When business unplugs from the grid, can utilities survive?
From Ikea to Walmart, corporations are increasingly interested in generating their own power. Where does that leave utilities?
Fri, Oct 18, 2013 at 11:08 AM
When Apple built a 20MW solar power plant at a data center in North Carolina, the project didn't just slash their own emissions — it helped change the relationship between utilities and their corporate customers. In fact, Greenpeace credits the array with spurring a statewide shift toward cleaner energy:
After Apple began investing in renewable energy in North Carolina, their example (as well as pressure from other clean energy leaders in the state like Google and Facebook) helped push Duke Energy to announce a new program to sell renewable energy to big electricity customers.
It's not just the tech industry which is embracing clean energy. Walmart has been rolling out solar on hundreds of stores. Ikea UK has been buying up entire wind farms in its bid to go 100 percent renewable. And car makers are increasingly greening their manufacturing plants, installing solar power and wind turbines as part of the process.
Big business versus big utilities
For the companies themselves, there are very good reasons to go green: The costs have come down dramatically; consumers are looking for responsible brands; and retailers like Walmart are putting pressure on their suppliers upstream to green up operations. Perhaps most importantly, businesses are also ensuring themselves against future energy shocks, locking in their energy costs for decades to come by buying the means of production.
For utilities, however, this emerging trend represents some significant challenges.
Demand for centralized electricity will not disappear any time soon. Solar, wind and other renewables still represent a tiny proportion of overall supply. Like airlines, however, utilities have benefitted from a cozy relationship with their business clients, which can be especially profitable due to economies of scale. Take away these big customers, and the burden of paying for those expensive power plants and mountaintop removal mines falls to fewer customers, and the combination of fixed costs and fewer customers means higher prices. Higher prices, of course, result in a greater attraction to alternative sources of power, and a decrease in investor confidence.
The old energy paradigm is becoming obsolete
This was a challenge highlighted in a report earlier this year from The Edison Institute, authored by Peter Kind, titled Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business, and which concluded that utilities must attack subsidies for renewables to protect their own interests:
"...the competitive economics of distributed energy resources, such as PV solar, have improved significantly based on technology innovation and government incentives and subsidies, including tax and tariff-shifting incentives. But with policies in place that encourage cross subsidization of proactive customers, those not able or willing to respond to change will not be able to bear the responsibility left behind by proactive DER participating customers. It should not be left to the utility investor to bear the cost of these subsidies and the threat to their investment value."
As anyone who has followed the debate over climate change knows, the discussion of subsidies and incentives is a thorny one indeed. While utilities and their allies may decry the impact of subsidies on their investors, environmental advocates and clean energy companies point to the massive direct and indirect subsidies enjoyed by the fossil fuel industries. From the historical government investments in rural electrification to the massive economic, social and environmental costs of coal-based power, it's hard to argue that utilities have been paying their way on a truly level playing field.
Entrench or innovate?
Finger pointing aside, advocates for clean tech argue that Kind's report for the Edison Institute correctly identifies the threat, but falls short when it comes to responses. Here's how energy experts Ron Lehr and Bentham Paulos of America's Power Plan frame the challenge in a post for Renewable Energy World:
While Kind urges utilities to circle the wagons, by making changes that would undermine distributed technologies and keep customer dollars flowing to utilities, we believe this approach is doomed to failure, and decidedly not in the public interest. Instead, the public interest — as expressed by both government policy and consumer preferences — demands that distributed generation and energy efficiency should be encouraged, not stifled.
That's not to say utilities and their investors shouldn't be concerned, nor that they don't have legitimate grievances. As Lehr and Paulos point out, the current regulatory model is based on an outdated, linear notion of supply and demand. As such, utilities are disadvantaged by every customer that generates its own power; they are burdened with higher costs by intermittent demand and supply; and they have little incentive to encourage conservation or efficiency.
Encouraging new business models
What's needed, argue Lehr and Paulos, is a new regulatory framework that allows utilities to innovate and evolve their business model. Under such a vision, utilities would no longer be the monilithic, near-monopolies that they currently are, but rather they'd evolve to become solutions providers, matching supply with demand and facilitating the exchange of power:
On the minimalist end of the spectrum, the utility can be limited to a role as a “wires company,” maintaining the part of the grid that is a physical monopoly — the wires and poles — while competitive providers supply the rest. At the other extreme is the “energy services utility,” which owns and operates all necessary systems to deliver energy services to consumers. Between these two, a “smart integrator” or “orchestrator” role involves utilities partnering with innovative firms to coordinate and integrate energy and related products and services without utilities necessarily delivering all of them.
The energy sector is evolving so fast that nobody knows what the future will hold, except that it will look nothing like the present.
What's self evident, however, is that energy prices should reflect the true cost of their sources. Utilities face the choice of playing a valuable, expert role in the transition to a clean energy future, or defending their corner and becoming entirely obsolete. For all the talk of undermining subsidies and maintaining the status quo, Apple, Google and Walmart may be forcing the utilities to innovate. And that can only be a good thing.
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