A New Utility Business Model in an era of Consumer-led Energy Transition

Larry Kellerman may not be a household name in Australia, but in US energy circles when he makes a move the market sits up and takes notice. So when a former colleague mentioned to me his latest venture, I did the same.

Mr Kellerman has spent most of his career successfully developing and operating independent grid-scale power generation.  As President of Goldman Sachs’ power unit Cogentrix Energy, he built the generation portfolio into a major IPP with over 2.5GW and 30 facilities around the US at its peak. At investment fund, Quantum Utility Generation the focus was much the same – investing in centralised utility-scale generation.

However, his latest venture, Twenty First Century Utilities (“TUFG”) has a decidedly different feel.  Quite apart from building out grid-generation, TUFG instead focuses on acquiring utilities in the US under a business model that would enable the rollout of small‑scale customer generation and energy technology.

Traditional utility network business models are built around the idea of centralized generation, large scale interconnected transmission/distributions networks, and historically predictable consumer usage patterns.  The buildout of rooftop solar and ongoing development of storage technology has required a reconsideration of this traditional model, and has brought the inherent value of large scale network and generation assets into question.  This is increasingly relevant locally with AEMO’s 2016 National Electricity Forecasting Report expecting upto 19GW of rooftop solar capacity by 2035-36, which would offset upto 13.8% of grid-based consumption.  A further 14.8% is expected to come off the grid via energy efficiency technologies.

TUFG’s model is one that looks to embrace and enable this customer transition by providing a full procurement, financing and installation option for these technologies.  In a same way that vehicle-manufacturer led financing drove motor vehicle penetration, the aim is to facilitate further deployment by integrating utilities into market access channels. Effectively, the customer purchases rooftop solar, batteries or other energy equipment through the utility, and pays for it over time as an incremental charge on the electricity bill.  This incremental charge would be determined by the utility’s regulated cost of capital with a separate regulated asset base for each customer, based on their generation and equipment choices.  As an example, a purchase of a $5000 rooftop PV system with a 20 year life (and a 6% regulated cost of capital) would result in amortised cost of around $36 per month added to the customer’s electricity bill.

This structure brings localized generation, which heretofore has been seen as a threat to incumbent utility models, into the domain of utility ratemaking and into a potential growth opportunity.  The only difference being that the decision to build generation is not determined by a regulatory process and centralized network requirements, but by consumer choice.

However, this new model is likely to require some modification of existing regulatory structures and regulatory approval, which is likely to take time to negotiate, procure and enact. TFUG is also yet to make its first acquisition, and so the concept remains yet to be proved out in practice. However, it expects to make its first acquisition within the next year, so there may be more developments to come shortly.

Are there relevant implications for the local market?  What are the prospects for similar models to be developed in Australia?  Given the already strong growth seen in Australian rooftop PV installations over the past five years, some may dispute the need for new market models.  However, notwithstanding continued reductions in panel costs, consumers face an element of subsidy loss through the reduction of feed‑in‑tariff rates and potential shifts to cost‑reflective network tariffs, which may hinder organic growth in rooftop PV. Furthermore, utilities face ongoing regulatory pressure to limit network augmentation and peak-shifting technologies such as integrated PV + storage systems may provide options to mitigate network pressures and peaking constraints.  Active business strategies that allow utilities to drive such buildout may be preferable to responsive or passive strategies.

The most obvious obstacle to a customer rate-base model in the NEM is the deregulated nature of retail energy operations. Most US states continue to adopt an ‘integrated utility model’ where the local distribution utility is also a retailer of energy – indeed for thirty states the utility is still the sole and exclusive retailer.   The inability for Australian Distribution Network Service Providers (DNSPs) to directly interface with the customer will necessitate collaboration and joint ventures between DNSPs and retailers.  It would also require a significant shift in the existing regulatory structure and tariff design, which could be integrated as part of broader debate on regulatory tariff structures.

Overall while local applicability requires some further consideration, regulators and utilities need to watch this space closely.   The electric industry is set for continued disruption, with novel and exciting business models for consumer-led energy transition continuing to emerge. To date, broadly speaking utilities have seen localized and customer-centric generation as a threat and a risk factor to existing operating models. Business models that shift the incentives for utility participation in localized generation could be a game-changer for the sector and the broader energy transition as a whole.


Argus Media (15 May 2015). New Kellerman venture targets regulated utilities. Accessed from http://www.argusmedia.com/news/article/?id=1040166

Australian Energy Regulator (2015) State of Energy Market 2015

AEMC (2008) Current Arrangements for Energy Retailing 

AEMO (2016) National Electricity Forecasting Report for the National Electricity Market

Borenstein, S & Bushnell, J. (2015) The U.S. Electricity Industry after 20 Years of Restructuring, EI@HaasWP252R. Accessed from http://ei.haas.berkeley.edu

Wesoff, E (16 November 2015) TFC Wants to Design Its Own 21st Century Utility—and It’s Starting With GridPoint. Accessed from http://www.greentechmedia.com/articles/read/TFC-Wants-to-Design-its-Own-21st-Century-Utility-And-Its-Starting-With-G

Twenty First Century Utilities website, http://tfcutilities.com



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