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by Bob Shively, Enerdynamics’ President and Lead Instructor

At Enerdynamics, we often end our classroom sessions with a quote from business guru Peter Drucker:  “The corporation as we know it, which is now 120 years old, is not likely to survive the next 25 years.”

While Drucker wasn’t speaking specifically about the electric utility industry, we believe that his quote is directly applicable.  Over the next few years, utilities are going to be asked to effectively respond to ongoing penetration of disruptive technology, increasing environmental challenges, and significant change among the customer base.  So the question for utility management, customers, investors and regulators is: What is the future for the electric utility? Is it destined to go the way of the traditional phone company serving a smaller and smaller base of customers while trying to build revenue by selling new services in competition with non-regulated providers?  Or will competing technologies completely replace the need for the utility?

First let’s discuss the challenges.  Disruptive technology threatens to significantly change the way that utilities generate and deliver power.  We already are seeing a major shift in generation – natural gas combined-cycle units and renewable power are pushing older and less efficient coal units out of the market, and construction of new coal units has more or less been halted.  New environmental regulations taking effect in 2012 are likely to further this trend.  Meanwhile energy efficiency and load shifting are becoming a key resource, reducing the need for new generation. While not yet ready for commercial application, storage technologies may be on the cusp of changing the paradigm that electricity can’t be stored.

And while the supply side changes, transformation is also coming rapidly to the transmission and distribution (T&D) sector in the myriad technologies termed the Smart Grid. Initial implementations often consist of better sensors and controls in the T&D system hidden from customer view and/or smart meters that initially don’t do much except make it easier to collect usage data. However, the long-term potential for Smart Grid is vast.

A decade from now, we may well be using an electric network that communicates unique real-time energy prices to preprogrammed appliances that know when to run and when to shut-down to save consumers money.  This network may also communicate with thousands of distributed supply sources such as solar photovoltaic cells, fuel cells, and localized storage to determine when local supply is more cost effective than centralized generation, and it must manage supply flowing from both centralized and distributed sources. A recent McKinsey paper even suggests that new homes in 2020 may consume 90% less energy than today’s home.

From an environmental standpoint, despite current politics, it still seems likely that low carbon generation will become a key issue for electric utilities.  And even absent federal carbon legislation, the impact that regulation of other environmental concerns such as cooling water, sulfur dioxide, nitrous oxides, and mercury is having significant impacts on utility resource planning.  It is highly unlikely that these concerns will abate as time goes on.  Future generation dispatch may be asked to take environmental considerations into effect alongside the current factors of cost and reliability.

Lastly, electric consumers are likely undergoing a significant change.  Baby boomers brought up on a single black phone in the kitchen, just four television channels and no iPods are being replaced as consumers by individuals brought up with hyper change and vast choices.  It is hard to imagine that the new consumer base will be content with one or two rate schedules with frequent rate increases.

And all three changes are likely to occur in a world where electric demand may be flat, meaning that new costs cannot be buried by simply spreading them out over an ever increasing customer base. So where does this leave utilities?

In next week’s blog post, we’ll look at long-time electric industry expert Peter Fox Penner’s two proposed models for the future utility.  His views, as explained in his recent book Smart Power, are very similar to the visions that Enerdynamics’ instructors
requently discuss when questions of the future arise in our courses.