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Summary:

The reality of the smart grid is that oftentimes the more power utilities sell, the more money they make, so utilities  risk losing money by deploying smart grid technologies that help consumers conserve energy (GridPoint’s Jeffrey Ross pointed out as much in his testimonial before the […]

The reality of the smart grid is that oftentimes the more power utilities sell, the more money they make, so utilities  risk losing money by deploying smart grid technologies that help consumers conserve energy (GridPoint’s Jeffrey Ross pointed out as much in his testimonial before the House’s Committee on Science and Technology yesterday morning). Well, an illustration of the mess created by this business model emerged recently from a spat between a disgruntled utility that was losing revenues through an energy efficiency program and a smart grid tech startup that was helping utility customers save energy.

Earlier this month the French Energy Regulatory Commission declared that the startup Voltalis, which sells energy management devices that curb energy consumption, would have to pay utilities for the power saved by its devices. Voltalis’ devices, through which utilities can remotely turn on and off appliances during peak energy-use hours, can save customers 10 percent of their energy bill, and can help utilities manage the power grid better and avoid building more expensive power generation plants as more people consume more energy.

Voltalis installed the device for free, charged utilities for the service, and worked with the utility to help them implement demand response programs. France’s main utility, EDF, seemed to be working with Voltalis well enough — until the revenue loss from the drop in energy consumption went before the regulatory commission.

France’s power regulator basically said that Voltalis was causing EDF to lose revenue and declared that Voltalis “can’t be a free rider.” The decision, which is utterly ridiculous and goes against the country’s efficiency goals, has caused a big hullabaloo in France — the New York Times quotes, an antinuclear group called Sortir du Nucléaire saying, “At this rate, it will soon be obligatory in France to consume large quantities of electricity, or face taxes and fines, and maybe imprisonment, too.”

It’s also got people talking about “a good old boys club” in France’s energy industry, says Echelon’s Senior VP of Sales and Marketing, Anders Axelsson, (whose company provides the power line technology for Voltalis’ home energy gear). EDF was government-owned until a few years ago but is now a limited-liability corporation.

To be sure, the French energy market has unique challenges. But the larger problem is the business model of having a company’s core product be something that much of the world is working to reduce consumption of: energy. As Axelsson tells us: “It is a must to change the way utilities do businesses. There has to be new business models worked out.” There’s a variety of ways to do this — like energy efficiency mandates — but one of the biggest is decoupling, in which utilities’ power sales are disconnected from their profits. There’s some movement on this (like encouraging language in the stimulus package) but until the problem get’s fixed, we’ll be seeing more cases like the one between Voltalis and EDF.

By Katie Fehrenbacher

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  1. Cookie Monster Friday, July 24, 2009

    This is also a/the problem with American health care and health insurance industries. What incentive do they have to reduce health care costs? None.

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  2. Bastien koert Friday, July 24, 2009

    This also happened in Ontario, Canada when the provincial government deregulated the main provincial electricity supplier, Ontario hydro. As in the French situation, there is a government sponsored program to reduce energy consumption. As the general population embraced the program and bought or installed energy effecient appliances, the utilities income dropped. This led to the utilties asking the provincial government for a rate adjustment, which of course was granted.

    This is a real dis-incentive to conserve since there is no savings to the consumer, which was to be one of the main promises made by the provincial government during the deregulation process.

    I completely agree that new business models need to be developed and quickly or utilities may find that the cost of going off the grid gets cheap enough to become attractive. And the new solar and wind tech start ups are rapidly getting there.

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  3. Interesting thanks @Bastien.

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  4. Hi Katie,

    In addition to my earlier post under yours “Smart Grid: We Still Need to Change Utility Regulations,” which I introduced with “the regulatory flaw is actually a system architecture flaw that originated in the Energy Policy Act of 1992,”, I add the following:

    “… until the problem get’s fixed” is just an illusion, which you wisely anticipate by adding “we’ll be seeing more cases like the one between Voltalis and EDF.” The reality is that we have disruptive technologies taking footholds of the power industry Investor Owned Utilities Architecture Framework (IOUs-AF) that are here to stay.

    The obsolete business model of IOUs winning cases to the regulator has its days counted, as the problem will not be fixed with artificial decoupling or any other business model incremental extensions, because it is not a mechanical problem that requires fixing. It is a systemic socio-technical problem and its holistic solution has already emerged in a transformation as a paradigm shift away from the IOUs-AF.

    Ongoing business models development should follow the Electricity Without Price Controls [first level] Architecture Framework (EWPC-AF) that will enable a second level architecture competition, between Second Generation Retailers (please hit the hyperlink http://grupomillenium.blogspot.com/2007/07/second-generation-retailer-2gr.html ) under the Silicon Valley Model. That way natural decoupling becomes available as customers will be able to freely choose in the competitive marketplace the best one stop service and investment deals.

    A parallel between the IOUs-AF and the railroad highlights the reality versus illusion as a result of the big change being experienced in the business environment. John Naisbitt’s 1982 Megatrends, explains under the section “Law of the Situation: the railroads did not understand,” the illusion IOUs and regulators are, with the quote of Walter B. Wriston, chairman of Citicorp, who in 1981 said:

    “The philosophy of the divine right of kings died hundreds of years ago, but not, it seems, the divine right of inherited markets. Some people [IOUs and regulators for example] still believe there’s a divine dispensation that their markets are theirs – and no one else’s – now and forevermore. It is an old dream that dies hard, yet no businessman in a free society can control a market when the customers decide to go somewhere else [under EWPC-AF for example]. All the king’s horses and all the king’s man are helpless in the face of a better product. Our commercial history is filled with examples of companies that failed to change in a changing world, and became tombstones in the corporate graveyard.”

    Under the new situation, regulators will go back to the good old days of doing almost nothing, when a virtuous circle existed that led to rate reductions year after year. That is I believe something that President Obama, Secretary Chu, DOE staff and State regulators must understand as soon as possible.

    Best regards,

    José Antonio Vanderhorst-Silverio, Ph.D.
    EWPC System Architect

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  5. Hi again Katie,

    Thank you for the lead that helped me add evidence to write the EWPC article “Strong Evidence of Why Utilities as We Know Them Will Fail,” which can be read at the Internet hyperlink
    http://www.energyblogs.com/ewpc/index.cfm/2009/7/26/Strong-Evidence-of-Why-Utilities-as-We-Know-Them-Will-Fail

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  6. This is perhaps the most remarkable story I’ve read all year, but then again perhaps not?

    Some powerful new forces are at play in the energy industry, and these are not from within the energy industry. Their people are used to working out in the wilds, and in their path lay many damaged and broken corporates. One industry that hasn’t coped so well with the influx of these new forces that comes to mind is the newspaper industry.

    And you know what? The single biggest reason to have a smart grid, believe it or not is to reduce energy consumption. AND this is also a significant objective of the people driving the smart grid start ups – I should know…

    At the fundamental level, the smart grid and the utilico are incompatible, period. No amount of regulatory instrumentation or monopoly mollycoddling will fix it. Sorry. Utilico makes money from the energy you use, and critical peak pricing will just drive customers to use less. The only way out for utilico is lower prices, and guess what? That ‘ain’t going to happen.

    What’s going to be really interesting for the future of IOU’s is the emergence of the cheap solar technology that will come online around 2013 which for the first time will cost competitive with coal. Then we are going to see some real interesting times.

    Remember – energy is in fact a public good, not the right of a monopoly corporation.

    Sam,
    @samotage

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  7. [...] Why a French Regulator is Bullying A Smart Grid Startup The reality of the smart grid is that oftentimes the more power utilities sell, the more money they make, so utilities  risk losing money by deploying smart grid technologies that help consumers conserve energy. [...]

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  8. [...] via Why A French Regulator Is Bullying A Smart Grid Startup. [...]

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  9. Hmm..I am not too sure you understand what’s at stake here. I suggest you read the French regulator’s reasoning. David Jolly of the NYT doesn’t have a clue what he’s talking about, nor did most French newspapers that wrote about the subject. You need to understand the regulating power market and imbalance agreements in order to have an opinion. Very very few people do.

    http://www.cre.fr/fr/content/download/8808/155078/file/090709Effacementsdiffus.pdf

    If the link doesn’t work, google Délibération du 9 juillet 2009 portant communication sur l’intégration des effacements diffus au sein du mécanisme d’ajustement.

    Make sure you read the annex carefully.

    The poor French are actually at the forefront when it comes to demand response, just take a look at the Tempo tariff!

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