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Explainer: Changing Nature of New Jersey’s Electric Utility Sector

We’re witnessing the transformation of a century-old industry sector, most likely to the benefit of customers

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The utility sector is being roiled by fundamental changes that could transform its century-old business model and force the industry to make dramatic adjustments in its operations. The shift could significantly alter how customers obtain the power they need to run their homes and businesses, as well as how it is produced. Another likely consequence is that long-established utilities with a history of enjoying unchallenged monopolies will have to adapt to selling less electricity, which will mean earning less revenue for delivering power to customers over their wires and poles.

The history: For most of the past 100 years or more, the traditional utility relied on the same system to prosper: Build a large, centralized power plant capable of supplying electricity to thousands of customers over its poles and wires. To maintain affordable yet reliable power, the utility was granted a lucrative enough rate of return on its investments to maintain the system and deliver profits to investors. That systems is slowly changing, partly a result of the deregulation of the sector in the 1990s.

What’s different: Much has changed, but perhaps the most crucial shift is the growth of distributed generation, localized power plants situated near where the electricity is used. These smaller, more-efficient units can provide cheaper power than the traditional utility and can ensure power remains on -- even if the regional electric grid experiences widespread outages. Distributed generation also erodes an existing utility’s revenue base.

To a lesser extent, the tremendous growth in solar systems and other sources of renewable energy pose similar challenges to the sector. Some traditional utilities have embraced the technology, such as Newark-based Public Service Electric & Gas; others have not.

What else is changing: Climate change is one of the biggest factors shifting how customers get their power. The fact that some renewable energy -- particularly wind and solar -- is reaching grid-parity with more conventional ways of generating electricity is convincing states to mandate that more of their power come from such sources. In New Jersey, there is an effort to have 80 percent of the electricity come from renewable energy by 2050. The Obama administration’s Clean Power Plan to reduce greenhouse gas emissions also is leading to the retirement of many older coal-fired generating units. Natural gas, for the moment, is filling the void.

The challenges confronting utilities: In the wake of extreme storms, such as Hurricane Sandy, regulators are pressing utilities to invest more in making their delivery systems more resilient to avert power outages, and to restore power much faster when they do occur. At the same time, they are facing new mandates to respond to climate change, and make their systems smarter and more customer-friendly. The other issue facing the sector is slow and stagnant load growth, as customers increasingly recognize the best way to reduce electric bills is to not use the power in the first place. Like renewables, however, this issue offers utilities opportunities by expanding efforts to promote energy conservation and diversifying into other areas, such as technology.

How states and utilities are responding: Some states have sought to encourage more conservation by developing a system that affords utilities a financial incentive to invest in such programs when customers use less energy. Dubbed “decoupling,’’ the system would ensure utilities recover the cost of maintaining their infrastructure -- even if their volume of sales fall -- by other rate adjustments in customers’ bills. In New Jersey, there has been talk of establishing such a structure, but no clear consensus has yet to emerge among utilities, regulators, and other stakeholders.

Are the changes good or bad for customers: Beneficial, if the changes are well-planned and managed. They probably offers consumers more choices, cleaner energy, and greater flexibility in managing bills through smarter thermostats and other technology. The challenge is maintain the reliability of the power grid in the United States, a system that has proved to be one of the great engineering feats of the past century.

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