21st Century Micro-Utility

07/31/2017 10:49 am ET

Microsoft recently decided it would no longer get power from its local utility at their Redmond, Washington campus, but would strike out on its own in pursuit of a different approach to power. In a blog post, the company said it would “go to the open market to buy 100 percent carbon-free energy to power most of our Puget Sound operations in Washington state. This isn’t just an aspirational goal. In this contract, we’ve committed to buying renewable energy at levels substantially higher than Washington state law, targets that are not only aggressive but meaningful. If we fail to meet these requirements we will face penalties.”[1]

This is a big deal. Microsoft’s campus uses 50MW of power, which is equivalent to the power demand of a city of 50,000. Microsoft isn’t alone, however, in making this move. Most large campuses – including universities, large data centers, and manufacturers – are examining similar steps to accomplish different financial and environmental goals than are enabled by the traditional relationship with their power utilities.

There are both normal business reasons, and “sign of the times” business reasons for this gradual and growing divorce between large users of power and their traditional utility. The normal reason is that utilities sell one product – electric power – to all their customers. The product comes from a mix of inputs – oil, coal, hydro, gas, and renewables. Some customers need higher quality power than the utility sells. Others need to be protected against the outages that utility power experiences. And an increasing number want “green” energy and they are sometimes dissatisfied with the ways utilities claim they have it. Companies – like Anbaric – provide different platforms for providing these services; they are, in essence, micro-utilities for microgrids. [2] This is also a part of a growing awareness that local, “distributed” energy is in many places a viable alternative to and complement of the traditional centralized power system developed in the 20th century.

The “sign of the times” reasons to leave utility service is increasing availability of distributed energy, high tech control devices to better manage demand for energy, and the rising popularity of microgrids and companies willing to finance them. There are hundreds of cases where utilities have lost customers – or portions of customers business – because the customer thinks it can do better itself or with others. A July 2016 article (“The Sun Will Set on Electric Utilities “) in Barron’s cites a survey of electric utility executives that found more than half of them believe their companies are in a “death spiral” as they lose more and more customers to distributed energy and demand management technology.

This phenomenon is also a tale of two cities. In the 20th century city, reliance the technology of utilities – even including low-carbon-emitting hydro and nuclear – brought with it an expectation of rising prices. Even today, proposals to provide this 20th century energy begin at price X in the first year, then rises each subsequent year by 2 or 3 percent. By the 20th year, that may be expensive electricity.

In the 21st century city, technology is more heavily influenced by the spirit of Moore’s Law that posits a relentless increase in efficiency and a decrease in cost in the tech sector. Applied to energy, that creates an expectation prices will come down. Both wind and solar power prices have come down over the last decade, creating the possibility of a future in which power prices continue to decline, if the power industry joins the tech sector, instead of remaining in the utility world.

Many expect that the price of wind, solar, energy efficiency technology and batteries will continue to fall. No wonder that companies like Microsoft, so firmly in the tech sector, want to reduce and perhaps ultimately eliminate their reliance on utility power. Utilities won’t be pleased: the news service E&E reported on July 19 that Washington state “regulators imposed a series of conditions meant to ease Microsoft's transition [on the utility]… The tech company will be required to pay nearly $23.7 million to leave, part of an arrangement aimed at offsetting the impact to consumers for paying a larger share of PSE's [Puget Sound Energy] system. Microsoft will also be required to make continued payments in PSE's energy efficiency and low-income assistance programs.” Microsoft had to pay a steep price to partially cut the cord to the 20th century!

It is interesting that the Ohio State University took a somewhat similar initiative. In April 2017 Ohio State entered into a 50-year public-private partnership with a consortium of energy and finance partners to operate and manage OSU’s Columbus campus utility system (comprised of electric, steam, heating, natural gas and chilled water facilities). In that transaction, a total value of $1.165 billion included a $1.015 billion upfront payment to the University and a $150 million commitment to support academics in specific areas, including a $50 million Energy Advancement and Innovation Center for energy research and technology commercialization.

Ohio State and Microsoft show two different approaches whereby a big power consumer’s relationship with regulated utilities migrates to platforms that provide more flexibility, more capital efficiency, and more creativity. These changes will put a lot of pressure on utilities, but this is part and parcel of life in a competitive economy. Even Ma Bell, who had a long and remarkable run as the nation’s communications monopoly, ultimately had to give in to the forces of progress. And look where our phones are now.

[1] https://blogs.microsoft.com/on-the-issues/2017/07/14/creating-carbon-free-headquarters-puget-sound-region/

[2] Anbaric Development Partners is the platform company for electric infrastructure of the Ontario Teachers’ Pension Plan, a $175 billion independent organization that invests the pension fund's assets and administers the pensions of 318,000 active and retired teachers in Ontario.

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