Evolving Distribution Grid article in Electric Perspectives magazine Jan-Feb 2015 edition. Article discusses emerging business opportunities for a utility Distribution Services Provider.

1. 34 E L E C T R I C P E R S P E C T I V E S | www.eei.org/ep34 E L E C T R I C P E R S P E C T I V E S | www.eei.org/ep34 E L E C T R I C P E R S P E C T I V E S | www.eei.org/ep
The

2. As the distribution grid of the future evolves, new
business opportunities for utilities will emerge—
driven by changing customer expectations.
T
he electric utility industry is in the midst of a historical tran-
sition toward a more customer-driven business powered by
changing customer expectations and technology innovation.
This change presents uncertainties and challenges for util-
ities across the world, and requires utilities to re-think the
business models and regulatory strategies needed to achieve success
through this evolution.
In response to this transition, utilities in the United States are
focusing their strategies on building 21st-century customer and
electric distribution platforms that create superior value. The overall
objective is to enable customers to take advantage of new products
and services in energy management and distributed generation. Ide-
ally, these “utility of the future” business strategies will ensure that
utilities remain attractive investments by transitioning successfully
to a service-based world.
JANUARY | FEBRUARY 2015 35
GRID
DISTRIBUTIONDISTRIBUTION
BY PAUL DE MARTINI

3. 36 E L E C T R I C P E R S P E C T I V E S | www.eei.org/ep
Paul De Martini is the former chief technology & strategy officer for Cisco’s Energy Networks business and vice president of advanced technology at Southern California Edison. He is currently a visiting
scholar at Caltech and an industry consultant.
regulatory, and competitive risks,” ac-
cording to a 2012 Ernst & Young sur-
vey of 100 global corporations. Many
residential customers have similar
concerns about the impact of electric
bills on their monthly budgets and
service reliability, as noted by several
recent national surveys. This follows
Best Buy’s 2010 household survey
that found 36 percent of customers
were interested in buying products
and services that enabled them to
protect their home both financially
and physically. Not surprisingly, the
focus for successful residential home
energy management, solar photovol-
taic (PV) systems, and backup gen-
eration marketing is to tap into this
value proposition of lower bills and/
or improved power reliability.There is
not one customer solution, but rather
a need to offer differentiated, person-
alized services designed for specific
customer segments.
Itisclearthatbusiness,government,
and residential customers will seek
to optimize their service between
Evolving Customer Expectations
Businesses across all sectors are fac-
ing the challenge of responding to
well-informed customers who have
rising service expectations. As J.D.
Power noted in 2014, “Consumers
are becoming more familiar with a
higher level of service in their daily
activities with other service providers
and, as a result, their expectations
are rising.” Sometimes called the “ex-
pectation economy,” these expecta-
tions are fed by nearly unlimited and
transparent information on the best,
cheapest, most unique, and most rel-
evant products and services via the
Internet. (See Figure 1.) For the elec-
tric utility industry, these increased
expectations include reliability of
service, lower cost, and eco-friendly
supply options that embrace giving
customers the control to make their
own energy decisions.
Business customers’ decisions on
energy and related services “have be-
come an integral aspect of managing
key financial, energy security, brand,
traditional utility services and
emerging services in the market-
place for active energy management,
alternative energy supply, and
reliability enhancement.
Active Energy Management
Customers are taking advantage
of greater access to information and
automation to manage their energy
spending. New technology from tradi-
tional building automation and con-
sumer products firms, as well as new
entrants, are empowering customers
to manage their energy use. Security
firm ADT reported that 70 percent of
all new customers are choosing its
Pulse service, which includes home
automation. Also, Google’s Nest has
reportedly sold more than 1 million
learning thermostats. These auto-
mated systems, combined with in-
formation from more than 50 million
utility smart meters and customer sys-
tems, enable customers to see their
usage dynamically in the context of
projected monthly spending along
F I G U R E 1
INTERNET USE, 1995-2014
(% of American adults who use the Internet, over time)
Source: Pew Research Center surveys, 1995-2014.
100%
14%
46%
66%
79%
87%
50%
25%
0%
75%
1995 2000 2005 20142010

4. JANUARY | FEBRUARY 2015 37
with options for reducing costs to fit
within their monthly budget.
Alternative Energy Supply
Customers are seeking alternative
distributed generation supply op-
tions based on retail costs, reliability,
and environmental objectives.
Total net-metered rooftop solar PV
systems exceeded 5 gigawatts (GW)
in 2014, according to the Energy
Information Administration
(EIA). Growth increasingly
will be due to reaching un-
subsidized retail rate par-
ity through declines in
both technology and in-
stallation costs, as well
as improvements in
solar cell efficiency.
While not a direct
supply option, energy
storage is being bundled
with rooftop solar PV to
create more effective and
resilient customer sup-
ply options. Over the past
four years, energy storage
technology advancement has
benefited from global research
and development initiatives total-
ing more than $7 billion. Firms like
SolarCity and Sunverge are incorpo-
rating energy storage batteries into
their commercial and residential
solar offerings.
Also, sustained low natural gas
prices have spurred a renewed
interest in combined heat and power
(CHP), particularly as part of micro-
grid systems. In 2012, the White
House announced an initiative to ex-
pand CHP by 50 percent, reaching
120 GW in the United States by 2020.
The economics of alternatives do vary
greatly by utility service area based on
local service factors, including appli-
cable tariffs, regulation, federal and
state subsidies, and individual cus-
tomers’ perception of value.
Reliability Enhancement
Superstorm Sandy and other recent
weather events have highlighted
that the value of electric service to
customers, communities, and local
economies grows exponentially over
time. Businesses and residential
customers are taking actions
to enhance their resiliency and
reliability. Generac, the market
leader, reports 16 percent average an-
nual growth over the past ten years
in residential and small commercial
There is not one customer
solution, but rather a need
to offer differentiated,
personalized services
designed for specific
customer segments.

5. 38 E L E C T R I C P E R S P E C T I V E S | www.eei.org/ep
sensors, actuators, and connectivity
are becoming ubiquitous—what is
often referred to as the “Internet of
Everything.” Cisco estimates that
more than 50 billion things will be
connected to the Internet by 2020.
Every energy consuming, produc-
ing, or storing device is increasingly
connected. Not only are they becom-
ing smart nodes on the Internet—
they are becoming smart nodes on
the electric grid. This convergence is
creating an energy network that re-
quires significant operational data
management and analyses. Accord-
ing to Bit Stew Systems, “a utility with
two million smart meters in the field
is inundated with approximately 750
million data elements each day”—
that’s almost twice the number of
global tweets daily.
This is no longer a significant chal-
lenge due to analytics driven by pow-
erful algorithmic engines. The pace of
information and control technology
advancement is staggering. Comput-
ing power and telecom bandwidth
have increased more than 1,000 times
during the past 20 years. However,
the real driver behind transforming
mountains of data into actionable
information is the advancement
in algorithm efficiency, which has
advanced by roughly 30,000 times be-
tween 1991 and 2008. As exemplified
stationary backup generators
primarily fueled by natural gas. Gen-
erac also estimates about 3 percent
of U.S. homes now have stationary
backup generators and another 12
percent have portable generators.
Additionally, a growing number
of customers are pursuing micro-
grids that can integrate energy man-
agement systems (such as build-
ing automation and industrial
controls), clean onsite distributed
generation, and backup generation
to create improved resiliency. These
customer perceptions and invest-
ments suggest an opportunity
to consider differentiated
reliability services.
Utility Business Models
and the Energy Internet
of Things
D e v e l o p m e n t o f
u n i q u e c u s t o m e r
insights and energy
production/consumption
optimization skill sets
is essential to future
business models. Solar
PV and energy storage
advancements are chang-
ing the traditional electric
utility industry value chain,
but sustained value will come
from their optimization. Low-cost
Low-cost sensors,
actuators, and connectivity
are becoming
ubiquitous—what is often
referred to as the
“Internet of Everything.”

6. JANUARY | FEBRUARY 2015 39
Utilities are considering several
options to pursue with customers
and growing distributed energy
resources markets. It is import-
ant to note that while growth rates
have been strong, the distributed
resource opportunity is still at an
early stage. There remains signif-
icant potential to benefit from a
more distributed and customer-
centric system. Two general business
options are taking shape, facilitating
customer choice and providing
enabling distribution system services.
Facilitating Customer Choice
Customers increasingly expect a
range of personalized services en-
abled by innovative technology—
including options from their utili-
ties. A 2013 Swiss Re survey showed
that more customers would rather
buy renewable energy from utilities
than generate their own. In addition,
several state commissions recently
have recognized market gaps and the
enabling role that utilities can pro-
vide. Existing utility relationships
with their customers provide tangible
franchise value that hasn’t been fully
explored to mutual benefit. Expand-
ing utility service offerings, on a level
and non-discriminatory playing field,
can enable choice for all customers.
Customer service team members,
by Amazon’s recommendation
engine and Apple’s Genius selec-
tions, these innovations are enabling
operational efficiencies, as well as
personalized services, for customers
based on unique insights.This emerg-
ing “algorithmic economy” is directly
applicable to advanced grid manage-
ment and personalized, differentiated
customer services.
Emerging Utility Business
Opportunities
Value creation in today’s digi-
tized global economy requires cus-
tomer-centric thinking—thinking
focused on customers’ needs and pri-
orities—and the identification of op-
tions through which these needs and
priorities can best be met. Custom-
ers’ distributed resource adoption
pathway is becoming clearer. Fun-
damentally, more customers are self-
optimizing their energy costs and
reliability; becoming prosumers—
both consuming and producing
energy; and actively providing ser-
vices to manage distribution and bulk
power systems directly or through
services firms. This evolution is mir-
rored by opportunities to evolve the
distribution system capability and
utility operations to enable integra-
tion, optimization, and market facil-
itation services.
processes, and technology represent
the foundation for an effective plat-
form for serving large numbers of di-
verse customers. In fact, as recognized
in the recent New York State Public
Service Commission “Reforming the
Energy Vision” (REV) proceeding,
these capabilities represent a signifi-
cant asset that have inherent econo-
mies of scope and have already been
paid for by customers. Utilities can
become effective marketing channels
and provide service support for a wide
range of utility and third-party prod-
ucts and services. This will, however,
require partnerships with competitive
technology and services firms. Retail
banking, for example, has transitioned
successfully to offer customers a wider
range of services and provides an
effective marketing channel for third-
party products.
The evolution of utilities as facil-
itators of customer choice begins
with enhancing customers’ decision-
support capability and empowering
their decisions about energy budget
management and electric service
reliability. This includes powerful an-
alytics that leverage a combination
of the customers’ data, utility oper-
ational data, public data, and rele-
vant commercially available data.
These decision-support and budget-
management tools would be available
to customers on any computing plat-
form, particularly mobile. And these
services could be expanded through
social media to create communities
of interest and lay the foundation for
digital business opportunities.
Concurrently, a utility could of-
fer customer-to-market facilitation
services. This includes developing
an Internet shopping portal to facil-
itate customer access to third-party
services firms—similar to what por-
tals such as Expedia do for travel. A
few utilities already are launching
revenue-generating sites to facilitate
customers’ ability to shop for and
compare offers on retail energy pro-
viders, distributed energy resources,
and back-up generation. Also, the
ability to originate financial services

7. 40 E L E C T R I C P E R S P E C T I V E S | www.eei.org/ep
distribution operations, plus the re-
latedtransactionmanagementservices.
Providing Enabling Distribution System
Services
As a more distributed future unfolds,
the distribution utility naturally can
become a more valuable link between
customers’ resources and bulk power
markets. Utilities have an opportunity
to profitably develop their existing
single-purpose distribution systems
into open platforms to enable seam-
less integration of distributed energy
resources (DER) and independent
microgrids. Additional investments in
more advanced grid and operational
technology and related grid designs
for distributed resource integration
are needed, as well as new opera-
tional responsibilities and market-
and process any payments could be
valuable to third-party providers and
finance firms. Taking this further,
utilities could become a marketing
channel for third parties by leverag-
ing existing workforce bandwidth to
originate leads and sales—and bene-
fit those customer segments that are
too expensive for competitive firms
to access profitably.
For a number of utilities, develop-
ment of distributed generation assets
for customers through community
solar or onsite resources is an attrac-
tive option. Ultimately, a segment
of customers will want an energy-
optimization service offering. This
could include managing customers’
distributed resources to achieve bud-
get objectives and providing services
back to the bulk power system or
enabling services to facilitate distrib-
uted resource services.
The electric distribution system is
a valuable asset that can be evolved
into an enabling platform that cre-
ates significant value for customers,
services firms, and utilities. The in-
dustry is currently investing to en-
hance the electric power grid to meet
the needs of our 21st-century econ-
omy. PG&E, like other utilities, has
incorporated changes in distribution
infrastructure to improve safety and
reliability, including investments in
larger distribution wire sizes, trans-
formers, and automation to help
enable integration of distributed
resource at scale.
An open platform builds on these
current investments through more
advanced technology to evolve

8. from the traditional closed, single-
purpose system to a more open,
flexible, operationally visible, and
resilient platform that can inte-
grate distributed resource growth.
Such a distribution platform may
fully enable the synergies from
electrification of transportation
and convergence with water systems.
Caltech estimates another $100-$200
billion in utility investment may be
needed through 2030 to address this
added capability.
To provide enhanced reliability
for select customers and/or commu-
nities, utilities may offer expanded
grid-based premium reliability services
through premium grid reliability
infrastructure, including utility
microgrids. A segment of customers
is clearly seeking, and willing to pay
for, premium reliability services.
Differentiated reliability services
on the grid-side of the meter are an
option for utilities to consider as an
alternative for customers doing it
themselves. Aside from traditional
circuit reconfiguration, dual feeds,
and undergrounding, utilities may
develop distributed assets or micro-
grids on the grid-side of the meter.
The current microgrid market is
highly fragmented and ill-defined—
presenting an opportunity for utili-
ties to take a lead in providing pre-
mium grid-based reliability services
to those customers willing to pay.
Advanced distribution system
operations capabilities will be
required to manage the bi-
directional power flows from
large numbers of distributed
resources across the distribu-
tion system in a safe and
reliable manner. In par-
ticular, this will require
additional functional
responsibilities for
utility distribution
system opera-
tors, and they will
actively coordinate
safe and reliable
operation of the
electric system with
JANUARY | FEBRUARY 2015 41
The electric distribution
business has tremendous
business opportunities into
the future based on becoming
the platform for customer
value maximization.
transmission system operators and
balancing authorities. As recognized
in New York’s REV and California’s
“769” proceedings, central aspects
of the emerging distribution system
operator are a natural and desirable
extension of a utility’s core business.
This will likely require state regula-
tory operational standard-of-conduct
protocols similar to Federal Energy
Regulatory Commission standards.
Ultimately, if distributed re-
sources reach the scale envisioned
in places like New York or California,
there will be a need for transaction-
management services to facili-
tate a large number of multi-party
micro-transactions across a dis-
tribution system that interfaces
with wholesale markets. The size
of individual DER transactions will
be very small and involve complex
terms that standard billing systems
don’t accommodate. This could
result in many tens of millions of
unique transactions annually, each
worth less than a dollar. Back-end
management of these transactions
is needed to facilitate scheduling,
settlement, and clearing among the
parties based on the corresponding
physical flows across the distribution
to transmission system. These ser-
vices are analogous to transaction-
management services needed for
online purchase of digital music or
videos and the related royalty and
jurisdictional tax settlements.
The Distribution Grid of the Future
Value creation in today’s digitized
globaleconomystartswithcustomer-
centric thinking—particularly in-
sights into customers’ needs and
priorities, as well as decision fac-
tors. This is essential as customer
interaction with the power system
is becoming more active with dis-
tributed resource adoption and
energy management systems.
This means that not only are cus-
tomer insights desirable to deter-
mine new business opportunities,
they are necessary to manage the
evolving grid. Utilities increasingly
are leveraging these insights and
using future scenarios to assess
new business opportunities as well
as potential exposure to stranded
infrastructure investment. Migration
from status quo to any future busi-
ness model is accomplished in in-
cremental steps through roadmaps.
Each step on a roadmap represents
a necessary evolution in business
strategy, regulation, technology
investments, and organizational
capabilities. Investment plans will
necessarily align with customer
needs, regulation, and the pace of
technological change.
The electric distribution business
has tremendous business opportuni-
ties into the future based on becom-
ing the platform for customer value
maximization. Investment choices
in the distribution platform business
versus services to facilitate customer
choice are not inherently mutually
exclusive. There are important regu-
latory questions to consider. But, as
discussed in several states, these can
be addressed in a manner that
enables a level and fair playing
field for utility and compet-
itive services to the benefit
of all customers. The elec-
tric utility industry has an
immediate opportunity
to begin envisioning its
business as an enabler
of customer choice and
public policy.