To Deliver Customer-Centric Energy, Industry Must Cut Its Own Cord to the Old Paradigm

I’m going to use a Toronto, Ontario, Canada, perspective, but replace with your jurisdiction.

Susan, a Toronto resident, wakes up to a cool morning. House still needs heating, despite being mid-way through spring. She turns up thermostat by another degree, since the cool wind is entering from around the doors. She knows she needs to make her house tighter, but just another cost she can’t afford right now.

She heats her home with natural gas, and while it’s cheaper than electricity, today, she knows that it causes more pollution than electricity.

The coffee machine already made some coffee on a timer about ten minutes ago. She pours her first cup.

What Susan doesn’t realize is that 100% of the energy (electricity and thermal) she needs to run her home comes from either the electric grid or natural gas. As she needs it, there is a charge for it. The cash register runs for every bit of energy she uses.

To make her coffee and heat her home, Susan’s charges are made up of:

Her portion of the electricity and natural gas supply that she is consuming in real time

Her portion to send the electricity over transmission lines to the local electricity distribution company

Her portion to deliver the electricity from the transmission station to her meter (including line loss)

Her portion to deliver the natural gas from a large hub to her home

Today, Susan could have a few things installed that reduce her overall energy costs and greener. Susan could have a ground or air-source heat pump installed in her home. This would mean that over 50 to 75% of her entire heating/cooling and domestic hot water requirements can be met by renewable source, with only 25 to 50% being met by electricity.

Susan can also install a sewage waste heat recovery system for her home to recapture heat from her sewage line before it dumps its sewage into the city system. Now, Susan is looking at meeting most of energy needs with thermal renewable energy.

Next, Susan has someone install solar pv panels on her rooftop, and this electricity allows her to secure most if not all of what’s left in electricity requirements for her home, at least during sunnier summer months. If Susan is lucky, she has room on her rooftop to bring in enough electricity to meet her electricity requirements during the winter months of least amount of daylight.

Susan installs battery storage to store the excess electricity so that she can draw on it when she needs it during the day.

We already have a situation, in what I’m describing, whereby the new solutions can meet Susan’s energy needs, and if they were just short, Susan can look at another option to back it up.

Susan should install a small micro-turbine that runs on natural gas, and she should use this during days that she either doesn’t get enough day light power to meet her electrical needs, or where panels or other equipment may be down. Assuming Susan doesn’t have additional renewable electricity to use, she should run this small generator to meet those needs.

There is a scenario whereby Susan can assess if connecting to the grid would be more cost-effective than installing a small generator, but today, in Toronto, she’ll find that the generator is more cost-effective.

With additional energy efficiency programs, Susan can manage her home in a very customer-centric way.

Of course I should place some parameters around the cost of electricity. I don’t expect that any customer should have to buy the equipment to generate the thermal and electric, upfront. I know there are companies that would own the capital and either allow you to pay it back over time from savings compared to what you would have paid, or provide you with Energy-as-a-Service contract.

This is important. It is cheaper to generate renewable thermal and/or electric on your site vs extracting it from grid or natural gas system for two reasons.

1-As IESO contract for power, the productivity gains and installing costs have improved for customers, so Ontario can’t compete for actual cost of renewable onsite vs their own procurement on central sites.

2-Even if the costs were equal, the cost to transmit and distribute the electricity and natural gas to your site is an added layer of cost that you don’t need to pay for what is already on your site.

I could replace solar pv with other technologies like nano solar thermal or small-scale ORCs. My point is that there are proven technologies that could be more cost effective, today, than using energy commodities from electric grid or natural gas.

The reason why Susan doesn’t know any better is because 100 years ago, Ontario created an energy generation system that delivered electricity to customers around the province. Out of site is out of mind, and consumers never second-guessed why they allow local electric utility to automatically deliver them electricity.

It’s not clear at what point the electric grid became too expensive compared to onsite alternatives, but it has.

Why has is not changed yet?

-Electric utilities buy massive amounts of equipment and services each year to expand and service their grid.

-HVAC and controls manufacturers and services companies benefit from the outsourced electricity and natural gas that Susan consumes

-Entire industries have been set up to support this model

-Post world-war II, builders benefited by building low-cost option homes

-Province and States created regulated utilities to perpetuate the growth of the model

-Consumer don’t know any better

Other industries have changed, so why not this one?

Taxi industry came out fighting, but other than policy considerations, Uber and other ride-sharing programs destroyed the industry, virtually overnight. So what’s different?

In Canada, and good portions of US, electric utilities are very political. Many are owned by a governmental body, and Provinces and States create the regulatory bodies that oversee the utilities and related industry.

Also, energy costs, like water costs, are quite political. Politicians don’t get elected by saying, “I will raise your rates!”

But it doesn’t end there.

City of Toronto, for example, greatly relies on its dividend from Toronto Hydro to pay for other municipal services. It relies on it because it cannot, politically, go back and ask for tax increases over and over, beyond reason.

In fact, in most municipal budgetary dicussions, they are generally looking at growing revenues from non-tax base, to keep tax payers happy. There is a notion that if you were charged more for your consumption, then it’s ok, compared to simply being a tax payer.

So now the City of Toronto keeps looking for more dividends from Toronto Hydro to offset additional budgetary needs. How do we think Toronto Hydro deals with it? Toronto Hydro then looks to increase their capital program to increase its dividends. But, who pays for the increased capital? The rate payers do. Rate payers get two items divided up for them based generally on their consumption and/or capacity: capital deployed and operational costs. (Don’t get me going on how operational costs are out of control)

Basically, cities are asking their utilities for more money, and utilities invest more capital to charge rate payers more, so that cities could have more funds to spend on them….

But it gets worse.

Ontario owns a large portion of Hydro One, about 1.2 million customer utility. Imagine that Ontario government gets to appoint Board Members to the Ontario Energy Board and the Independent Electricity Systems Operator to oversee the energy industry and utilities, and approve their rates and their rates of returns.

Would it shock you to know that during the Great Recession, pension funds would have gladly taken 3-5% returns on their deployed capital, if they could. Yet, during that period, these politically-appointed regulators allowed these government-owned utilities to earn 9%. It’s simple economics. What do you think happened to the value of these electric utilities during this period? Their valuations were the highest ever. I would now because I helped buy a few of them.

What also happened during this period? Ontario sold majority of shares in their utility that was earning 9% on capital deployed because of regulators who were appointed by the owner of the utility.

In my opinion, governments with vested interests in utilities tend to create policies that support the ubiquitous integration of those utilities, regardless of economics. For governments without those vested interests, you need to see the value to customers and make policy decisions from them as a starting point, not from solely from the success of the industry.

I recall being in discussions with industry executives on the role of government policies to support the regulated industry and its growth. That conversation would be very different now that alternatives are less expensive on a customer’s site.

Ok. Ok. Back to Susan.

The industry doesn’t change as easily as say taxis, because there are way more players and businesses and investors to lose if it changes.

That is why the only way to deliver to Susan, solutions that allow her to generate her own energy at lower cost and greener are to have new companies deliver it.

It is the fault of regulators, regulated-utilities and their masters that this industry hasn’t shifted to the new economy yet, and yet in many instances those same regulators turn to those utilities to deliver programs to help shift to new paradigm.

The irony is that industry players must cut their own cord to the old paradigm, for customers to get what they deserve.

I am trying to generate a conversation about this. Comments are appreciated.

2 replies on “To Deliver Customer-Centric Energy, Industry Must Cut Its Own Cord to the Old Paradigm”

It’s amazing how much municipal leaders turn a blind eye to the situation.

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