Will large capital-intensive power plants become the buggy whips of the 21st century, finding themselves in the undesirable position of no longer being needed?
Rob Wile of in Business Insider seems to think so. “It’s been a good run,” he says in the closing line of his assessment of the outlook for the electric utility industry. Citing the sector downgrade by investment bank Barclays from “market weight” to “underweight,” which refers to how much utility investment they are recommending for a typical portfolio, he sees trouble ahead.
That trouble comes in the form of residential solar, which is increasingly taking on the form of a perfect storm from the utilities’ perspective. First, the price of installed rooftop solar has plummeted, falling by half since the year 2000. That led to a rising number of installations, but the utilities could still count on continued sales since they continued to serve as the primary source of storage in the grid-connected systems that have been the predominant configuration. But now the cost of battery storage, helped along by the commercialization of electric vehicles, has also dropped. And if Elon Musk keeps his promise about a super-factory for batteries, the price will drop even further. In this case utilities will be the provider of last resort, only used when all else fails. Yet, even that requires the utilities to maintain roughly the same level of infrastructure as they do today, with little in the way of revenue to show for it.
It is somewhat reminiscent of the old saying, “why buy the cow, if you can get the milk for free?”
The problem is, we need to keep the utilities around, at least for the foreseeable future, because we need them to maintain the grid and to continue to deliver power those who can’t generate their own and also to those who can during those long cloudy spells, when the solar panels are idle and the batteries drained.
The fact that people, in increasing numbers, are essentially downloading their electricity from the sun for free, has led Edison Electric Institute to issue a report called Disruptive Challenges that confronts the existential threat being posed to the industry by accelerating penetration of distributed energy resources, demand side management, and energy efficiency. The authors raise the specter of “irreparable damages to revenues and growth prospects” as the scenario plays out.
So if we still need to keep utilities around but their business models are no longer viable, something has to change. That is the question being pursued by eLab at the Rocky Mountain Institute. They have convened a wide variety of stakeholders including utilities, regulators, renewable providers, and customers to dialog about the issue in search of workable solutions. Their first step was to outline a set “of principles that should guide the creation of new business models.”
These are included in their report entitled, New Business Models for the Distribution Edge. The distribution edge is defined as, “the interface between the electricity distribution system operated by utilities and the rapidly growing portfolios of energy assets, control systems, and end-use technologies at or near customers’ premises.”
The old business models and rate structures no longer apply to the reality of today’s world. In the new models, “Rates must be restructured to provide clearer signals about the costs of electricity service… In order to progress to a future where distributed resources can provide real value and reduce costs of electricity service overall, we must transition to refined pricing structures that reflect diverse service needs and offerings.”
When the game has changed this much, it’s time to change the rules, too.