A Death Spiral for Utilities?

I’ve been doing some reading about the problems facing the electric utility industry worldwide — and there does seem to be a growing realization that the model under which electricity providers have operated under for decades is undergoing major changes. In January of this year the Edison Electric Institute, an association that represents for-profit electric companies in the United States, published a report that brought attention to factors that posed major threats to the industry, and made proposals to help mitigate those disruptions.

Here’s an outline of the problem from the report:

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.

In other words, utilities are under threat because of the development of new technologies that have reduced demand for energy from electric companies, and also government policies that have promoted the adoption of these new technologies.

The disruptions outlined above have led some observers to predict a so-called ‘death spiral’ for utilities which goes something like this:

1. New technologies and programs allow more people to become less reliant on the grid for their energy needs.
2. Loss of revenue from these customers causes utilities to increase charges for customers overall.
3. Increased charges causes more people to install cost-saving systems, and maybe leave the grid altogether.

The Edison Institute report raises this alarm:

While tariff restructuring can be used to mitigate lost revenues, the longer-term threat of fully exiting from the grid (or customers solely using the electric grid for backup purposes) raises the potential for irreparable damages to revenues and growth prospects. This suggests that an old-line industry with 30-year cost recovery of investment is vulnerable to cost-recovery threats from disruptive forces.

The report proposes that utilities take immediate action to mitigate against these threats by adding monthly customer service charges to cover fixed costs, implement tariffs on customers who use distributed energy resources (such as solar systems), and revise net-metering policies where customers are able to sell energy back to the grid. This debate is already playing out in various places around the world, such as Arizona, where the public utility is claiming that subsidies and credits to solar customers are creating an unfair playing field putting an unfair burden on non-solar customers.

The report also mentions that at present in the United States there are 200,000 (or 1%) customers using some kind of distributed energy resource.

I have to say that while interesting, the report is sometimes difficult to follow because it is filled with business, legal and financial jargon that I am unfamiliar with — it would be nice if they could write something that the average person could easily understand. The bottom line seems to be that the electricity industry is very concerned about future viability of its business model. They are concerned that shareholder value will increase over time, as well as their ability to raise capital if their business model is see being broken by investors.

All the above is considered in terms of technology that is already available. What happens to this scenario if a technology like LENR comes along (LENR is not mentioned in the report, unsurprisingly)? It’s hard to predict the impact when there is so little known about its capabilities and the products that will be produced, but I would guess from the utilities’ point of view it would be seen as an added reason for alarm when looking at the long-term implications.

Maybe it is time for the utilities to look at changing their business model, and moving from a centralized system to a more distributed one. Could utilities be involved in installing and servicing home or community based energy production systems? Or will it turn out that the electric utility will eventually become an outmoded service whose days are numbered? And during any transition period will power get more expensive for those left on the grid (probably less wealthy people), while more affluent consumers can afford to move off?

It’s hard to say at this point, but it seems that this industry is well aware that things are changing, and that the rate of change is likely to increase.