Are Utility Companies Doomed?
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Regular readers of ReWire know that we've talked up the potential for new energy technologies to overturn traditional utilities' business plans for some time. That notion is now gaining traction in the larger world outside ReWire, spurred in part by a no-holds-barred report released by a utility trade assoaction in January that calls for stringent policy measures to clamp down on the burgeoning energy democracy movement.
The report, "Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business" prepared by Peter Kind for the Edison Electric Institute, says that increasing pressure to decarbonize our power use through distributed generation, demand-side management, and conservation might have unthinkable consequences for the country's investor-owned utilities: lower profits. And not just lower in the sense of "having a bad third quarter," but more in the sense of "the gravy train doesn't stop here anymore."
Today, a variety of disruptive technologies are emerging that may compete with utility-provided services. Such technologies include solar photovoltaics (PV), battery storage, fuel cells, geothermal energy systems, wind, micro turbines, and electric vehicle (EV) enhanced storage. As the cost curve for these technologies improves, they could directly threaten the centralized utility model. To promote the growth of these technologies in the near-term, policymakers have sought to encourage disruptive competing energy sources through various subsidy programs, such as tax incentives, renewable portfolio standards, and net metering where the pricing structure of utility services allows customers to engage in the use of new technologies, while shifting costs/lost revenues to remaining non-participating customers.
As people start buying less power from utilities, either because they generate their own or they use less, or both, says Kind, "these financial pressures could have a major impact on realized equity returns, required investor returns, and credit quality. As a result, the future cost and availability of capital for the electric utility industry would be adversely impacted."
The threat to the centralized utility service model is likely to come from new technologies or customer behavioral changes that reduce load. Any recovery paradigms that force cost of service to be spread over fewer units of sales (i.e., kilowatt-hours...) enhance the ongoing competitive threat of disruptive alternatives. While the cost-recovery challenges of lost load can be partially addressed by revising tariff structures (such as a fixed charge or demand charge service component), there is often significant opposition to these recovery structures in order to encourage the utilization of new technologies and to promote customer behavior change.
Kind points out that as utilities pass on the cost of doing business to a smaller and smaller set of energy consumers, those consumers' cash outlays for power will rise, making the prospect of getting off the electric bill treadmill by installing solar panels or conserving even more enticing. This will lead to a cycle that Kind refers to as "vicious," though it looks more virtuous from the perspective of those of us whose primary motivation isn't utility profit margins.
What does Kind recommend as a way out? Clamping down on subsidies and other policies that encourage consumers to wean themselves from utilities, including net metering laws, and charging customers fees if those customers choose to provide the utility with solar electricity. Kind recommends that utilities push for immediate measures including:
Institute a monthly customer service charge to all tariffs in all states in order to recover fixed costs and eliminate the cross-subsidy biases that are created by distributed resources and net metering, energy efficiency, and demand-side resources; Develop a tariff structure to reflect the cost of service and value provided to DER [Distributed Energy Resources] customers, being off-peak service, back-up interruptible service, and the pathway to sell DER resources to the utility or other energy supply providers; and Analyze revision of net metering programs in all states so that self-generated DER sales to utilities are treated as supply-side purchases at a market-derived price. From a load provider's perspective, this would support the adoption of distributed resources on economically driven bases, as opposed to being incentivized by cross subsidies
By "cross subsidies," Kind means the costs utilities claim they have to pass on to consumers without rooftop solar and other renewable-conservation programs. As groups like Vote Solar point out with some regularity, such costs are completely offset by the benefits distributed energy and conservation offer to non-participating ratepayers including greater grid resiliency, fewer new transmission lines and power plants, and an overall cleaner environment.
All those benefits share at least two characteristics:
- They contribute to a better quality of life for you and me;
- They don't make the utilities any money.
This isn't the first time that the continued financial reward to an industry has been set in opposition to the general welfare, but it's rare that the stakes are so high on both sides. On the one hand, we're faced with the prospect that disruptive technology might cause utility dinosaurs to go extinct. On the other hand, if they don't go extinct, we might as a result of continued greenhouse gas emissions into the atmosphere.
Chris Nelder at GreenTech Media puts it succinctly:
While all of these challenges to the traditional private-sector utility model are indeed disruptive, it's instructive that they're also for the good of the environment, and for our communities. Nobody ever said that energy transition was going to be easy, or that there wouldn't be losers as well as winners. Some utilities will navigate the transformation successfully, while others will fight it tooth and nail until they die.
