Death Spiral: Energy Efficiency Blowing Up Utility Business Model

February 3, 2015


I posted the other day about Electric Utilitie’s Kodak Moment – the growing realization that we are in a technological paradigm shift that will destroy the business model electric generators have relied on for the last 100 years – and bring down any companies that don’t change fast enough.

All over the country, utility customers are finding ways to use less energy – not only generating their own, but using unglamorous but effective and ever-increasing pathways to greater energy efficiency.  I’ve pointed out for several years now, that even in an era of multiplying gadgets, power use continues to flatten or drop. (see graph above)

Building a new power plant these days in most states, because the cost is so steep, requires utilities to put those construction projects in the rate base, even before they begin producing power. As much as 5 years or more before. (10 or 15 in the case of nuclear)
That means, they necessarily send a price signal that consumers are much more sensitive to, and empowered to respond to, than ever before. That means, by the time the new power plant is online, the demand for it has dried up. This is the death spiral, and it’s coming to utilities everywhere that do not wake up to the new reality.

The Wall Street Journal underlines the problem today.

Rebecca Smith in the Wall Street Journal:

The long-term future of the nation’s electric grid is under threat from an unlikely source—energy-conserving Americans.

That is the fear of some utility experts who say that as Americans use less power, electric companies won’t have the revenue needed to maintain sprawling networks of high-voltage lines and generating plants.

And if the companies raise rates too high to make up for declining sales volumes, customers will embrace even more energy-saving gizmos and solar panels, pushing down demand for grid power. The Edison Electric Institute, the trade group for investor-owned utilities, has warned that they could face a “death spiral.”

“Utilities seem to have concrete shoes on,” says Elisabeth Graffy, co-director of Arizona State University’s Energy Policy, Law and Governance Center.

Since 2004, average residential electricity prices have jumped 39%, to 12.5 cents a kilowatt-hour and prices for all users have jumped 36% to 10.42 cents, according to the U.S. Energy Information Administration. Retail sales to homes and businesses still are less than they were in 2007, before the recession.

Even in parts of the country where the population has been growing, electricity sales have been anemic. Southern Co. , for example, said that in the third quarter of 2014, residential accounts grew 0.7% in its four-state region—but total home electricity sales contracted 0.6%.

One of the most radical proposals surfaced recently in Wisconsin. Last May, Madison Gas & Electric Co. , a unit of MGE Energy Inc., asked state utility regulators to let it charge residential customers $68 a month by 2017 as a fixed monthly fee for electricity service, covering 77% of the utility’s fixed costs, versus the existing $10.50 fee, which covered 12%. In return, the utility agreed to cut the price of electricity in half, to 7 cents a kilowatt-hour. The proposal created such uproar that the utility withdrew the request. Instead, it got approval to begin charging about $20 a month, enough to cover 23% of its fixed costs, and to slightly reduce its electricity price.


Utilities like fixed fees but “they’ve not met with much success because customers dislike them,” says Steve Kihm, chief economist for the Energy Center of Wisconsin, a nonprofit research institute. He says customers think these fees punish energy-conservers and lengthen pay-back periods for solar power and energy-efficiency upgrades.

Recommend reading the whole piece.  Change is afoot. The genie is out of the bottle, and will not go back in.

Utilities that can make the pivot will survive.

Midwest Energy News:

“There has been an endless amount of interest in the utility of the future,” Paulos said. “It started two years ago when the Edison Institute commissioned a paper on how solar, in particular, would impact the traditional utility model.

“Depending on your perspective it was either an exciting opportunity or dire threat. The argument has come to the domain of regulators, who are starting to look at these issues with the idea of pursuing these regulations and policies that could promote distributed energy.




6 Responses to “Death Spiral: Energy Efficiency Blowing Up Utility Business Model”

  1. Is the other half of the story the introduction of electric powered vehicles?
    Have topmanagers of utility compagnies already switched to this innovation?

  2. andrewfez Says:

    The Minnesota video also implies something about the exponential power of end use efficiency: If the light bulb uses 2 out of 100 units if energy, then replacing the bulb with something that only uses 1 unit results in 50 less needed units at the power station, or 1/2 the original lump of coal.

  3. andrewfez Says:

    =$68 a month by 2017 as a fixed monthly fee for electricity service, covering 77% of the utility’s fixed costs=

    That’s more than I pay using the standard model, for a 1000 sq.ft. townhouse.

    Los Angeles has it’s own scheme going, which is serendipitous in nature: Inflate home prices so high that no one can buy a single family home, but instead are forced to rent/buy smaller, apartment, condo, townhouse type units which are more efficient by design.

  4. […] I posted the other day about Electric Utilitie's Kodak Moment – the growing realization that we are in a technological paradigm shift that will destroy the business model electric generators have r…  […]

  5. I hope the house with the roof covered with PV panels has got bypass diodes and an intelligent connection strategy. The shaded panels are well down on output and will decrease power out for the whole string that they are part of – even with diodes. Without diodes the shading would cripple the elated string and also risk fire if the string is long and any shaded panel has low insulation. Gargoyles ….

    It seems to be winning overall. Owners report here –

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