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Public Utilities Should Embrace Renewable Energy Revolution, Not Get Run Over By It

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Public Utilities Should Embrace Renewable Energy Revolution, Not Get Run Over By It

This article is the second of a three-part series on the Future of Electricity. Read Part I and Part III.

The U.S. electricity sector will be unrecognizable in 20 years. How—and how—fast it changes will be a big factor in how large a price the world pays for having disrupted climate equilibrium—but it is not the climate threat that will drive the changes. Electricity is a very capital intensive business. The rapid shift from one set of technologies and business models to another means that much of the existing capital will be stranded—worthless—sooner than its owners will like. This is what Schumpeter called capitalism’s “creative destruction.” But incumbent owners and firms are using every tool at their disposal to slow change to protect the value of their investments.

Utilities have enormous opportunities if they are willing to be revolutionaries, as they were in the 1920’s when electrifying the nation the first time.
Photo credit: Shutterstock

Three major threats undermine the value of the classic U.S. utility model: big power plants linked to big transmission grids operated by monopoly companies with guaranteed profits.

  1. SLUMPING DEMAND: Historically electricity was mostly wasted (90 percent of the electrons in a light bulb turning to heat not light). Optimizing its value required information, which cost more than electrons. Now electrons are more expensive than information. The historic link between total economic production and electricity demand has shattered. Not only is electricity consumption rising slower than the economy grows, in the U.S. it is actually shrinking. So utilities whose profit model required adding new generation capacity and new wires to meet higher demand are suddenly running out of load growth to feed their stock value.
  2. DISECONOMIES OF SCALE AND AGE: For decades utilities built bigger and bigger generating plants further and further from customers requiring more and more transmission because bigger was cheaper—and then kept them running as long as possible. Now the arrival of distributed generation—mostly in the form of rooftop solar—is enabling customers to become generators, and to replace precisely those electrons which create utility profits—peak afternoon and early evening load. And when utilities look around for “bigger is cheaper” options, they come up short, because most of their central station technologies—coal, nuclear, big hydro, new transmission corridors—are bad, unpopular neighbors. The bigger they are, the harder they are to site. Resulting delays and the need to compensate neighbors make ever bigger utility technology no longer cheaper. Recent nuclear and coal projects have, without exception, been plagued by enormous delays and cost overruns. Meanwhile, since 1977 utilities have chosen to delay modernization of their power plants, preferring instead to lobby for exemptions from pollution standards. This left power companies with an outmoded fleet of filthy coal plants that poured mercury, soot, sulfur and other toxins into neighboring communities. That delayed maintenance bill has now come due, but the economics of old coal power plants doesn’t work when both renewables and natural gas have dropped dramatically in price—cleaning up most old coal plants costs more than they are worth. (That’s before climate clean protection is added to the bill.)
  3. EMPOWERED CUSTOMERS. Rooftop solar, cheaper than remotely delivered grid power when you include the cost of transmission, is the killer-ap. It enables utility customers to go partly independent. In California, the combination of utility scale and roof-top solar has already stripped away the traditional afternoon peak load. This time of day fattened the profit ledger because large base-load generators could charge the same rate as more expensive intermittent natural gas peaking plants. Utilities inability thus far to respond to this threat caused Barclay’s bank to downgrade the bonds for the entire sector. But rooftop solar is only one new innovation disrupting the traditional capital and electron wasteful model. Demand response technologies, recruiting consumers whose power needs can be shifted by a few hours to shave peak demand are now a significant part of the total management strategy of many utilities. Industrial customers are jumping into the business of deploying combined heat and power making them, too, generation competitors. The U.S. grid is deplorably unreliable—20 percent of the total U.S. power supply has to be backed up with diesel generators, because the hospitals, airports, data centers, university laboratories, highways and bridge signaling systems which use that power cannot tolerate grid failures. But new fuel cell and battery storage technologies are becoming the preferred reliability option. Once customers have their own reliable storage capacity, it becomes much easier for them to self-generate and pull away from the grid altogether.

While the research that led to these disruptive changes was in many cases inspired by concern over climate, they have now achieved a competitive advantage over traditional centralized generation that is self-sustaining, no longer dependent upon climate policy. The sector will change dramatically—utilities cannot survive on their present models.

Read page 1

But the utilities are not out of the game yet. They have enormous opportunities if they are willing to be revolutionaries, as they were in the 1920’s when electrifying the nation the first time, or in the 1950’s when they provided the finance that enabled Post World War II Americans to shift to an appliance heavy, kilowatt hour dependent suburban “all electric” life.

They have three huge business opportunities the environmental community would love to support. Most of the industry is desperately trying to throw them away.

1. Rooftop solar. What are the “first principles” as Elon Musk likes to say?

  • Rooftop solar is very capital intensive
  • It is customer centric.
  • It requires lots of detailed knowledge about every roof and substation.

Who in the marketplace possesses cheap capital, intimate customer relations with every electricity user, and detailed knowledge about roofs and substations?

SolarCity? Sunrun? Well, they can buy rooftop maps from Google. They pay a fortune to obtain the rest, particularly customer knowledge.

But, with that same little help from Google, your average public utility has those assets in spades. They ought to dominate the rooftop solar business and the electrons it generates, to fill in their grid and make it more reliable and robust. They can choose the best roofs for their purposes without regard to the income of the homeowner, because they can lease the space not the panels.

2.  EV saturation. If utilities embrace the rooftop revolution, they still need load growth.  They also need balancing capacity—customers who can be cycled on and off with load shifts since the cheapest power they can get soar and wind, is intermittent. EV's are the perfect solution to provide demand growth, while simultaneously enabling balancing load—because the average car is parked 95 percent of the time, available to charge or discharge.

Indeed, as the industry did with the "All Electric Home" in the 1950's, utilities should become the financiers of EV sales, making it cheap to buy EV’s in exchange for paying a slight a premium on the electrons they use.

3. The Storage Breakthrough. It will come—perhaps the visionaries who say our cars will become grid storage are right, and EV saturation will BE the storage breakthrough. Or perhaps some other form of storage breaks through instead. Having a grid with lots of distributed rooftop solar and demand manageable EV load means that the volume of storage needed is much smaller than would be required to meet the needs of remote solar and wind.

And if there is no technological breakthrough beyond batteries, EV's are still the key to storage. As batteries improve and EV's penetrate, this will generate a huge supply of used batteries which can no longer cycle as nimbly as an EV requires, but which have a decade or more of utility grade service left in them.

Utilities would need permission from their regulators to convert from a capital rate-based monopoly to one reliant on a diversified portfolio of fees, with modest recovery from generation of electrons. Utilities would look more like a bank or a cable company. Which in today's world does not look like a bad profit strategy.

But it’s a very different world, and holding on to old stuff for a few more years will only ensure that instead of leading the revolution, today’s public utilities are run over by it.

Part III of this series will focus on getting through the transition.

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