Electricity prices are rising, data centers are struggling to connect, and consumers are feeling the pinch — yet utilities keep reporting record earnings. What’s going wrong, and how do we fix it?
In this episode, I speak with Michael Lee, former CEO of Octopus Energy US and founder of Distributed Grid, about the flaw at the heart of the American utility model: an incentive system that rewards building infrastructure regardless of whether it is needed.
Lee argues that this cost-of-service model — largely unchanged for a century — inflates electricity rates and blocks distributed energy resources that could make the grid more affordable and resilient.
But his argument is not simply that utilities are bad actors. It is that utilities are rational actors operating under the wrong rules. Change the rules — and the business model — and utilities could earn more revenue by coordinating a decentralized grid than by building poles and wires.
Roadmap for a distributed grid
Lee lays out a roadmap toward creating a distributed grid, reframing utilities as “network coordinators” and paying them for outcomes rather than capital deployed. He also discusses the political and social realities involved — utility shareholders who depend on dividends, governors who fear blackouts and a public that has never had to think much about how electricity works.
“Utilities don’t make money broadly on selling electricity. What they make money on is building more infrastructure. And the more infrastructure they build, the more money they make,” he said.
That model made sense when utilities were expanding service across the country. Today, Lee says, it is producing results that are becoming harder to justify.
“The asset base needs to grow in order to grow earnings,” he said. As a result, utilities have “a fiduciary duty to grow the rate base, kind of regardless of whether or not it’s needed.”
The problem is becoming more visible as electricity demand grows. Data centers want power faster than utilities can provide it. Customers are seeing higher bills. At the same time, utilities continue to propose new infrastructure investments.
Many of those investments solve for a relatively small number of peak-demand hours. “And so what that means is that we’re currently spending tens of billions of dollars, maybe even hundreds of billions of dollars in aggregate…to build a bigger network for these 1% or 2% of hours,” he said.
His alternative is to make better use of resources already connected to the grid. Batteries, electric vehicles, smart thermostats and flexible loads could help meet demand during constrained periods if utilities are rewarded for coordinating them.
New revenue streams
“Utilities could get paid much more for being network coordinators,” Lee said.
He envisions utilities earning revenue based on results such as reliability, affordability, sustainability and speed to power rather than the size of their asset base.
The technology, he says, is far enough along to begin.
The first principle becomes: is there capacity behind the meter that is latent and underutilized? “The answer is very strongly yes,” he said.
A cultural challenge
The harder challenge is changing utility culture and investor expectations. Utilities are built around planning, constructing and operating infrastructure. Coordinating millions of customer-owned devices on a distributed grid requires different skills, different tools and different incentives.
Still, Lee believes the opportunity is significant. Instead of earning more by adding costs to the system, utilities could earn more by reducing them.
“They can get paid for taking costs out of the system. They can get paid for creating deflation,” he said.
Whether that happens will depend on utility leadership, regulators and investors embracing a different model. Lee believes the payoff could be lower costs, faster connections and a more flexible grid.
