(Opinion) Utilities need a business model that’s aligned with the needs of society

How do we effectively and affordably build out the electric grid to handle the impending tidal wave of electrification?

BY SAM EVANS-BROWN

For nearly 20 years, electricity consumption has been pancake flat in the United States, but that era is about to end. Electrification is coming.

Electric vehicles are hitting the road much faster than we ever anticipated. There are currently just over 10,000 EVs registered in New Hampshire, but by 2032 there are forecast to be more than 165,000. Across all of New England, there are expected to be 2.2 million vehicles reaching the road by 2032, with more to the north in the Canadian Provinces.

Electric heat pumps are popular, too. This partial electrification of building and transportation sectors will add nearly 6,400 additional megawatts (MW) to the winter peak demand, which is nearly the equivalent of five new Seabrook stations, the nuclear plant that is the largest electric generator in New Hampshire.

Electrification is efficiency. Electric vehicles and heat pumps use two to four times less energy to move people or heat homes than their fossil-fueled counterparts, so this trend will reduce the total energy consumed by society. However, it will increase the total demand for electricity, which will create challenges. Choices we make now regarding how electric utilities set goals and manage their operations will determine how expensive this energy transition is.

Meeting this rising demand won’t be easy, but it is doable through comprehensive planning and coordinated investment. At a recent industry conference, I heard one grid engineer remark that the last time the United States saw demand growth of this magnitude, electric utilities had to run new, thicker wires down nearly every street of America and replace nearly every pole-mounted transformer.

It was an enormous generational investment; one that we have been benefiting from ever since. But that hard infrastructure was also the only tool that the electric utilities and government officials had in their toolbox at that time, and in 2024 it’s a completely different story.

Let me give you an example.

Managing peak demand is everything

My house is relatively new and is equipped with 200-amp service, while many older homes have 100-amp panels. These numbers equate to the capacity to consume either 48,000 watts, or 24,000 watts of power, respectively. The biggest energy hog in the house is our EV charger which each consumes about 7,500 watts at full blast. Our electric heat pump comes next at about 2,000 or 3,000 watts depending on how much heat the home is calling for. The dishwasher, heat pump water heater and the toaster oven can each draw about 1,000 watts. The rest of our appliance — lights, laptops, phone chargers — are peanuts in comparison, and contribute a few hundred watts each.

Here’s the point of all those numbers: We would have to turn on every appliance in our house at the same time to get anywhere close to maxing out our electric service or tripping our breakers. This is a metaphor for the electric grid writ large.

The whole grid is designed to meet the peak moment of demand. On average, we use only about 50% to 60% of the total capacity of our grid, which means that most of the year we have massive investments in our infrastructure that are sitting there waiting for the few hours a year that we use them. That’s an expensive way to run a railroad.

In your own home it might not seem terribly important to run some fatter wires just so they’ll be there when you need them, but when we start to talk about the millions of miles of distribution lines, or the tens of millions of transformers that constitute our grid, suddenly we’re talking about real money.

In the 1950s, when we were rapidly expanding our grid, when materials and labor were cheaper, when our understanding of power electronics was quite limited, this brute force method of massively expanding access to electricity was a reasonable (and indeed the only) approach, but in 2024 we have options.

We have devices that can turn themselves on or off based on a remote signal; we have real-time electric markets that set a new price for power plants every five minutes; we have increasingly affordable batteries that can charge slowly over a smaller wire right at the point of consumption and be ready to discharge for a short burst.

In other words, we have innovated.

So why do we not see more of these innovations being aggressively adopted by our electric utilities to make the coming wave of electrification more affordable for all of us?

One word: incentives.

Utilities get paid to build and own things

You don’t get to choose the company that delivers your electricity. Electric utilities are “natural monopolies” in that it does not make economic sense for companies to compete to connect wires to homes. However, in exchange for having been granted the right to be a monopoly, the electric sector has agreed to be subject to heavy regulation.

The NH Public Utilities Commission (PUC) is the regulatory body charged in approving the various rates and programs that each utility offers. This entails an exhaustive review of the finances of every utility every few years. The biggest review occurs during a “rate case” during which the PUC must determine whether the utility’s investments in their systems are “used and useful” and “reasonable and prudent,” which is to say that the company is working in the best interests of their electric customers.

Assuming those investments meet the PUC’s criteria, the utility gets paid back, plus some. And the key feature of that “plus some” — which is where a lot of the utilities’ profits come from — is that it’s a percentage on top of whatever the utilities spent to build their infrastructure.

This is a familiar model to anyone who has built a house. General contractors (GC) similarly work on a “cost plus” model, where they charge you 10% of whatever your project costs them. If you’ve ever experienced what it’s like to build a house with a GC who is working on this model, you might have a sense of what incentives this gives them. Project costs tend to creep up, the GC doesn’t often have an interest to tell you about cheaper solutions, or push you towards more cost-effective products.

As long as the utilities think the regulators will say “yes,” the incentives of the system are for them to use the same old solutions as before, no matter the cost.

But even more precisely (and here’s where the comparison with a contractor breaks down), utilities only get paid their return on capital investments. When it comes to utility operations, like their billing department, customer service and maintenance expenses, they simply get reimbursed for what they spend.

This creates a powerful bias towards building stuff.

If the same volume of reliable, low-cost electricity could be delivered more cheaply by another solution — say by investing in some of the innovations I described above — the utilities’ investors actually get penalized because of the utilities’ good stewardship of their monopoly service territory.

This means that utility shareholders would rather the company build a new multimillion-dollar substation to handle increased peak demand than invest in targeted demand reduction measures. It also means they’d rather own the battery in your basement, instead of letting you buy one and pay you to use it.

A new business model for our utilities

So how do we get this right? How do we effectively and affordably build out the electric grid to handle the impending tidal wave of electrification?

There are many individual strategies and technologies I can point to — energy efficiency, advanced rate structures, energy storage, local generation to defray local consumption, electric vehicles that can discharge back into the grid — but the reality is that, until we change how the utilities make their profit, we will struggle to get their leadership fully bought into these strategies.

That is why this year Clean Energy New Hampshire supports NH Senate Bill 320, which would direct the PUC  to open a docket to chart a new course for our utilities. This docket would begin to move our utilities away from our current model and towards one in which the utilities earn their profit by achieving goals that state policymakers set out for them. This new model is called Performance-based Rate-making.

Those policy goals can be whatever we decide they are: reliability, keeping electricity rate growth below the rate of inflation, customer satisfaction, the number of individuals who are up to date on paying their electricity bills, speed with which the utilities are connecting new clean generation resources to the grid. Performance-based rates can look completely different depending on the state in which they are put into place, but offer the tantalizing goal of creating a new business model in which the interest of utility shareholders are aligned with the interest of NH policymakers and ratepayers.

At Clean Energy New Hampshire, we envision a future in which abundant, affordable, clean energy powers an innovative and thriving economy. Until New Hampshire begins to take steps away from the current utility model, we’ll continue to get the results we’ve been getting so far: rates will rise and innovation will be slow.

Unfortunately, this bill was sent to interim study largely due to the opposition of the state’s Department of Energy, which argued that performance-based ratemaking is too new, too untested, or too risky. While it’s true that this innovative new framework would be a change from the current regulatory compact, this much is clear: doing nothing has its own risks.

We risk not being able to rise to meet the moment and build the next generational investment that will be needed to meet rising electric demand at an affordable cost. We risk seeing our electric rates rise even further, which will hamper the clean energy transition. We risk being left even further behind.

Sam Evans-Brown is the executive director of Clean Energy NH.