Will Electric Utilities Become the Next Dinosaurs?

((3BL Media/Justmeans) - We ran a piece a week ago about Barclay’s downgrade of the utility industry. The move cited fears of rooftop solar undermining the industry profitability the way that internet downloading has disrupted the music business. Once people have solar on their rooftops, they will buy considerably less electricity from their utilities, using it only as a dynamic storage mechanism, providing power when none is available from the sun. Solar panels are most effective at mid-day when air conditioning needs are highest, which is also the time that utilities can charge the highest rates to their commercial customers.

As the cost of battery storage system continues to fall, more customers will disconnect from the grid altogether, a phenomenon known as “grid defection.” Some analysts have raised the specter of a “death spiral” for the industry, where, as more customers defect from the grid, utilities will be forced to raise prices, encouraging even more customers to defect.

But according to Leia Guccione of Rocky Mountain Institute, You don’t want to defect because the greatest value comes from staying connected. When you’re off the grid, you need to invest in redundancy and into oversizing the system, so you end up taking a penalty that ranges from 10 to 50 percent of the cost of the system.”

However Guccione writes in her blog, “Because grid parity arrives within the 30-year economic life of typical utility power assets, the days are numbered for traditional utility business models.”

A new report entitled The Future of the Utility Industry and the Role of Energy Efficiency by the American Council for an Energy Efficient Economy (ACEEE) also puts these concerns into perspective. The study “estimates future electric sales under several scenarios, concluding that in the coming two decades sales will either be level, increase modestly or decrease modestly.”

 The authors find, after reviewing more than 50 papers and other studies, that a death spiral is unlikely, even under the most extreme example. The most optimistic scenario (from the industry perspective) shows a growth rate in electricity sales of about 0.7% per year through year 2040. Worst case is an annual decline of about 0.39% over the same period. That works out to an overall drop in electricity sales of about 10%. While that is hardly good news for the industry, it hardly signals its demise, either.

They identify, describe and evaluate 19 options for the future and close with a series of recommendations. They note that “since the utility industry is at core a regulated monopoly, regulations and business practices must evolve in tandem for progress to be made.”

In the short term (next three years), they recommend:

  • Reassess the how regulation can best be structured to meet both consumer and utility needs in a period of change.
  • Expand the use of energy efficiency as a way to replace retiring generation, minimize rate increases, meet environmental requirements, and provide a valued customer service.
  • Institute decoupling and shareholder incentives to meet energy efficiency goals in states (roughly half) that have not presently done so.
  • Increase the use of demand response and smart pricing
  • Establish fair pricing to pay for fixed costs without unfairly discouraging investments in energy efficiency and distributed generation.
  • Look at infrastructure needs and prioritize them so that key projects with significant net benefits can move forward.
  • Experiment with new utility services to see what works in particular situations and what does not.
  • Experiment with performance-based regulation (PBR).
  • Effectively manage a diverse grid with large contributions from distributed generation and variable resources.
  • Think very carefully before proceeding with decisions to build new generation.

All of these should coalesce into a long-term model as utilities, consumers and regulators jointly come to understand what makes the most sense in dealing with this complex issue.

Image credit: Randy Robertson: Flickr Cretive Commons