How will utilities cope with shrinking electric demand growth? Part II

by Matthew Rose, Enerdynamics Instructor

In last week’s post and Part I of this discussion, I examined the situation that electric utilities are facing as electric demand requirements across the country have steadily Electricity Businessdeclined over recent decades. So what does this mean for the future of the electric utility’s business model?

Declining demand poses numerous implications to utilities. The biggest challenge is determining how the business model may need to be changed.  From the utility standpoint, the lack of demand growth poses difficulties for sustaining the traditional business model of investing to meet demand and recovering costs through ratepayers. Additionally, the promise of more consumers relying on distributed generation or renewables serves to decrease the number of ratepayers to defray utility investments, potentially causing higher rates for the shrinking pool of ratepayers. This may ultimately resemble the “death spiral” concept: utilities have fewer customers to pay the same fixed costs, which raises rates, which causes more customers to leave.

In California for example, it is estimated that 85,000 PG&E customers have installed distributed solar systems causing approximately $200 million in lost sales to the utility[1]. The utilities are questioning whether it is fair that customers without solar bear these costs.

The situation also directly impacts the central tenet for investor-owned utilities — attracting utility investors through a return on their investment by increasing the value of these investments through growth in earnings (and dividends). This premise is challenged when customers have the ability to reduce their electricity use or find another provider. Left unchanged, this may impact the attractiveness of utility investment.

The reality of the changing landscape is causing some companies to change the way they conduct business and take advantage of “grid edge” opportunities[2]. Looking to the future, there are some utilities seeking new ways to transact and maintain their relationships with customers. The following provide some illustrative examples:

  • PG&E in California has developed a solar offering for customers through the state’s California Solar Initiative (CSI) and remains an important participant in customer transactions.  Other utilities including American Electric Power and Southern Company also are looking at distributed solar as a utility opportunity. Stated Nick Akins, CEO of American Electric Power: “On its face you would look at it and say distributed generation is a threat. But on the other hand we see it as an opportunity because our business is changing. There’s no getting around it.”[3]
  • Exelon Corporation has established numerous businesses to facilitate energy management for customers including serving as a curtailment service provider for large businesses in bidding demand response resources in wholesale markets across the country.
  • The California utilities (as well as others across the country) have successfully negotiated with regulators for risk/reward performance incentives. These incentives provide the opportunity for companies to earn profits from investments in energy efficiency.
  • Electric utilities such as NStar are proactively positioning their roles in supporting electric vehicles as consumer options including examining alternative rates and charging station infrastructure requirements[4].

The future risks and challenges to utilities are substantial. The end result will likely evolve over time and may be varied in accordance with the fragmented nature of the industry with different markets, regulation, corporate culture, and views of relevant stakeholders. The need to manage this transition is also critical to ensure the end result is fair and effective. It’s clear these challenges seem to be more structural, affecting longer-term positions of electric utilities and requiring a focused, transformative response unlike the traditional approach of making smaller incremental changes to the existing legacy system.


References

1. Lauren Sommer, KQED Science, Could Rooftop Solar Kill Utilities? California Grapples with Solar’s Success. May 17, 2013.

2. The terms “grid edge” and “distribution edge” are used by various authors to reflect the boundary space surrounding the electric utility supply and delivery transaction process.

3. Ryan Tracy, Utilities Weigh a Turn to the Sun. Wall Street Journal. May 28, 2013.

4. Massachusetts Electric Vehicle Roundtable, Plug-in Electric Vehicle presentation from Watson Collins, Manager of Emerging Technologies, Northeast Utilities. March 2013.

About Enerdynamics

Enerdynamics was formed in 1995 to meet the growing demand for timely, dynamic and effective business training in the gas and electric industries. Our comprehensive education programs are focused on teaching you and your employees the business of energy. And because we have a firm grasp of what's happening in our industry on both a national and international scale, we can help you make sense of a world that often makes no sense at all.
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