Aaron Melda, Vice President Transmission Operations & Power Supply, Tennessee Valley Authority
Famed strategist Michael Porter defined competitive market forces as those of suppliers, buyers, substitutes, and barriers to entry. The traditional power utility has for 80+ years been in a market environment with low supplier power, little buyer power, very few rational substitutes and high barriers to entry. These market dynamics translated to very low levels of competition. This market paradigm, however, is changing - technology is transforming these dynamics and the power utility must transform with it.
The traditional power utility has for years operated on a very linear business model: Use macroeconomic indicators to forecast naturally occurring growth of 1.5-2.5% every year, layer this growth into their long-range plan, identify future gaps in supply, and initiate major construction to close the gaps. This model took advantage of significant capital investments in the form of transmission or power plant construction.
Somewhere in the 2010 timeframe, a technologically driven disruption occurred. The forecasting models that had been so reliable for 60+ years were no longer producing accurate results.
Actuals were coming short of projections the year over year even as the economy began to rebound from the Great Recession. A trifecta of technology drivers had quietly transformed the power utility marketplace. First, energy efficiency: more efficient lighting, HVAC, appliances and “smart” devices had offset all naturally occurring growth. Second, advancements in solar, wind, and combined heat and power coupled with major advancements in the ability to harvest shale gas introduced economic competition and substitutes into the marketplace. Third, a growing consumer base with rational concern over carbon’s effects on the environment began demanding and paying for “green” power.
The traditional power utility has for years operated on a very linear business model
The power utility must transform to take advantage of this trifecta with a trifecta of our own. We must leverage energy efficiency and embrace supply and demand-side resources at the distribution level. This will entail a merging of our communication (fiber optic) capabilities with our ability to move energy (T&D). Real-time data on consumption will be used to optimize the load shape locally by selecting the path and means instantaneously and optimally. Next, we must transform our transmission and distribution infrastructure from a delivery system into a platform for a marketplace. The new power utility must derive their value by being a market maker; embrace (not control) the technology at the grid’s edge and provide a market opportunity and participant rules to optimize its use. Finally, we must develop commercial functions that strive to segment and understand consumer behavior, match that behavior with products and programs, and drive a pricing strategy that matches the underlying cost structure. We must transform these areas of the business while maintaining high reliability and leveraging flexible grid-scale solutions that have historically provided rates as low as feasible.
Vision: the best way to see the future is to create it. The grid of the future will no longer derive its primary return on investment through a volumetric revenue stream focused on the delivery of an electron. It will come from a commercial construct, rooted in consumer behavior, incenting participation in a market where grid-scale economies and grid edge innovation merge for optimized solutions. These new competencies combined with the traditional focus on operational excellence will provide the customers we serve with safe, reliable, low-cost power for generations to come.