**1. Introduction**

The electric utility landscape is experiencing rapid and unprecedented transformation. A powerful confluence of structural, technological, and socio-economic factors is driving

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. © 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

this change. Distributed technologies (e.g., distributed generation, energy storage, flexible demand, and advanced power electronics) are competing in the emerging distributed utilities market and, as a result, putting pressure on investors and regulators to consider utility choice management (UCM) opportunities that promote more capital-efficient options for the provision of electricity services [1]. The second installment of the Quadrennial Energy Review (QER), released in the winter of 2017, recommends spending \$300–\$500 billion in grid modernization, noting that it "is the platform for the twenty-first century electricity system, bringing significant value associated with lower electricity bills due to fuel and efficiency savings, more electricity choices, and fewer and shorter outages" [2]. The QER also recommends that utilities deploy a "wide range of new, capital-intensive technologies" to modernize their aging infrastructure, and to "support increased reliability, security, value creation, consumer preferences, and system optimization and integration at the distribution level." At the distribution utility level, the electric utility faces a fundamental challenge. Besides investments needed for grid modernization, the emergent role of the consumer as prosumer coupled with new priorities, such as enhancing electricity reliability, affordability, resilience, environmental protection, and grid security, are driving the current evolution in the industry and destabilizing the century-old government-regulated, vertically integrated, monopoly business model that is the energy utility.

The pressure to revamp the electric utility landscape is evident not only in the contiguous United States—for example, New York, California, Illinois, Massachusetts, and North Carolina—but also in Hawaii and Alaska [3]. The dominating trend of fast-flexing renewable energy sources, mostly solar and wind power, continues to underpin early retirement of baseload power-generating sources such as nuclear, coal, and natural gas steam generator [4]. The growth of solar and wind power, flat or declining electricity demand, and cheap natural gas have been cited as the reasons for the decline in electricity prices and economic viability of baseload energy generation sources such as nuclear energy [5, 6] and thus declining revenues for utility generators. As a result, strategic improvement of utility structure and planning to create new choices for customers requires explicit recognition and response to these challenges as well as local and regional idiosyncratic design and operational obstacles. For instance, utilities across the country face distinctive characterizations of the so-called 'death spiral' - the cycle of eroding market share to distributed energy prosumers that raises costs on remaining utility customers, leading to accelerated market losses [7, 8]. Nationwide, the 'death spiral' debate is substantial. According to Accenture, estimated utility sector revenue erosion in the United States resulting from increased distributed generation and gains in energy efficiency could be between \$18 and \$48 billion by 2025, depending on status quo, demand disruption, or perfect storm assumptions [9] (**Figures 1** and **2**). However, this debate continues with varied levels of concerns across states and regional electricity markets like PJM Interconnection, Midcontinent (MISO), Texas (ERCOT), California (CAISO), New England (ISO-NE), and New York (NYISO). The effect of the dreaded 'death spiral,' if it materializes, will be felt differently across the nation's utilities. Similarly, aging infrastructure concern due to long periods of low investments in grid modernization, changing supply and demand profiles, and investments in research and development (R&D) commitments are not geographically ubiquitous [2, 6, 10].

Recent studies by McKinsey & Company conclude that energy storage is already economical for many commercial customers [11]. Rapidly falling solar photovoltaics (PV) prices coupled with low-cost storage will create an increasing number of residential and commercial customers who will meet their electric service needs through distributed generation. Falling storage prices have the potential to transform the power landscape by smoothing out the variations in power associated with variable electricity power, such as solar and wind, and achieve 24/7 reliability. Frew et al. review pathways to a highly renewable U.S. electricity future and observe that design of policies such as renewable portfolio standard (RPS) targets, Federal Energy Regulatory Commission (FERC) orders, emission regulations, greater regional coordination and geographic aggregation, and energy storage is critical to the emergent distributed electricity market [12]. While there is disagreement on the structure of electricity market design, regional coordination planning, flexibility mechanisms required to help mitigate the variability and uncertainty challenges arising from a high penetration of intermittent electricity generation, and how soon and how fast a highly renewable electricity future can occur, the

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Several response strategies have emerged shaped by policy, market, public oversight, and financing support. These include utility-as-platform models like the New York Public Service Commission's (NYPSC) grid and market modernization initiative called Reforming the Energy Vision (REV), utility as a smart integrator, and electric services operator model [13]. The New York's REV vision recognizes that the path for a distributed utility model which promotes a highly renewable electricity future in the state will not be linear. Hence, the vision lays out multiple sets of solutions to various aspects of electricity market design and operations,

trend is similar for many parts of the United States.

**Figure 1.** Estimated erosion of utility revenue.

Diversifying Electricity Customer Choice: REVing Up the New York Energy Vision for Polycentric Innovation http://dx.doi.org/10.5772/intechopen.76023 5

**Figure 1.** Estimated erosion of utility revenue.

this change. Distributed technologies (e.g., distributed generation, energy storage, flexible demand, and advanced power electronics) are competing in the emerging distributed utilities market and, as a result, putting pressure on investors and regulators to consider utility choice management (UCM) opportunities that promote more capital-efficient options for the provision of electricity services [1]. The second installment of the Quadrennial Energy Review (QER), released in the winter of 2017, recommends spending \$300–\$500 billion in grid modernization, noting that it "is the platform for the twenty-first century electricity system, bringing significant value associated with lower electricity bills due to fuel and efficiency savings, more electricity choices, and fewer and shorter outages" [2]. The QER also recommends that utilities deploy a "wide range of new, capital-intensive technologies" to modernize their aging infrastructure, and to "support increased reliability, security, value creation, consumer preferences, and system optimization and integration at the distribution level." At the distribution utility level, the electric utility faces a fundamental challenge. Besides investments needed for grid modernization, the emergent role of the consumer as prosumer coupled with new priorities, such as enhancing electricity reliability, affordability, resilience, environmental protection, and grid security, are driving the current evolution in the industry and destabilizing the century-old government-regulated, vertically integrated, monopoly business model

The pressure to revamp the electric utility landscape is evident not only in the contiguous United States—for example, New York, California, Illinois, Massachusetts, and North Carolina—but also in Hawaii and Alaska [3]. The dominating trend of fast-flexing renewable energy sources, mostly solar and wind power, continues to underpin early retirement of baseload power-generating sources such as nuclear, coal, and natural gas steam generator [4]. The growth of solar and wind power, flat or declining electricity demand, and cheap natural gas have been cited as the reasons for the decline in electricity prices and economic viability of baseload energy generation sources such as nuclear energy [5, 6] and thus declining revenues for utility generators. As a result, strategic improvement of utility structure and planning to create new choices for customers requires explicit recognition and response to these challenges as well as local and regional idiosyncratic design and operational obstacles. For instance, utilities across the country face distinctive characterizations of the so-called 'death spiral' - the cycle of eroding market share to distributed energy prosumers that raises costs on remaining utility customers, leading to accelerated market losses [7, 8]. Nationwide, the 'death spiral' debate is substantial. According to Accenture, estimated utility sector revenue erosion in the United States resulting from increased distributed generation and gains in energy efficiency could be between \$18 and \$48 billion by 2025, depending on status quo, demand disruption, or perfect storm assumptions [9] (**Figures 1** and **2**). However, this debate continues with varied levels of concerns across states and regional electricity markets like PJM Interconnection, Midcontinent (MISO), Texas (ERCOT), California (CAISO), New England (ISO-NE), and New York (NYISO). The effect of the dreaded 'death spiral,' if it materializes, will be felt differently across the nation's utilities. Similarly, aging infrastructure concern due to long periods of low investments in grid modernization, changing supply and demand profiles, and investments in research and development (R&D) commitments are not

that is the energy utility.

4 Energy Systems and Environment

geographically ubiquitous [2, 6, 10].

Recent studies by McKinsey & Company conclude that energy storage is already economical for many commercial customers [11]. Rapidly falling solar photovoltaics (PV) prices coupled with low-cost storage will create an increasing number of residential and commercial customers who will meet their electric service needs through distributed generation. Falling storage prices have the potential to transform the power landscape by smoothing out the variations in power associated with variable electricity power, such as solar and wind, and achieve 24/7 reliability. Frew et al. review pathways to a highly renewable U.S. electricity future and observe that design of policies such as renewable portfolio standard (RPS) targets, Federal Energy Regulatory Commission (FERC) orders, emission regulations, greater regional coordination and geographic aggregation, and energy storage is critical to the emergent distributed electricity market [12]. While there is disagreement on the structure of electricity market design, regional coordination planning, flexibility mechanisms required to help mitigate the variability and uncertainty challenges arising from a high penetration of intermittent electricity generation, and how soon and how fast a highly renewable electricity future can occur, the trend is similar for many parts of the United States.

Several response strategies have emerged shaped by policy, market, public oversight, and financing support. These include utility-as-platform models like the New York Public Service Commission's (NYPSC) grid and market modernization initiative called Reforming the Energy Vision (REV), utility as a smart integrator, and electric services operator model [13]. The New York's REV vision recognizes that the path for a distributed utility model which promotes a highly renewable electricity future in the state will not be linear. Hence, the vision lays out multiple sets of solutions to various aspects of electricity market design and operations,

defines a business model as "the rationale of how an organization creates, delivers, and captures value" while [18] describes a business model as "the heuristic logic that connects technical potential with the realization of economic value." Ref. [19] defines a business model as "a representation of the underlining core logic and strategic choices for creating and capturing value within a value network." As an analytic tool, the concept has been widely used in studying investors' preference for service-driven business models [15], energy service company (ESCO) [16], micro-generation solutions [20], the distributed electricity generation market [21], energy efficiency programs [22], evolution of energy utilities [23], and the ongoing expansion of distributed electricity generation market [24]. As a result, the business model concept has been widely tested in practice in the energy sector. Common components of the business model include the value chain, value propositions, target markets, competitive strategy, revenue-generation models, customer interface, value network, and infrastructure ser-

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Business-model innovation as a term remains largely vague. Reference [25] notes that business-model innovation is less a matter of superior foresight, but more of trial and error and expost adaptation. Reference [26] suggests that it entails business model experimentation, while [27] views it as a strategic renewal mechanism for organizations undergoing through periods of transformation in their external environment [28]. In this chapter, business-model innovation refers to the development of new organizational forms to create, deliver, and capture value for realizing a distributed utilities future. Electric utilities in New York and elsewhere have different starting points, value propositions, customer expectations (across customer classes), and priorities, and they vary significantly with respect to electricity revenues, electricity sales, and customer-base. How can utilities meet these demanding business expectations in an uncertain environment? Fox-Penner (2010) offers a solution through a "two-and-a-halfbusiness model" innovation as an alternative [13, 28]. The half refers to a smart integrator scenario in which the utility operating the power grid does not own or sell the power delivered by the grid. Consequently, power generation and grid infrastructure development including its information and control systems are community-owned (e.g., a community micro-grid). The advantage of a community-owned distributed generation is its potential for economies of scale. Hundreds to thousands of customers join the network participating as both consumers and producers (or prosumers) of renewable electricity from sources like solar PV and wind turbines. These prosumers use the set operational standards, but the financing and adminis-

tration side of the business model is handled separately by the utility.

With that in mind, our research shows that aligning core business incentives of electricity distribution utilities with cost-effective integration of DERs into power systems is a prerequisite for achieving DMS and UCM business model constructs that might allow this future to come about, arguing for a 'polycentric' approach in the near term. As a preliminary matter, it is commonly noted that the smart integrator model has well-developed analytic capabilities to ensure the electric grid can meet electricity demand at all times. The smart integrator model also has a green dispatch mechanism that enables utilities to determine when and how to switch to low-carbon energy sources such as solar, wind, and hydroelectric power. Therefore, the only key obligation of the utility is ensuring that the local grid meets power demanded in

vice [18, 25].

**2.2. Business-model innovation**

**Figure 2.** How the adoption of energy demand-disrupting technologies could erode energy demand and utilities' revenues through 2040.

taking into consideration utility market composition and regulatory structures. This paper evaluates a typology of policy, regulatory, and business model constructs for diversifying energy mix and utility choices, arguing for a polycentric approach to carry out utility businessmodel innovation and electric power market design that might allow this suggested future to play out in the real world. Section 2 discusses challenges, limitations, and opportunities of utility-side and customer-side business models. Section 3 evaluates the Hamel framework, and Section 4 applies this framework to the New York's REV. Section 5 concludes the paper.
