January 15, 2018
The Future of Utilities: A Conversation with Anne Pramaggiore
The landscape for utilities is rapidly changing, with states moving forward on myriad climate-related policies—from mandating subsidies for nuclear power generation to offering credits to homeowners who contribute solar energy to the grid. Traditional electricity distributors confront these changes while also facing new competition from distributed energy sources like rooftop solar. On Dec. 11, EPIC hosted Anne Pramaggiore, senior executive vice president and CEO of Exelon Utilities, for a public conversation with EPIC director Michael Greenstone on how utilities will navigate the various challenges and opportunities such changes present.
Pramaggiore jumped into the utility industry in 1998, when the industry was restructuring. She was hired as an attorney by Chicago-based ComEd, an electricity distribution subsidiary of Exelon. As with other utilities, ComEd needed lawyers who understood markets to help navigate the industry’s restructuring—in which the energy generation side of the business was split from the electricity-delivery side.
It was akin to what the telecommunications and transportation industries had already experienced, Pramaggiore said.
“I decided it was a great opportunity to see what was really the last fully-regulated economic industry to go through restructuring,” said Pramaggiore, who later spent six years as the first female CEO of ComEd before taking over at Exelon Utilities, which serves 22 million customers in Washington, D.C., Delaware, Illinois, Maryland, New Jersey and Pennsylvania.
Today, the utility industry is facing the next wave of restructuring. Utilities are grappling with distributed energy such as residential solar panels, technological changes, and the need to manage the integration of intermittent renewable energy resources. Aside from the massive undertaking of reforming the physical grid itself, utilities must figure out how to stay afloat as energy demand in the United States is projected to remain flat or decline for the foreseeable future.
“When you tie your pricing to consumption, and you’re counting on more and more consumption to drive your pricing down to your customers but you’re largely a fixed-cost business, that’s a very tough proposition,” she said. “That’s one of the big issues we deal with today.”
But It's My Rooftop
Traditional utilities’ business models have been virtually the same for the last 20 years: they recoup fixed costs to maintain the grid and deliver electricity by charging rates set by state regulators.
Distributed energy, such as rooftop solar panels, challenges that model, as well as management of the grid’s energy load. In many states, customers with solar panels on their homes can sell excess electricity back to the grid and receive a credit on their bills for it, a process known as net-metering.
“Now we’re going into a world where people have rooftop solar…so all of a sudden you have power on your grid you didn’t count on, and we’re a business that doesn’t have much storage,” Pramaggiore said. “So, you need to balance that in real time and you can’t get it wrong, or you can lose the system. We’re trying to figure that out.”
On the economics, battles between ratepayers and utilities over net-metering from Florida to Arizona have pitted customers and utilities against each other. Illinois’ net-metering law, for example, gives customers who generate their own electricity and sell it to the grid a credit on both the electricity consumption portion and grid maintenance portion of their bills.
Pramaggiore said utilities believe customers who produce their own energy should still receive a credit for selling to the grid but should have to pay for using the grid. She explained that grid maintenance is 96 percent fixed costs, and the fact that someone is using less energy doesn’t mean they’re “using less grid.”
Utilities are concerned the customers without solar panels are subsidizing those who do, Pramaggiore said.
“One of the things I think the industry has done well for 100 years is ensuring that electricity is equitably distributed,” she said. “One of the things we’re very focused on is ensuring that the benefits are distributed equitably and costs are fairly allocated. When you have people pulling pieces off the system, you have the risk of disrupting that balance. That is one of the big questions we see that needs to be resolved as we work through this transformation.”
Renewables, Intermittency and Nuclear
Pramaggiore said that in 15 to 20 years, utilities will be powered by renewable energy that is largely distributed. The challenge today is properly integrating more and more renewable energy as states move to meet various climate goals such as renewable portfolio standards, which mandate that a state’s energy mix include a certain percentage of renewable energy.
Because renewable energy such as solar and wind are intermittent—that is, they only produce power when the sun is shining or the wind is blowing—and because large-scale battery storage capacity isn’t at a scale to adequately back up renewables, Pramaggiore said Exelon supports nuclear power, which provides 24/7 generation backup.
Nuclear power is under intense economic pressure due to increasingly inexpensive renewables and cheap natural gas, and plants across the nation face early closure. Exelon received financial support in the form of Zero-Emissions Credits (ZECs) for economically struggling nuclear plants in Illinois and New York from the state legislatures, who agreed to compensate nuclear for producing carbon-free power. The move was seen as controversial; some argued that fledgling nuclear plants should not be saved because they were uneconomic.
Keeping alive those nuclear plants is necessary for several reasons, Pramaggiore said.
“We think it’s very important. It is zero-carbon energy,” Pramaggiore said. “When you read the recent IPCC report that basically says we’ve got 12 years to get ourselves in line to meet roughly Paris [climate agreement] goals or we’re going to start seeing very significant effects of climate change, you want to make sure you have those nuclear plants around – both because you’re not able to put renewables in place quickly enough to meet those goals, and secondly because we haven’t quite figured out how to run a grid with all renewables yet.”
Illinois ranked first in the nation in 2017 in both generating capacity and net electricity generation from nuclear power, which accounts for almost half of the state’s electricity generation, according to the U.S. Energy Information Administration.
Utilities such as Exelon are preparing for the future with robust planning. Pramaggiore cited three key components to her company’s five-stage maturity model: developing grid resiliency against climate and cyber risks, adapting to increasing distributed generation, and electrifying more sectors of the U.S. economy.
On that last component, Pramaggiore said cleaning the electricity sector, which accounts for 28 percent of U.S. carbon emissions, sets the stage for electrifying transportation and the industrial sector, which together account for an additional 50 percent of emissions.
“If you can ‘clean the stack’ and electrify those two other sectors, we’ve gone a long way to decarbonization,” she said.
It also presents utilities with an opportunity to reverse the gloomy demand projections. More electric cars on the road, for example, means much more demand for electricity.
“It may not be as much of a growth engine—it’s not going to take us back to the 60s or 70s, but it does offset some of the decline,” Pramaggiore said.
For as much disruption as utilities are facing, Pramaggiore still sees utility companies as a driving force toward the future of energy in the United States.
“We absolutely have a commitment to a clean economy…and we think we have a central role to play,” she said. “We’ve got a platform business—we think of ourselves as one of the original platform businesses—and we can, over that platform, provide customers with energy-efficient options, and if customers want to control their own power and make sales, we can be the platform for those transactions. We think that’s a really important role for the future.”