By Richard Kauffman
This should be good news for profits. State governments allow utilities to charge customers for the costs of their capital expenditures, plus a guaranteed rate of return on top. The more utilities spend on infrastructure, the more revenue they collect from customers.
But spending is now so high that residential electricity prices have jumped 8.6 percent from last year. Some states — as politically diverse as Ohio, Washington, Montana and New Jersey — are seeing double-digit percentage rate hikes. Customers are outraged, leading politicians to call for rate freezes. Utilities are caught in a vise.
There is a way out. Utilities can accommodate growth, make additional investments and increase their profits without big rate hikes. The problem is their business model. Tying profit to spending — which made sense in the early 20th century when state governments wanted to build out the grid — pushes utilities to build large power plants to deliver electricity to customers over long distances. Utilities spend heavily to build capacity for high-demand times, such as summer heat waves when air conditioners are cranked up. But on average, only half the grid is being utilized, wasting capacity for most of the year.
Building additional infrastructure for these peak moments is good for utilities’ bottom line, but it increases rates for customers. To lower costs, utilities can use batteries to tap into the grid’s unused capacity. Locating solar panels, fuel cells and geothermal energy close to consumers can often be cheaper than traditional solutions, avoiding costly upgrades to the distribution system.
Any company that is paid based on its capital expenditures will spend more capital. Electricity rates will continue to skyrocket if utilities are rewarded for building infrastructure to satisfy peak demand instead of finding cheaper alternatives. Changing the financial incentives for utilities would push them to use existing capacity more efficiently.
In 2016, years before the data center build-out, Consolidated Edison of New York planned to spend $1.2 billion on new substations to satisfy expected demand in Brooklyn and Queens. In response to state clean energy priorities, the utility solicited non-wires solutions — or alternatives to traditional infrastructure upgrades — from outside energy providers to keep prices down.
The providers submitted a wide range of proposals: distributed solar (power generation near where it would be consumed), demand response programs (rebates to customers who use less power in peak periods), battery storage and energy-efficiency projects. They cost $200 million in total, saving customers more than $1 billion. Solutions like these can reduce energy costs, improve grid resilience and reduce carbon emissions.
More than 20 states now require non-wires solution analysis when planning electricity distribution. Utilities understandably aren’t excited about these alternatives, which don’t involve large capital outlays. But states can provide utilities with a financial incentive by changing regulations to allow utilities to keep a portion of the cost savings.
Encouraging utilities to use existing capacity more efficiently can not only moderate increases in rates, but also reduce them. If a data center uses more power without the need for more infrastructure, the utility’s revenue will increase but not its fixed costs. Those gains would be spread across the utility’s customers, dropping rates.
Though the need for data centers has increased the demand for power, artificial intelligence itself may be the key to lowering electricity rates. A company called Emerald AI says that power-flexible data centers — where power consumption is shifted away from peak times — “could unlock up to 100GW of grid capacity.” That is enough to meet the capacity needs for data centers through 2027, according to Goldman Sachs estimates, and lower rates for customers at the same time.
Increasing efficiency also doesn’t mean allowing infrastructure to decay further. Utilities still need to make investments in large power plants, but they should profit from capital-saving innovations — not spending — just like any other business. If they do, customers, utilities and the U.S. economy all win. And nothing is boring about that.
Richard Kauffman is the CEO of CGC and former chairman of energy and finance for New York state.
Link to original article: Utilities can meet power demand from data centers without raising rates