West Monroe Partners survey reveals key differences in how the groups view the growth of DERs

Utility Dive discusses our new Distributed Energy Resources survey with Paul DeCotis.

By Herman K. Trabish

When it comes to distributed energy, the key to giving customers what they want and keeping utilities financially healthy is getting them and their regulators on the same page.

That's the key takeaway of a new survey of utility insiders from consultancy West Monroe Partners. 

Greater adoption of DERs “is more a question of ‘when’ than ‘if,’” according to "Keeping the Lights On," a report on the survey released earlier this month.

West Monroe surveyed nearly 2,000 customers, 109 utility executives and interviewed "dozens of regulatory commission chairpersons, commissioners, and senior staff." What customers want, they found, is more access distributed energy resources (DERs).

Four out of five utilities already have DERs on their systems, and almost half (48%) of their residential customers say they are considering adding them in the next two years.

“Residential customers’ DER adoption may not seem remarkable now in many parts of the U.S.," the report warns, "but this audience is clearly positioned as a major driver of renewable energy’s future growth.”

Utilities leaders and their regulators agree they need to work together to address challenges of DER investment and protect utility revenue streams, the survey reports, but at present, they differ in both focus and approach.

Utility-regulator divide

One key obstacle to DER adoption, the survey found, is that while 82% of utility executives say residential customers are adding DERs to their systems, only 37% report having “services, systems or technologies in place” for the coming growth.

But if the survey points to a technical divide for utilities, it also reveals one between utilities and regulators. While 79% of regulators surveyed say that the current system of rules and regulations in place in their state "allows and encourages utility ownership of DERs,” only 53% of utility executives agree.

In some markets, commissions seem to “lack the resources necessary to thoroughly investigate the regulatory changes needed to support utility investment and ownership” of DERs, the survey reports.

Though DERs promise new life for the traditional utility business model, they “present a new layer of complexity to utilities’ operations,” observed Paul DeCotis, West Monroe director and head of East Coast energy and utilities practice. “Executives and regulators do not share a common vision when it comes to how regulations currently (or should) impact DER support and ownership.”

Because of increasing customer interest, DER adoption is on the brink of booming in many states, DeCotis said. Both utility leaders and regulators see this potential shift, but “in many states they have yet to settle on clear and collaborative ways to prepare for it.”

Utilities on DERs: Threat and opportunity

DERs open the door for utilities to capitalize on new business opportunities, DeCotis pointed out. Decentralized generation located closer to load can serve primary power needs and be used as backup power to help with load balancing. It can also support alternative rate designs like differentiated pricing. And it can generate the sale – possibly through an unregulated arm – of services like solar installation, distributed generation (DG) financing, and equipment maintenance.

Examples include the Georgia Power move into solar services, the AES acquisition of Main Street Power, Duke Energy’s investment in REC Solar, and the Consolidated Edison partnership with SunPower.

These are ways utilities can maintain revenue and serve their customers without inhibiting the development of a competitive DERs market, DeCotis said. But DERs also bring to utilities the difficulties of enrolling and interconnecting customer-sited DERs.

There are solutions like “electronic enrollment and interconnection software to improve customer engagement and satisfaction,” the survey finds. But many utilities feel the cost of creating these services outweighs the returns, DeCotis noted.

That could be why, according to the survey, 59% of utility executives reported “their utility plans to make no or minimal investments to support DERs on their systems unless mandated by regulators."

Only 3% of the executives surveyed said DERs are nothing but a threat. But only about a third (30%) see them as an unqualified opportunity. Two-thirds (66%) say DERs “are both a threat and opportunity,” DeCotis observed.

"Understandably, many executives feel it is too early to claim that DERs will or will not wreak havoc on their operations," he said.

This utility hesitation can lead to customer uncertainty and confusion. The survey showed that 69% of customers don’t know if their utilities have DER offers and 94% say their utilities have not approached them about DERs. 

“Utilities that fail to provide a sufficient DER customer experience may suffer business and compliance consequences, and as a result, need more oversight from regulators,” DeCotis said.

The regulatory perspective

Relative to utility executives, the West Monroe survey found that regulators are more likely to feel that DER growth will necessitate “significant operational and management changes" at utilities in the near future.

Three-quarters (75%) of regulators say the tipping point will happen when DERs get to between 1% and 10% of system penetration, while almost half (49%) of utility leaders believe the tipping point will only come when DERs reach a penetration of 11% to 25%.

In response to this, some commissions and other regulatory agencies have begun requiring utilities to do more about DER growth, DeCotis said. 

There are other important gaps in perception between the two groups, he noted. Although both see rooftop solar, community solar, and battery storage as the three most impactful DER technologies, they differ on those technologies’ importance.

While 85% of utility executive see rooftop solar as the most impactful, only 56% of regulators agree, the survey found. Community solar is ranked as important by 62% of utility executives but only 39% of regulators. Over half (52%) of utility executives see battery storage as impactful while only a third (33%) of regulators do.

Regulators see the administration of regulatory policy as the key obstacle to DER adoption, while utility executives list financial constraints and internal friction first. Utility leaders are almost three times more aware than regulators of the lack of executive buy-in as an obstacle to DER growth.

Revamping the utility business model falls below 11% on regulators’ list of barriers and only 30% of utility executives have that as a chief concern.

These kinds of divisions complicate DER adoption, DeCotis said. Regulators need to better understand and address the difficulties utilities face, like keeping rates affordable and assuring utility revenue recovery in the face of DER proliferation.

Almost two-thirds (65%) of those surveyed agree uncertain cost and benefit implications represent the top planning challenge for commissions. Regulators therefore need to help utilities find substantive ways to quantify the challenges DERs represent instead of relying on “generalized and often anecdotal evidence about the technology’s long- term financial impact,” DeCotis added.

Almost half (47%) of those surveyed have concerns about technology maturity and 41% are concerned about the “unknown pace of adoption” of DERs. This “hints” that regulators might want to consider authorizing utility funding for research and pilot projects that would drive commissioners toward doing more about DERs,” DeCotis also pointed out.

Utility action on DERs

Utilities are not simply taking a complete “wait and see” approach to DERs, the survey reports.

Many have started to tweak their internal planning processes to compensate for DER impacts. Almost two-thirds (65%) of utilities are addressing distribution system planning, 60% are working on financial analysis and load forecasting, 56% are working on technology planning, 48% on risk planning, and 42% on supply planning. Environmental compliance, transmission planning, and workforce planning still have low priority.

There is also significant planning for how to manage DER growth, the survey finds. Four out of five utilities (80%) are working on interconnection processes and procedures, 57% are addressing engineering, risk management, and planning, and almost half (49%) are developing virtual net metering.

Almost two-thirds (65%) of the utility leaders surveyed are considering changes to their revenue models and almost as many, 59%, are making changes in internal planning. Over half (52%) are considering revisions to distribution planning to better integrate customer-sited resources.

But less than a third (32%) of utility executives are addressing customer planning or DER management services. And much of the planning seems “directed at protecting revenue, not supporting or satisfying customer demands,” DeCotis pointed out.

This suggests utility executives may still see DERs as “more of a risk to their businesses than an opportunity, particularly with continued regulatory uncertainty,” he added. "Without greater policy and regulatory clarity, utility intentions are much more likely to be directed toward minimizing business threats and risks rather than supporting DERs, at the risk regulatory penalties."

Regulatory action

More than three-quarters of regulators (77%) are looking at DER cost effectiveness and performance but many still use “cost of service” standards in traditional regulatory proceedings, DeCotis observed. DER costs are market-driven and “do not necessarily lend themselves to a cost-of-service benefit/cost assessment.”

Markets can set prices higher or lower than prices determined by regulators, but the majority of commissions, intent on sustaining what they see as a “non-invasive approach,” will continue relying on traditional proceedings and utility filings.

“This may be less disruptive in the short term,” the survey suggests, “but using dated methods to measure an emerging technology could skew the data and cause more confusion later on.”

What is needed are market-based tests for cost effectiveness that link “the personal and intrinsic value that extends beyond energy and environmental benefits,” DeCotis observed. Returns can be higher where utilities risk market-based prices and lower where cost-of-service based prices are applied by regulators.

Toward collaboration

“Regulators need a better approach to understanding utilities’ challenges in order to create and adjust policies in ways that eliminate the barriers to DER support,” DeCotis observed.

They could begin by more precisely quantifying the difference between utility-owned and non-utility owned DERs.

“Regulators must focus less on rates and more on costs,” the survey concludes. This more precise valuation would help utilities address their concerns about how the increased penetration of DERs could affect reliability and resiliency.

Regulators can also help utilities find ways to innovate by opening “utilities’ trove of real-time information and the potential of performance-based ratemaking,” the survey suggests. This could reveal ways to reward utilities when they take entrepreneurial initiatives and to share revenues with the private sector or customers when they share in the risk.

This kind of regulatory initiative could push utility leaders to see the opportunity to satisfy customers interests in DERs rather than see that as a threat to revenues. A regulator-led turn toward achieving grid reliability through DERs will open up “new revenue streams by integrating DERs more closely into their systems and honing their distribution services,” DeCotis explained.

If one thing is clear from the respondents, it is that “the industry’s status quo has reached an inevitable turning point,” the survey concludes.

“If utilities and regulators make a concerted effort to confront these changes, everyone – including customers – can endure the growing pains and realize economic, social, and environmental benefit.”


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