sold to load-serving utilities under purchased power agreements (PPAs). In most jurisdictions, utilities simply pass through the costs of those PPAs to their customers on a dollar-for-dollar basis, and do not earn a return on investment.
At lower levels of market penetration, the impact of these PPAs on the utility business model is generally small. But as renewable energy becomes a larger part of the overall generation mix, policymakers and utilities may reconsider the PPA business model for acquiring renewable electricity supply. In choosing between utility ownership of renewable generation resources and PPAs with IPPs, utilities and their regulators will need to consider how to balance the benefits and risks to shareholders and consumers from each business model.
Additionally, utilities with significant transmission interests must consider how to expand and retool their assets to serve and manage increasing supplies of renewable or distributed energy, much of it with variable output. Building new transmission facilities to deliver renewable energy, particularly from remote areas without any existing transmission, represents a significant opportunity. But planning new transmission facilities, choosing commercial partners, and allocating the costs can present significant challenges and regulatory and financial risks that utilities in this business will weigh. A new emerging risk is uncertainty in demand forecasts.
Finally, the core business of the utility – selling electricity at retail to homes and businesses – will likely adapt and evolve to capture value and opportunity from renewables and the new “green ethic” among consumers. But the retail business of the utility also faces challenges and potential threats, as consumers generate their own renewable energy through distributed generation technologies, or (where allowed) seek to buy “greener” energy from competitive retail providers.
The program addressed: