Dave Roberts: The Renewable Threat to Utilities

April 25, 2013

solarroof1This is a point I’ve been hammering in my talks, and in recent postings. We are heading for a policy train wreck if we do  not find a way to smoothly transition to the new energy technologies that are inexorably ramping up across the planet.

If you are making photographic film in a world that is going digital, or typewriter ribbons for laptop users – it doesn’t matter how big and powerful you are – you are going away.  Our utility industry has been playing “lah lah lah I can’t hear you” with the burgeoning renewable revolution for too long – they can slow down the transition, but they can’t stop it.  That could mean a bumpy passage when the inevitable occurs. Renewable advocates need to understand this as well, the roadmap does not yet give us a smooth transition from where we are to where the technology is leading us.

Dave Roberts or Grist has been writing on this, and I’ll present the first of his important series here today, more tomorrow.

Solar power and other distributed renewable energy technologies could lay waste to U.S. power utilities and burn the utility business model, which has remained virtually unchanged for a century, to the ground.

That is not wild-eyed hippie talk. It is the assessment of the utilities themselves.

Back in January, the Edison Electric Institute — the (typically stodgy and backward-looking) trade group of U.S. investor-owned utilities — released a report [PDF] that, as far as I can tell, went almost entirely without notice in the press. That’s a shame. It is one of the most prescient and brutally frank things I’ve ever read about the power sector. It is a rare thing to hear an industry tell the tale of its own incipient obsolescence.

I’ve been thinking about how to convey to you, normal people with healthy social lives and no time to ponder the byzantine nature of the power industry, just what a big deal the coming changes are. They are nothing short of revolutionary … but rather difficult to explain without jargon.

So, just a bit of background. You probably know that electricity is provided by utilities. Some utilities both generate electricity at power plants and provide it to customers over power lines. They are “regulated monopolies,” which means they have sole responsibility for providing power in their service areas. Some utilities have gone through deregulation; in that case, power generation is split off into its own business, while the utility’s job is to purchase power on competitive markets and provide it to customers over the grid it manages.

This complexity makes it difficult to generalize about utilities … or to discuss them without putting people to sleep. But the main thing to know is that the utility business model relies on selling power. That’s how they make their money. Here’s how it works: A utility makes a case to a public utility commission (PUC), saying “we will need to satisfy this level of demand from consumers, which means we’ll need to generate (or purchase) this much power, which means we’ll need to charge these rates.” If the PUC finds the case persuasive, it approves the rates and guarantees the utility a reasonable return on its investments in power and grid upkeep.

Thrilling, I know. The thing to remember is that it is in a utility’s financial interest to generate (or buy) and deliver as much power as possible. The higher the demand, the higher the investments, the higher the utility shareholder profits. In short, all things being equal, utilities want to sell more power. (All things are occasionally not equal, but we’ll leave those complications aside for now.)

Now, into this cozy business model enters cheap distributed solar PV, which eats away at it like acid.

First, the power generated by solar panels on residential or commercial roofs is not utility-owned or utility-purchased. From the utility’s point of view, every kilowatt-hour of rooftop solar looks like a kilowatt-hour of reduced demand for the utility’s product. Not something any business enjoys. (This is the same reason utilities are instinctively hostile to energy efficiency and demand response programs, and why they must be compelled by regulations or subsidies to create them. Utilities don’t like reduced demand!)

It’s worse than that, though. Solar power peaks at midday, which means it is strongest close to the point of highest electricity use — “peak load.” Problem is, providing power to meet peak load is where utilities make a huge chunk of their money. Peak power is the most expensive power. So when solar panels provide peak power, they aren’t just reducing demand, they’re reducing demand for the utilities’ most valuable product.

But wait. Renewables are limited by the fact they are intermittent, right? “The sun doesn’t always shine,” etc. Customers will still have to rely on grid power for the most part. Right?

This is a widely held article of faith, but EEI (of all places!) puts it to rest. (In this and all quotes that follow, “DER” means distributed energy resources, which for the most part means solar PV.)

Due to the variable nature of renewable DER, there is a perception that customers will always need to remain on the grid. While we would expect customers to remain on the grid until a fully viable and economic distributed non-variable resource is available, one can imagine a day when battery storage technology or micro turbines could allow customers to be electric grid independent. To put this into perspective, who would have believed 10 years ago that traditional wire line telephone customers could economically “cut the cord?” [Emphasis mine.]

Indeed! Just the other day, Duke Energy CEO Jim Rogers said, “If the cost of solar panels keeps coming down, installation costs come down and if they combine solar with battery technology and a power management system, then we have someone just using [the grid] for backup.” What happens if a whole bunch of customers start generating their own power and using the grid merely as backup? The EEI report warns of “irreparable damages to revenues and growth prospects” of utilities.

Utility investors are accustomed to large, long-term, reliable investments with a 30-year cost recovery — fossil fuel plants, basically. The cost of those investments, along with investments in grid maintenance and reliability, are spread by utilities across all ratepayers in a service area. What happens if a bunch of those ratepayers start reducing their demand or opting out of the grid entirely? Well, the same investments must now be spread over a smaller group of ratepayers. In other words: higher rates for those who haven’t switched to solar.

That’s how it starts. These two paragraphs from the EEI report are a remarkable description of the path to obsolescence faced by the industry:

The financial implications of these threats are fairly evident. Start with the increased cost of supporting a network capable of managing and integrating distributed generation sources. Next, under most rate structures, add the decline in revenues attributed to revenues lost from sales foregone. These forces lead to increased revenues required from remaining customers … and sought through rate increases. The result of higher electricity prices and competitive threats will encourage a higher rate of DER additions, or will promote greater use of efficiency or demand-side solutions.

Increased uncertainty and risk will not be welcomed by investors, who will seek a higher return on investment and force defensive-minded investors to reduce exposure to the sector. These competitive and financial risks would likely erode credit quality. The decline in credit quality will lead to a higher cost of capital, putting further pressure on customer rates. Ultimately, capital availability will be reduced, and this will affect future investment plans. The cycle of decline has been previously witnessed in technology-disrupted sectors (such as telecommunications) and other deregulated industries (airlines).

Did you follow that? As ratepayers opt for solar panels (and other distributed energy resources like micro-turbines, batteries, smart appliances, etc.), it raises costs on other ratepayers and hurts the utility’s credit rating. As rates rise on other ratepayers, the attractiveness of solar increases, so more opt for it. Thus costs on remaining ratepayers are even further increased, the utility’s credit even further damaged. It’s a vicious, self-reinforcing cycle:

One implication of all this — a poorly understood implication — is that rooftop solar fucks up the utility model even at relatively low penetrations, because it goes straight at utilities’ main profit centers. (It’s already happening in Germany.) Right now, distributed solar PV is a relatively tiny slice of U.S. electricity, less than 1 percent. For that reason, utility investors aren’t paying much attention. “Despite the risks that a rapidly growing level of DER penetration and other disruptive challenges may impose,” EEI writes, “they are not currently being discussed by the investment community and factored into the valuation calculus reflected in the capital markets.” But that 1 percent is concentrated in a small handful of utility districts, so trouble, at least for that first set of utilities, is just over the horizon. Utility investors are sleepwalking into a maelstrom.

(“Despite all the talk about investors assessing the future in their investment evaluations,” the report notes dryly, “it is often not until revenue declines are reported that investors realize that the viability of the business is in question.” In other words, investors aren’t that smart and rational financial markets are a myth.)

Bloomberg Energy Finance forecasts 22 percent compound annual growth in all solar PV, which means that by 2020 distributed solar (which will account for about 15 percent of total PV) could reach up to 10 percent of load in certain areas. If that happens, well:

Assuming a decline in load, and possibly customers served, of 10 percent due to DER with full subsidization of DER participants, the average impact on base electricity prices for non-DER participants will be a 20 percent or more increase in rates, and the ongoing rate of growth in electricity prices will double for non-DER participants (before accounting for the impact of the increased cost of serving distributed resources).

So rates would rise by 20 percent for those without solar panels. Can you imagine the political shitstorm that would create? (There are reasons to think EEI is exaggerating this effect, but we’ll get into that in the next post.)

If nothing is done to check these trends, the U.S. electric utility as we know it could be utterly upended. The report compares utilities’ possible future to the experience of the airlines during deregulation or to the big monopoly phone companies when faced with upstart cellular technologies. In case the point wasn’t made, the report also analogizes utilities to the U.S. Postal Service, Kodak, and RIM, the maker of Blackberry devices. These are not meant to be flattering comparisons.

Remember, too, that these utilities are not Google or Facebook. They are not accustomed to a state of constant market turmoil and reinvention. This is a venerable old boys network, working very comfortably within a business model that has been around, virtually unchanged, for a century. A friggin’ century, more or less without innovation, and now they’re supposed to scramble and be all hip and new-age? Unlikely.

So what’s to be done? You won’t be surprised to hear that EEI’s prescription is mainly focused on preserving utilities and their familiar business model. But is that the best thing for electricity consumers? Is that the best thing for the climate?

mortalthreat

Wall Street Journal:

Traditional transmission and distribution utilities will have to deal with distributed solar power, and it won’t be a pretty fight, according to David Crane, president and chief executive of NRG EnergyNRG +1.46% NRG +0.19%, a large independent power producer.

Utilities “do realize that distributed solar is a mortal threat to their business,” said Mr. Crane, speaking at The Wall Street Journal’s ECO:nomics conference on Thursday in Santa Barbara, Calif.

“They can’t cut costs, so they will try to distribute costs over fewer and fewer customers.” This, he said, will increase costs for the customers, and will drive more of them toward distributed solar.

mortalthreat2

Reuters:

Every new solar panel installed on European rooftops chips away at power utilities’ centralized production model. Unless they reinvent themselves soon, these giants risk becoming the dinosaurs of the energy market.

The industry faces drastic change as renewable energy turns consumers into producers and hollows out the dominance of utilities. With their stocksat decade lows and a millstone of debt around their necks, Europe’s utilities have little margin for error.

In Germany, where 22 percent of its electricity came from renewable sources in 2012, the big four utilities – E.ON, RWE, EnBW and Vattenfall Europe – are nearly absent in this new sector.

Of the 71 gigawatts of renewable energy capacity installed at the end of 2011, the four owned just 7 percent, environment ministry data show. A gigawatt roughly corresponds to the capacity of one nuclear plant.

Individuals owned 40 percent of renewables capacity, energy niche players 14 percent, farmers 11 percent, various energy-intensive industrial companies 9 percent, and financial companies 11 percent. Small regional utilities and international utilities owned another 7 percent.

In the solar industry the big four are even more marginal, having ceded 97 percent to investors from outside the power industry, Lueneburg University researcher Mario Richter said.

“Utilities produce electricity, and here’s a new technology for producing electricity, and they are not in there. They have completely missed the opportunity,” Richter said.

Will post more tomorrow, or if you have time, go here.

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9 Responses to “Dave Roberts: The Renewable Threat to Utilities”

  1. pendantry Says:

    Unfortunately, there’s no guarantee that obsolete technologies will be superseded by superior ones. There are powerful vested interests working against such sensible action. Professor Dvorak’s failure to introduce a redesign of the computer keyboard layout is a classic example.

    • andrewfez Says:

      On the investment website I watch, there was a recent article about investing in disruptive technologies. The main focus was on Solar City which has had a huge run up in its stock price recently. If one would have invested at or near their IPO they’d have doubled their money easy in a few months – pretty extraordinary.

      One of the commenters under the article was saying that he lived in Florida, the SUNSHINE state, and in Florida, they DO NOT allow people to profit from putting up solar panels on their roof: You can only sell back to the utility the ‘normal’ amount of power that you use. For example, say you used 1000KWh on average, but your solar system consistently added 1,500KWh to the grid. The utility is only required to pay you for the 1000KWh and they get the other 500KWh for FREE.

      That, to me, sounds protectionist. I don’t know anything about FL, but it just smacks of old-boy-republican protectionism. Could be other things happening – such as trying to avoid physical disruption on the system by discouraging excess of electricity. Could be the is the norm in most places. I don’t know. I don’t have enough info to make a competent judgement, but it just sounds like FL is up to no good.

    • rayduray Says:

      Qwerty You!

      Signed, A Troglodyte

  2. stephengn1 Says:

    Dave Roberts is usually right on with his analysis. I’m a big fan.

    This only underscores the need to put lots of R&D money into storage that is as easy and cheap as solar itself. There have been great strides in energy storage recently and like PV, energy storage technology is advancing on an exponential curve.

    Graphene
    Artificial Photosynthisis
    Biofuels

    Techs that will further eat away at the enormous old machine are coming, some are here now, others should be here in a couple of years, but deployment will take a while and the old guard will fight tooth and nail any subsidies or uncentives that tend to work against their interests

    In the meantime, as far as policy goes, we should look to Germany as a model of how to make such a transition. But it won’t be easy. The utilities are powerful, entrenched, connected and wealthy. Then again so was IBM when tiny companies like Microsoft and Apple started rocking their world

  3. ahaveland Says:

    Wise people would jump off the fossil fuel death spiral now, and let those that still don’t get it, go down the plug-hole.

    Wise fossil fuel companies would start diversifying, or they’ll go the way of the dodo and vinyl gramophone records.


  4. The simplest, most cost-efficient, most easily-coordinated, most expeditious way to build and adapt and run our new renewable future would be to have National Renewable Energy Utility company.

    The private sector has no inclination and is in no position to to ensure that we transition to 100% renewables in time to avert disaster. The private sector demands only that it makes healthy, if not exorbitant profits, at every step. The public already subsidizes the private energy domain, yet shares in none of its gargantuan profits.

    Is it not time to consider changing this paradigm? Time to see that the national response to a national public crisis is a public, non profit solution? Consider the advantages of a national public utility:

    1) Infrastructure can be planned in a inter-coordinated fashion on a nationwide scale.

    2) Renewable infrastructure can be sited where it is most efficient. For example, rather than trying to encourage solar in areas across the country where the sunlight characteristics are very suboptimal, installations can be sited in the Southwest, where the sun shines strongly and nearly uninterruptedly. The power can then be entered into our new smart grid, which needs to be built in any case.

    3) Infrastructure can be be purchased at wholesale pricing.

    4) The cost of our new national system will be borne equally among all taxpayers and bond holders, not shouldered by individual home and business owners.

    5) The huge economy of scale of efficiency-optimal installations means vastly less cost per installed watt. Siting tiny-scale solar on 50 million rooftops means 50 million duplicated systems. 50 million convertors, transformers, wiring packages, etc. Instead of a handful.

    All of these rooftop installs are customized and difficult installs – and this is the most expensive portion of home solar.

    6) Only the Federal government has the resources to finance the amount of infrastructure we need. Fortunately, they can keep writing checks while putting the bills onto the national debt. They also are the only entity that can actually print their own money.

    7) A public utility is a non profit entity. We have the opportunity here to redirect our energy expenditures out of the hands of the carbon fuel sector and use it to build something of value. For example:

    We spend, in the U.S., about 1.3 trillion dollars per year on carbon fuels. If we merely took that money and spent it on a new National Energy Utility, in just 7 years we could completely pay for the following:

    * Enough renewable energy infrastructure to replace every calorie of carbon fuel

    * A brand spanking new Smart Grid

    * retrofitting every home and business from carbon fuels to clean electricity

    * adding electrical inductive charging coils to our roads, so we could have a 100% electrical fleet without the need for large batteries or destination anxiety.

    * putting a free electric car in every driveway

    * Not charging a dime to anyone for any electricity produced by the new national utility! Instant conversion to renewables. Huge popular demand at the voting booths.

    * All this with no increase to our national debt – the money we would have spent (squandered) on gasoline and coal would instead pay for this. Or put the bill on the national tab if you like. If people no longer have to pay for energy, they will have something like $3000.00 extra in their pocket, for every person in their household, every year, forever.

    * After 7 years this system is all payed for, all profit. Except there is no profit, because electricity should be sold for what it costs to generate, which is essentially zero.

    Going public is the answer. It alone, I believe, offers us the opportunity to complete the job on time, and at a far, far lower price than our current (failing) paradigm – staying in the private sector.

  5. rabiddoomsayer Says:

    Solar for medium sized companies is a well viable option. Solar with batteries is cheaper than running a line in for a relatively short distance in rural communities.
    Even without feed in tariffs, solar to take up the peak demand period is viable.

    If the regulators will not play ball then those activities we time at night to avoid peak power costs will become daytime activities to utilize peak power production.

    All this will happen, utilities need to be ready or go the way of the dinosaur.

    Our power distribution systems are actually quite fragile. Internal solar power with backup generators could soon be more reliable than grid power.


  6. [...] I posted part one of this very valuable discussion yesterday. [...]


  7. [...] 2013/04/25: PSinclair: Dave Roberts: The Renewable Threat to Utilities [...]


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