The focus on the transition to renewable energy, energy efficiency programs and legislation surrounding these areas is spurring tremendous change in the utility industry. A lot of money and effort are being funneled to the research, development and deployment of clean energy technologies. The federal debate over fuels, technologies and the legislation supporting them has reached a fever pitch.

The utility industry is undergoing fundamental change. The extreme change sometimes envisioned-that utilities will disappear-is not likely. The future utility will almost certainly be a hybrid of centralized power plants and massive distributed generation, combined with a much more efficient system of both generation and consumption. But the business model of the utility and the relationship between utility and customer will be radically different.

Nearly every utility is aware of these looming changes; even those who have opposed this transition are hedging their bets by testing renewable generation and smart grid deployment. The elephant in the room that is being ignored by the utilities and the renewable energy community alike is that this new distributed generation is a significantly disruptive technology and the commodity-focused economics of America’s 100-year-old utility industry is aging out. Few, if any, utilities seem to be working on finding a new business model that will successfully mitigate these twin threats.

That truth is what drove Austin Energy to get involved in the Pecan Street Project, in which a group of more than 200 volunteers including representatives from Austin Energy, the City Council of Austin, the University of Texas, private corporations and the Environmental Defense Fund teamed up to develop a set of recommendations that will help usher in transformative change to the way energy is generated, managed and delivered in the city.

For more than a year the groups convened to work on the project. The Pecan Street Project’s final report (PDF), released this past March, provided four groups of recommendations: water, public policy, economic development and Austin Energy.

For the utility, the challenge in sum is this: if a utility’s revenue must be maintained and the utility’s business model is based on the volume of energy sold, how can it justify changes that will require up-front investment and is explicitly intended to reduce the amount of energy it sells? The demise of the “spinning meter” business model is inevitable. Everyone knows it’s coming and most people now think it’s coming pretty quickly. What has not emerged yet is its replacement. And until we know where the revenue streams will flow from and to, it doesn’t really matter what brilliant technical plan we come up with. The business model is the linchpin.

The renewable energy industry has rightly fought and achieved net metering laws requiring utilities to buy solar and wind energy from customers. This was absolutely necessary since most utilities, unlike Austin Energy, have fought interconnection and purchase of customer-owned generation due to their current business model.

However, simply asking the utility to “net out” the total consumption and generation and pay the customer the difference is not sustainable either for the utility or the renewable energy industry when distributed generation becomes widespread. That’s because such a policy does not allow the utility to recover distribution system costs. In Austin, we have about 1,000 buildings now that generate more energy than they consume in a summer month. That means during those periods the owner receives a payment rather than a bill. The owner, however, is using the distribution system both to receive power in the evenings and sell excess power during the day. If a thunderstorm knocks out a transformer, the owner expects the utility to have a lineman out to replace it. But the current net-metering policy does not allow the utiliy to recover the debt, operation and maintenance of the distribution system.

Thus, a prime recommendation of the Pecan Street Project is for Austin Energy to “unbundle” its base rate charge, allowing Austin Energy to establish a distribution system charge, even if an owner puts solar on his or her roof.

The recommendations urge the utility to deploy additional distributed renewable energy until it has installed 100 MW of solar that it owns or finances. Another 200 MW of solar would be “owned” by residential or commercial customers. The recommendations encourage testing of energy storage and advanced demand response programs. And they encourage pilots of other renewable energy and storage options, such as co-op solar, micro-wind and geothermal.

Each of these areas is important and many of these recommendations are already being acted upon. Others will be tested in the smart grid demonstration project at Austin’s Mueller community, a project that is being managed by the Pecan Street Project Inc. organization.

Separate Profit from Volume

But the most urgent and complicated issue addressed by the Pecan Street Project, and that will be tested as part of the smart grid demonstration at Mueller, is the business model. We have to separate profit from volume. That means utilities have to explore new ways to provide value to customers and test pricing options for those services. It means the utilities need to upgrade their systems (internal and external) so the private market can participate in what has historically been a two-party energy relationship. And it means utilities need to invent a replacement for the spinning meter revenue model.

The new rate-structure recommendations include several concepts that have been debated in the utility industry for a while now: unbundled rates that separate generation costs from transmission and distribution; new rate structures that integrate customer-generated energy (specifically solar) into the grid in a financially sustainable way; and introducing dynamic, real-time pricing. But the Pecan Street Project went beyond these often-discussed concepts and proposed fundamentally new ways to operate.

For customers, imagine Austin Energy not as a rate-charging commodity provider but as a fee-based service provider. Customers could sign up for a service plan for a fixed cost per month. For that fee, they get all the power they need, within a tested and predetermined range. In exchange for the predictable flat fee, they would agree to become energy partners-not just customers-with Austin Energy. They’d make their rooftops available to solar equipment owned by Austin Energy. They’d agree to reduced-cost appliance upgrades such as solar water heaters. They’d participate in Austin Energy’s demand response program, which might cycle off their air conditioners in 15-minute increments on the city’s hottest days. They’d agree to limit their peak use of non-essential appliances in favor of off-peak use. They would never be denied power when they need it. But they would agree that using energy at certain times outside their service plan would be “pay as you go,” just like tossing more garbage than will fit in city-issued trash cans is “pay as you throw.”

The Pecan Street Project report goes even further likening a third-party services potential to Apple’s app store for iPhones. As with the flat-rate service fee model, this free-market energy platform is purely hypothetical; it hasn’t been tested or even fully imagined. So far the premise is that Austin Energy would establish standards and help manage the market, but outside companies would be able to provide plug-and-play add-on services that would help customers better manage their energy usage. In addition to improving energy management across the city, this could be a new source of revenue for Austin Energy. While it is not at all clear what this third-party service potential could add to the business model, it is clear that this is the type of imaginative thinking is what is needed to change the business paradigm.

The report also considered plug-in electric vehicles, recommending that Austin Energy promote the early penetration of plug-in electric vehicles (PEVs) in the region as a new revenue source, a way to reduce carbon and smog emissions and a new source of dispatchable load. The utility should analyze whether to promote public charging stations and if it wants to establish a time-of-use rate tied to smart plugs, which could require off-peak charging. Premium rates should be tested for charging during peak hours.

The report recommends that Austin Energy develop a complete PEV Power Discharge (vehicle to grid) strategy by 2014, including partnerships with several large employers to incentivize PEV connectivity in their employee parking facilities and a rate structure for residential and public PEV charging stations.

Change is coming to utilities. If they don’t change they will go broke. And if that’s true, it’s a little easier to understand why utilities have been slow to adapt, even though they must. It is my hope that the Pecan Street Project will be seen as one of the early formative efforts defining the energy systems of the future. I hope other utilities will use our recommendations to define their own transformative mix of distributed generation, smart grid, new rate structures and successful business models.

Roger Duncan is president of the board of Pecan Street Project Inc. He was GM of Austin Energy until his retirement in March 2010.