Distributed Energy Resources: How Utilities Have Stared Death in the Face and Emerged Victorious

It has never been a more lucrative time to be an electric utility in the United States. So naturally, it is hard to believe that just a few years ago, analysts were predicting that the energy transition could send the traditional utility model into a death spiral.

Historic infrastructure investments, coupled with growing momentum in the climate movement, have led to a boom in demand for the types of capital projects that utilities have traditionally seen as their bread and butter. Massive utility-scale solar and wind installations are popping up across the country. As the energy transition moves forward, demand for these types of projects will only increase as America races to electrify much of its energy sector and reduce its reliance on fossil fuels.

But in addition to investment in these massive capital projects, utilities have found other means to adapt to a rapidly changing energy landscape.

Perhaps most importantly, they have been able to integrate behind-the-meter, distributed energy resources (DERs), like rooftop solar installations and household energy storage units, into their business models. Keep in mind that the advent of these same resources is what led to predictions of that utility death spiral in the first place.

It is true that DERs like rooftop solar and home battery storage could pose a threat to the traditional utility model by allowing consumers to generate their own electricity, reducing their dependence on the traditional grid. Predictions for a death spiral assume that as dependence on the grid decreases, rates would increase for customers remaining on the grid, encouraging those customers to also install their own DERs in a vicious cycle that eventually would feed the collapse of the utility’s business model.

Utilities are creative creatures though and have, in many cases, changed the narrative of DERs from that of an existential threat to one of great opportunity. Many utilities have been able to integrate these resources into their infrastructure in such a way that they can actually improve their bottom lines.

So how have utilities been able to turn a profit on the exact type of technology that was supposed to doom them? DERs can provide a wide range of benefits if properly integrated into a utility’s portfolio:

1. Reductions in Capital Costs: DERs can help utilities reduce their capital costs by reducing the need for expensive upgrades to transmission and distribution infrastructure. This can free up capital for other investments, like utility-scale solar and wind farms, and reduce the cost of delivering electricity to customers.
2. Reductions in Day-to-Day Operational Costs: DERs can help utilities reduce their operational costs by reducing the amount of energy that needs to be transmitted over long distances, reducing potentially costly inefficiencies in the grid.
3. Reductions in Regulatory Costs: DERs can help utilities better meet environmental standards, especially by reducing their emissions. For example, in states and regions that have implemented cap-and-trade systems such as the Regional Greenhouse Gas Initiative (RGGI) in the northeastern United States, incorporating DERs into a utility’s portfolio can reduce reliance on fossil fuel-powered plants and make it easier for the utility to abate its emissions, reducing the need to purchase costly allowances in order to comply with the initiative (if a utility reduces its emissions enough, it can even sell some of its allotted allowances, generating new revenue streams). 
4. Improving Customer Relations: DERs can increase customer satisfaction by giving customers more agency in decisions about their energy consumption. DERs can help customers to feel more environmentally conscious and can give them a greater sense of control over their electricity consumption (and bills).

Of course, in order to realize these benefits a utility must seamlessly integrate distributed energy resources into its network, which is a task much easier said than done. But utilities have found success in using various market implements. These include offering incentives or rebates for installing rooftop solar or energy storage systems and implementing demand-response programs to reward customers who install certain elements of DER systems like smart thermostats with lower electricity bills.

Notably, the benefits of adding more DERs to the grid have not necessarily been distributed symmetrically among utilities and their customers. Utilities benefit from increased revenue streams by reducing operating expenses, but current rate design structures have limited benefits to customers. In most states, residents are charged a flat-rate service fee which is generally set by regulators to provide a guaranteed rate of return to a utility. These flat service fees have remained unchanged in many cases, essentially allowing utilities to make the same profit off of a lower volume of service.

For the large-scale implementation of distributed energy resources to be sustainable, ratemakers will need to restructure rates in a way that sends appropriate signals to consumers so that they take actions to benefit both themselves and the grid infrastructure as a whole.

Many states have modified their rate structures to address the influx of DERs by implementing net metering policies, which essentially allow customers who install rooftop solar to “roll back” their meters and pay only for the difference between their production and consumption. More changes need to be made though to ensure that a utility’s success in integrating DERs isn’t at the expense of benefits to customers.

So far, the energy transition has not sent the utility into a downward spiral like many have predicted. Utilities have been able to adapt DERs into their portfolios relatively seamlessly over the past few decades. Sure, challenges still exist for utilities as they struggle to adapt to a rapidly changing energy landscape. But for now, they don’t show signs of slowing down anytime soon.

This insight is a part of our Undergraduate Seminar Fellows’ Student Blog Series. Learn more about the Undergraduate Climate and Energy Seminar.

James Tonrey

Undergraduate Seminar Fellow

James Tonrey is a fourth-year undergraduate in the College of Arts and Sciences studying Earth Science and Russian/East European Studies. Tonrey is also a 2023 Undergraduate Student Fellow.