The Future Electricity Business

The transition of the electricity business into the

competitive market will result in change as significant
as that brought about by the PC or the deregulation of
telecommunications, and with it opportunities for new
products, services, and technologies, particularly to
support an increase in distributed generation.

Vikram S. Budhraja

Vikram S. Budhraja is President of

Edison International’s Edison
Technology Solutions unit, Irwindale,
CA, which he started in 1998 as a
nonregulated technology company to
develop, commercialize, and invest in
new technologies and start-up
companies. Previously, he spent 20
years at Southern California Edison,
ultimately serving as a Senior Vice
President and head of Edison’s Power
Grid Business Unit and Research and
Technology Development. He led
California’s effort to create the
Independent System Operator and
Power Exchange for California’s
competitive electricity market. Prior to
joining Edison in 1977, he spent six
years in the energy and environmental
consulting field.
T he electricity industry, histori-
cally a regulated, vertically
integrated business with central-
ized planning and decision mak-
ing, is entering a new chapter in
which new emerging technologies
for distributed generation, energy
storage, controls, communica-
tions, and energy management
offer the potential for customers to
manage their energy use and pro-
cesses on an integrated basis. The
future electric power business will
be shaped by customers and how
they choose to manage their energy
bill. Customers’ need for inte-
grated, cost-effective, timely, and
reliable solutions opens up signifi-
cant investment and business
opportunities for new products,
services, and emerging technolo-
gies to make the future electric sys-
tem more efficient, reliable, lower
cost, decentralized, and smart.
In the electricity business’ his-
tory so far, economies of scale have
led to larger power plants located
long distances from customers,
with a system of transmission lines
built to connect these power plants
and customers. What started out to
be a point-to-point system con-
necting a power plant to a load
center ultimately evolved to a net-
work of interconnections. The elec-
tric power grid is often referred to
as the largest and most complex
synchronized machine, one con-
sisting of power plants, transmis-
sion lines, substations, and distri-
bution lines all operating in perfect
coordination to meet customer

54 © 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00078-0 The Electricity Journal
needs for electricity. This regu-
lated, vertically integrated struc-
ture has enabled central planning
and economic dispatch of the
power system to bring the maxi-
mum benefit to the maximum
number of people.
The regulated structure and the
need for local self-sufficiency and
reliability led to substantial invest-
ments in an infrastructure which,
at best, was utilized half the time—
the average to peak load ratio is
approximately 56 percent and,
with the traditional reserve margin
for contingencies, the average utili-
zation drops well below 50 per-
cent. As the needs of the economy
changed and technology
advanced, the industry moved
from meeting a basic need for elec-
tricity to satisfying the multiple
objectives of energy efficiency, reli-
ability, customer choice, market
competition, fuel diversity, tech-
nology choice, and environmental
protection. It became more and
more difficult to maintain the ver-
tically integrated and regulated
structure in which the risk of cen-
tral decisions was passed on to
customers who felt disconnected
from those decisions. The transfor-
mation from isolated power sys-
tems to an integrated network
enabled widespread movement of
power and undermined the ratio-
nale for continued vertical integra-
tion. Global competition, disparity
between average prices estab-
lished by regulation and lower-
cost options from new technolo-
gies, and customers’ push to
obtain customized energy services
at low cost all have contributed to
the policy consensus to shift from a
November 1999
vertically integrated, regulated
system to a competitive market
structure.
The electricity industry’s result-
ing change is perhaps as signifi-
cant and startling as that brought
about by the personal computer
and deregulation of the telecom-
munications industry in the last 20
years. The development of distrib-
uted technologies and the prolifer-
ation of the Internet, communica-
tion networks, and silicon and
The key element is to
collect information and
process it to enable
management and
integration with
customer processes.
digital control technologies is start-
ing to similarly transform the
electric network.
The electricity business has been
viewed as having three building
blocks—generation, transmission,
and distribution. Almost all invest-
ments in these three sectors histori-
cally have been made by utilities,
but now these investments have
begun to be made by customers or
new entrants under a competitive
market model. With the high-
voltage transmission system largely
built, the business focus will shift
to efficient utilization of that infra-
structure through investments in
grid automation control, commu-
© 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00078-0
nications, and network manage-
ment. And while the primary func-
tion of the distribution system—
connecting customers to the utility
grid—will remain unchanged,
there will be new requirements on
the distribution system to integrate
distributed technologies and cus-
tomer micro grids. Generation
power plants are as likely to be
located at customer sites as at util-
ity or central-station sites. Cus-
tomers may choose to create micro
grids that are locally self-sufficient
and may or may not be connected
to the utility grid. The characteris-
tics of the distribution grid are
likely to change from a “one-way”
system in which power flows from
utility central-station power plants
to customers, to a “two-way” sys-
tem in which power may flow in
either direction. Hence, the focus
will increasingly shift to integra-
tion of a portfolio of distributed
technologies. The opening of the
electricity business to competition
also opens new markets and busi-
ness opportunities for new
entrants. The changing electricity
business and new competitive
business segments are summa-
rized in Figure 1.
The key element in the new mar-
ket and resulting business oppor-
tunities is to collect information—
for example, prices, loads, and
usage patterns—and process it to
enable management and integra-
tion with customer processes. The
advent of the Internet and low-cost
communications technologies pro-
vides the basic enabling platform
for many of these new business
opportunities which will shape the
future electricity business.
55

Figure 1
I. The New Market Drivers
The advent of a competitive elec-
tricity market shifts decision
drivers from utilities to markets and
customers. The industry is disag-
gregating into a production side
consisting of power plants, a mar-
ket side consisting of energy
trading and retail marketing,
ISOs to manage and dispatch the
grid in real time, and utilities to
manage the transmission and dis-
tribution (T&D) wires infrastruc-
ture. Disaggregation and unbun-
dling has led to the creation of
markets for a range of energy
products—including day-ahead,
hour-ahead, and real-time
energy, as well as such ancillary
services as spinning reserves,
standby reserves, regulation, and
voltage support—where previ-
ously there was essentially one
product and one market.
56 © 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00078-0
Energy service companies (Escos)
are setting up retail marketing
functions to provide new products
and services to customers where
no such function existed before.
Increased transactions and use of
the grid in ways not envisioned by
historic design have stressed the
current system of planning and
operation. Customer preferences
and market competition, instead of
central planning and dispatch, are
shaping the power system. The
new market structure opens the
door for application of distributed
technologies and market innova-
tions to meet the needs of cus-
tomers for reliability, efficiency,
cost competitiveness, and new
products and services.
T he economic drivers in the
competitive electricity mar-
kets are substantially different
than those in the wholesale
energy markets in which utilities
traditionally operated. At the
wholesale level, the primary
product was trading of energy,
which was viewed as a commod-
ity whose price was essentially
tied to the production costs of
power plants. These wholesale
prices averaged between $10 and
$30 per MWh. Customers, on the
other hand, saw retail prices in the
range of $60 to $100, and in some
cases as much as $150. That price
differential continues to be large,
and will likely drive entrepre-
neurs to bundle the commodity
with value-added services and
meet customers’ needs at the
retail level so they can gain the
maximum share of the customers’
energy dollar. The wholesale mar-
ket is commoditized with signifi-
cant producer competition, while
the retail market focus is to pro-
vide value-added high-margin
service offerings.
A nother significant driver in the
competitive market is cus-
tomers’ exposure to real-time
prices. During the summer of 1998,
prices in the Midwest peaked at
$7,500 per MWh—300 times the
average. This price volatility did
not translate into changed con-
sumption patterns at the cus-
tomer level because the price sig-
nals are not visible to customers
in real time. As the market
matures and technology enables
customers both to be exposed to
this price volatility and to have
the ability to manage their con-
sumption to reduce their cost,
one can expect wider application
of real-time customer energy
management systems.
The Electricity Journal
II. New Products and Services
to Serve Customer Choice
Customers who make decisions
relating to electricity is a new expe-
rience. Historically, customers
have had to deal with a local utility
that provided one service, one
price, and one product. With cus-
tomer choice comes the ability to
make decisions, and customers
will make decisions that serve
their needs at minimum cost. In
thinking about new products and
services, it is important to start
from the customer and under-
stand what that customer really
wants and needs: competitive
pricing, high-quality service, high
reliability and power quality
(“perfect power”), transparent
integration (“solutions not tech-
nologies”), and risk management
and price hedging.
These are complex issues and the
initial reaction of customers is to
shy away from the piecemeal deci-
sions and complexity. However,
unbundling and disaggregation
opens the door to innovative and
entrepreneurial offerings that pro-
vide value-added services to meet
customer needs.
C ustomers’ ability to choose a
range of energy services is
relatively new, but already there
are many examples of services that
have benefited customers. Escos
have been able to work with gro-
cery stores to provide aggregated
billing and remotely monitor and
manage energy consumption to
reduce costs. Lighting manage-
ment companies are offering to ret-
rofit customer facilities with effi-
cient lighting and state-of-the-art
November 1999
Internet-based energy manage-
ment systems, which simulta-
neously lower energy cost and
improve lighting service. The
introduction of micro-turbines in
sizes below 100 kW has encour-
aged customers to consider these
small power plants at their facility
as an option to reduce operating
costs and improving reliability.
Energy storage technologies rang-
ing from superconductors to
power-electronics-based systems
Initial offerings are
technology-based
and over time are
likely to be bundled
into value-added
services.
that provide short-duration stor-
age capability are being consid-
ered by customers to improve
power quality and reliability at
their facilities.
These early entries into what is
expected to be a vibrant and com-
petitive electricity market environ-
ment, provide glimpses of the
future electricity business. As can
be expected, the initial offerings
tend to be technology-based and
over time are likely to be bundled
into value-added services that
address a range of customer
energy needs, including lighting
management, backup supply,
equipment monitoring, demand
© 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00078-0
aggregation, and minimizing
energy costs in response to real-
time price signals.
III. Distributed Technology
Solutions
Distributed technologies substi-
tute the economies of mass manu-
facturing for economies of scale,
and capitalize on the advances in
materials, semiconductors, power
electronics, controls, and commu-
nications. Distributed technolo-
gies for electric energy generation,
storage, grid management, reliabil-
ity, and data communications pro-
vide the building blocks to meet
customer needs for reliability and
market efficiency. Distributed tech-
nologies can defer or eliminate the
need for construction of new T&D
lines and upgrades, and offer such
valuable features as local reliability
and power quality, emergency and
backup power, and cost manage-
ment ability, using peak shaving
and energy management strate-
gies. Given their many unique fea-
tures, distributed technologies are
expected to have as profound an
effect on the electricity business as
the introduction of the PC had on
the mainframe-based information
technology business. Economies of
scale are being replaced by econo-
mies of mass manufacturing. For
example, the cost of manufactur-
ing and deploying a micro-turbine
is expected to be in the range of
$400 per kW and can be installed
in days, compared to large central
generating plants and infrastruc-
ture, which cost $600 to $1,500 per
kW and require years to construct.
Other distributed generation tech-
57
nologies such as fuel cells and fuel mainframes and PCs, it is impor- flexibility (it can be where the
cell/micro-turbine hybrids, in tant to understand the distinc- power needs to be), the economies
development and demonstration tions between distributed power of mass manufacturing, and a
have the potential not only of plants and central power plants, reduction in transportation needs.
delivering small-size modular and between distributed micro Self-contained micro grids could
designs but also efficiencies that grids and utility transmission be interconnected with existing
match or beat central-station systems. Central-station power distribution systems. Figure 2
combined-cycle power plants. plants are large and expensive, summarizes the attributes of dis-
Distributed technologies open require a lot of infrastructure tributed and central-station tech-
new business opportunities to such as transmission and fuel nologies, and their potential to
meet customer needs for electric- delivery systems, and cannot be transform the electricity business.
ity, reliability, and efficiency. This where the load is, resulting in low The potential for applying
trend will reshape the electricity utilization and losses. economies of mass manufactur-
business by bringing solutions to
customers. Investment focus shifts
from utilities to customers, solu-
L ike PCs, distributed generation
technologies are small.
Micro-turbines come in kilowatt
ing and reducing the cost of dis-
tributed technologies is substan-
tial. Moore’s Law has governed
tions are customized, and energy sizes rather than megawatts. Fuel the economics in the semiconduc-
use and management get inte- cells are 40 to 60 percent efficient. tor industry, positing a doubling
grated with customer processes. Integration of these two emerging in capacity and halving in cost
These new businesses will comple- technologies allows the creation every two years. While the eco-
ment the utility T&D grids and of a hybrid power plant, which is nomics of the semiconductor
central-station power plants, not nearly emission free. The target industry are unlikely to be
necessarily replace them. efficiency of 60 percent is almost directly transferable to the elec-
Before the competitive market twice that of the current stock of tric power industry, there are
started, electricity was thought of central-station power plants. some interesting parallels.
as an undifferentiated product. Other advantages include low The electric system which histor-
Customers choice of differentiated equipment cost, reliability, siting ically has been dominated by
solutions relied on centrally
planned solutions. Greater reliabil-
ity meant increasing reserve mar-
gins by adding expensive new
power plants and parallel or
redundant transmission lines that
were costly and that increased reli-
ability costs for all customers,
whether they needed it or not. Dis-
tributed technologies provide
choices in the new competitive
market that can be tailored to spe-
cific customer needs—reliability
may mean a micro-turbine
installed at a customer site, elec-
tronic filters and capacitors cor-
recting voltage dips and sags, and
protecting customer equipment.
In drawing an analogy between Figure 2

58 © 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00078-0 The Electricity Journal
mechanical systems—mechanical
switches, large rotating machin-
ery—is being siliconized and digi-
tized. Power electronics, semicon-
ductor technologies, and real-time
control and communication sys-
tems are replacing slow acting,
bulky, and expensive mechanical
systems. A substantial portion of
the value added is in the power
electronics interface between the
power plant and the electric grid.
As the volumes ramp up, the cost
of at least the power electronics
portion of the electric system will
start to resemble the economics
of the semiconductor industry,
driving per-unit cost down.
Distributed technologies provide
a customer solution, a market solu-
tion, and a grid solution. That flex-
ibility combined with high efficien-
cies and practically zero emissions
will lead to a major transformation
of the electricity business. Distrib-
uted technologies are likely to meet
a portion of customer needs for
ancillary services, managing price
volatility, local reliability, power
quality, congestion management,
and grid upgrades.
an average age of 30 to 40 years. As
the industry transitions to a com-
petitive market structure, the
demands on this grid for greater
reliability, efficiency, and real-time
management can be expected to
increase. The commercialization of
new and emerging technologies
will facilitate this transformation.
Conventional power plants have
an operating efficiency of approxi-
mately 20 to 30 percent. To capture
maximum efficiency, utilities built
larger and larger power plants to
the point of diminishing returns.
Distributed generation technolo-
gies offer the potential to achieve 60
percent efficiency in small-size
power plants. These distributed
generation power plants lend them-
selves to application of mass manu-
facturing techniques such that the
per-unit cost comes down as the
manufacturing volumes go up.
The transmission grid is de-
signed to meet customer needs
during peak load conditions
while allowing for contingencies
and equipment outages. The in-
dustry practice is to use an N-1 or
N-2 design criteria; that is, with-
stand the loss of one major com-
ponent (N-1) or two major com-
ponents and still serve customers.
Given the industry peak to aver-
age load ratio of 56 percent, an
N-1 design results in utilization
of transmission at 28 percent;
under an N-2 design, the utiliza-
tion drops to 14 percent.
C ompetitive industries enjoy
utilization rates of 90 percent
to get maximum value from the
invested dollar. This has not been
the experience in the electric utility
industry because the design crite-
rion was to serve the customer at
all times, with costs averaged over

A new technology with better

performance does not auto-
matically translate into business or
commercial success. The technol-
ogy must offer solutions and pro-
vide seamless integration. Distrib-
uted technologies are beginning to
demonstrate these attributes.

IV. The Future Electric Power

Grid: Integrating Distributed
Technologies
The existing stock of power
plants and transmission lines has Spinning reserves are traditionally 7 percent.

November 1999 © 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00078-0 59
all customers. The abilities to store
electricity or to transmit a price
signal to customers were not possi-
ble. The advent of storage technol-
ogies such as batteries, flywheels,
superconducting materials, and
ultra-capacitors; control and com-
munications technologies to trans-
mit real-time prices and allow cus-
tomers to manage their energy
consumption at minimum cost; and
smart appliances that respond to
price signals; all point to substantial
increase in utilization of the electric
power grid, perhaps doubling the
utilization rate of the current infra-
structure. New information sys-
tems that give customers the abil-
ity to receive a real-time price
signal and manage their con-
sumption in response to prices
change a fundamental business
premise: that customer demand is
fixed and the power system must
be planned to meet this demand.
The ability to vary demand opens
up a degree of freedom that will
present new business opportuni-
ties to manage and integrate elec-
tricity consumption and cus-
tomer uses of electricity.
Traditionally, power systems
have operated with spinning
reserves of 7 percent and average
losses of 7 percent. With better con-
trol and communications and
management of customer loads,
reserves and losses can be reduced,
resulting in lower costs.
defined as power plants below 5
MW the load served by distrib-
uted generation technologies
drops below 2 percent. Commer-
cialization of distributed genera-
tion, storage, and control and
communications technologies,
along with the customer need for
high-quality power at all times, is
likely to lead to a substantial
increase in the deployment of
distributed generation to as
much as 15 or 20 percent of the
total over the next 20 years.
T oday’s electric grid is some-
times described as a dumb,
underutilized grid—dumb
because it is designed to serve the
customer load under the most
adverse loading conditions in the
absence of real-time intelligence
and control capabilities. With the
evolution of the electric power
grid to a network not unlike a tele-
communications network, we have
the potential to deploy the control
communications and intelligence
gathering on a real-time basis to
substantially improve the perfor-
mance of the grid and transform it
from today’s static dumb grid to a
smart switched network. In addi-
tion, distributed technologies at
customer facilities and customer
micro grids integrated with smart
utility grids have the potential to
make the electric system more reli-
able, efficient, and smart, as sum-
marized in Figure 3.
V. Challenges to Integrating
Distributed Technologies
Many studies indicate that the
advances in distributed technolo-
gies and the move to competitive
markets are likely to result in
increasing market penetration of
distributed technologies. Inte-
grating distributed technologies
such that they contribute 15 to 20
percent of the total power is a

D istributed generation tech-

nologies currently serve a
small percentage of customer
loads. If distributed generation is
defined as power plants below 25
MW, the number is below 5 per-
cent. If distributed generation is Figure 3

60 © 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00078-0 The Electricity Journal
considerable challenge. With 20
percent of U.S. power plant
capacity equal to about 150,000
MW, this is equal to 150 large-
scale 1,000 MW power plants or
as many as 1.5 million distributed
generation power plants of 100
kW each. Distributed generation
technologies are coming to mar-
ket in even smaller sizes, as with
Allied-Signal’s 75 kW micro-
turbine, Capstone’s 30 kW
micro-turbine, Plug Power’s 7kW
fuel cell, and 2 to 10 kW standard
photovoltaic systems. Whether
the actual number of new power
plants integrated into the electric
power grid turns out to be 150 or
1,500 or 15,000 or 150,000 or 1.5
million is hard to predict; it will
require addressing the following
significant issues:
• Standard interconnections,
• Standard tariffs,
• Protocols for integration with
grid operations,
• Control communications and
dispatch protocols for seamless
and reliable operation, and
• Communication interfaces
between the generating power
plants, customer loads, and
utility grids.
VI. Future Scenarios for
Integrating Distributed
Technologies
The introduction of distributed
technologies into the power grid is
likely to be an evolutionary pro-
cess. These distributed technolo-
gies cover a wide range including
generation, storage, power system
controls, communication systems,
metering and measurement. There
November 1999
are several future scenarios that
could emerge:
• Deployment of distributed
technologies at customer facilities
• Deployment of distributed
technologies at utility substations
for integration with the utility grid
• Creation of stand-alone micro
grids isolated from the utility and
self-sufficient in meeting local
power requirements
• Micro grids interconnected
with utility grids, with the ability
As customers start
to manage their
energy bill, business
opportunities for
new products, services,
and technologies are
significant.
to trade power in either direction
depending on customer and sys-
tem conditions
These scenarios have significant
implications for the size and vol-
ume of distributed technologies
that would be required to achieve
20 percent penetration. It is likely
that the future will be some hybrid
of these four scenarios.
VII. Business Implications
Industry transformation to a
future electricity supply that is reli-
able, efficient, and smart has sig-
nificant business and investment
implications. Currently, much of
© 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00078-0
the attention of utility managers
has been on the regulatory frame-
work and the need to restructure
utility assets to transition to the
emerging competitive market
structure. However, as customers
start to manage their total energy
bill, the business opportunities for
new products, new services, and
new technologies are significant.
Entrepreneurial start-ups are
addressing these market needs. As
we have seen in the computer
world and in a deregulated tele-
communications industry, new
technology start-up companies
have become those industries’
growth engines, and it is interest-
ing to speculate on which market
segments and companies will
become the growth engines of the
electric industry.
C onnecting large numbers of
little power plants will
require standard interconnections,
standard protection schemes, sen-
sors, meters, and real-time intelli-
gence gathering and control capa-
bility. In some ways this is no
different than the routers and net-
works business that has been
among the high-growth segments
of the computer industry. The
Internet and intranet architectures
of the computer industry are simi-
lar to the interconnected grid and
customer micro grids of the future
electric industry. Many new mar-
ket segments are emerging in the
electric industry. Companies that
can serve customers with new
products, services, and technolo-
gies will not only help define the
future electricity business, but
may find a huge market opportu-
nity in front of them. j
61