New technologies and financial innovation have launched an era of consumer choice and control in the power sector the likes of which the industry has never seen before.

Solar panels, smart meters, energy storage, electric vehicles and microgrids are transforming the distribution grid and spurring debates around a model for “utility 2.0.” But while technology is stimulating change, policy drove the conversation at a meeting of electricity industry leaders last week, hosted by the Edison Foundation's Institute for Electric Innovation.

“Let’s not have another discussion about grid of the future -- utility 2.0, utility 3.0,” said Lawrence Jones, vice president of utility innovations and infrastructure resilience at Alstom.

There’s little value in designing a new technical model for the electrical grid, without a clear understanding of the system in which the technical model will operate, he said.

“We agree today we will no longer write another report [referencing the] ‘utility of the future,’” said Jones. “What we need now is 'regulation of the future.'”

So what does "regulation 2.0" look like?

Today’s regulatory framework is built on the notion of universal service and non-discriminatory rates that ensure everyone in the country has the ability to pay for electricity.

“I can’t say, ‘Is it fair to charge somebody more and somebody less for the same thing?’ That’s the system we have today,” said Michael Champley, commissioner at the Hawaii Public Utilities Commission.

Having non-discriminatory rates “is a universal practice,” he added. “But you can question whether it’s appropriate for regulation 2.0.”

Hawaii has been on the front lines of grid transformation, particularly when it comes to testing the limits of rooftop solar penetration. According to Champley, 12 percent of residential customers in Hawaii have rooftop solar -- the highest percentage of any state in the nation. As a result, Hawaiian Electric Company (HECO) reports that it’s seeing an increasing number of distribution circuits with rooftop solar exceeding 100 percent of daytime minimum load.

In 2013, HECO initiated a strict approval process for solar systems connected to the grid. Consequently, the number of permits dropped by half, and the state’s solar sector shed thousands of workers.

Regulators and utilities in Hawaii are now negotiating a comprehensive reform plan to guide the adoption of distributed energy going forward.

“We went forward -- way too far, probably -- without really having a master plan,” said Champley.

Hawaii, and indeed many other states, need to find a sustainable model for customer choice, he said. For Champley, that means regulators should be less focused on fixed charges -- a view that some utilities would disagree with -- and more focused on establishing the right incentives.

“I believe we’re going to have to have a whole lot of optional rate tariffs, as opposed to the one-size-fits-all [model],” he said. “I really do believe we’re going to have to go to time-of-use or dynamic pricing.”

“Ultimately, I think it’s going to be...the more advanced developers that are going to figure out a value proposition for customers,” he added. “And that value proposition needs to change from fleeing the grid financially, to how I can provide value to the grid and get paid for it.”

"Plug-and-play, but at some point somebody also has to pay"

New technologies have emboldened consumers, to the point where some think it's their constitutional right to plug new technologies into the grid at their own will, said Champley. The term "plug-and-play" needs to further defined, he said.

"It’s great you can plug in, but it’s the rules and terms and conditions of how you play that makes the difference," he said.

“Plug-and-play, but at some point somebody also has to pay," joked Bob Rowe, president and CEO of Northwestern Corporation.

Bob Stump, commissioner at the Arizona Corporation Commission, which oversees Arizona Public Service (APS), echoed that rate modernization is paramount to enabling consumer choice, while also ensuring that the new class of "prosumers" do not put additional stress on the grid.

Stump called the controversial demand charges recently approved by Salt River Project, which is not governed by the ACC, “an ingenious solution to peak shaving.”

“I think the demand charge was an intriguing way to go about it, because it does offer that choice to the consumer, in the sense that you can reduce your usage during the peak, thereby the consumer can save and you can also help the grid,” Stump told Greentech Media. “I hate the cliché 'win-win,' but I think there’s a lot of potential there for good.”

Increased utility control of rooftop solar would also help to reduce the impact solar arrays have on the grid, he said.

“I think we need to consider if you own solar or are involved with a leasing company, perhaps ceding some control of the inverters to the utility,” said Stump. “Allow [the inverters] to be reprogrammed so the utility can speak not just to substation, but to the individual homeowner, and also reduce some of those voltage issues.”

“The question then becomes in Arizona, and nationally, whether solar users are indeed willing to do that -- to be a good grid citizen, but [also] to have their panels potentially producing less,” he continued.

Utility ownership of rooftop solar would go even further in helping the grid, because utilities would angle the panels west instead of south, accepting reduced efficiency to help with peak shaving, Stump said. It would also solve the issue of not taking infrastructure costs into account under net metering.

"Put the sloganeering aside"

The topic of utility control and ownership of rooftop solar has spurred a lively debate. Late last year, Arizona regulators gave the state’s two largest utilities -- APS and Tucson Electric Power -- the green light to enter the residential solar market.

This comes as APS and leading national solar installer SolarCity continue a heated battle over solar fees and net metering policies. Stump called out Barry Goldwater Jr.’s solar advocacy group, Tell Utilities Solar Won't Be Killed (TUSK), for adding fuel to the fire.

To make his point, Stump told attendees at the IEI event a tongue-in-cheek story of the fictional consumer George B. Green, who is seeking energy independence, choice and freedom through rooftop solar. Along the way, however, George realizes that rooftop solar won’t get the U.S. off of imported oil, and that the utility is central to both power reliability and a competitive energy marketplace.

Stump said he hears regularly from people who sincerely believe that deploying rooftop solar will enable energy independence and liberation from the grid. This is a point of view being encouraged in part by some of the louder voices in the solar industry, he said.

“I think if you take solar seriously, as I do, and I know everyone in the room does, then you will portray it accurately,” he said. “As a regulator, all I ask [about] any energy source is to discuss the pros and cons.”

A 2013 study by the consulting firm Crossborder Energy, determined that the APS net metering program would produce a net benefit of $34 million each year by 2015.

Now, as the Commission considers reforming policies on rooftop solar, a new, comprehensive evaluation of the costs and benefits is essential, according to Stump. A range of stakeholders, including the Electric Power Research Institute, will be important players in this.

In the meantime, politicking needs to be put aside, he said.

“I made it very clear to my friends from SolarCity [that] we need to have a serious discussion about ratemaking. Put the sloganeering aside from all parties,” said Stump. “These are serious ratemaking issues we need to get right and do it in a rational, mature way.”

Testing new approaches

These discussions are already well underway in New York and California.

Flexibility needs to be at the heart of whatever new regulatory framework takes shape, said Robert Schimmenti, senior vice president of electric operations at Consolidated Edison, which is heavily involved in New York’s Reforming the Energy Vision proceeding.

For Con Ed, demonstration projects -- like the distribution utility’s plan to defer rebuilding a $1 billion substation -- are proving to be pivotal in allowing the utility to test new business models and third-party partnerships.

“We also have the ability to fail. I think that’s something that utilities aren’t used to. We’re tied to public safety and reliability, so we tend not to overreach and try to do things that might not be fruitful,” said Schimmenti. “Demonstration projects will allow us to try thing some things and fail, and move on and modify some of those things.”

Theodore Craver, chairman, president and CEO of Edison International, said he sees Southern California Edison playing a central role in enabling the grid of the future. “We believe we will be facilitators for all these distributed energy resources, and ones we can’t even think of today,” he said.

But similar to Champley and Stump, Craver said the utility industry's non-discriminatory regulatory model is creating barriers for the integration of new technologies. The flexibility for utilities to provide customers different levels of power quality through differentiated pricing is part of the way SCE envisions the grid of the future operating. “But we have a long way to go to get there,” said Craver.

“I’m very optimistic we will eventually get ‘regulatory model 2.0,’” said Alstom’s Jones.

“We will get something, but it will be evolutionary,” he continued. “I think we need to be very careful that disruption, albeit coming, will be at different levels, and that there are no unintended consequences. […] We need to make sure to protect utilities, as well as others, so we don’t blow up the whole system and end up flat-footed.”