Disruption On All Sides – What Is A Utility To Do?

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Utilities and generators face lower sales, lower prices, lower profits, disruption on all sides. What is a utility to do? It must identify and defend existing advantages and become a disruptor itself where there is no defense.

Technological change and regulatory requirements besiege utilities and independent generators today as never before. New means of delivering what customers want appear daily. Regulators increase demands to implement social programs, not always recognizing the full implications. Utilities struggle with a business organization designed for another time. Generators watch as lower demand leads to excess supply, leads to cratering prices, leads to capital destruction.

Most of utility / generator money is in assets, power plants and distribution. There is a huge incentive to protect their interests, to keep doing what they already know how to do. This means keeping the central station / distribution paradigm.

But the advent of new, distributed technologies eats away. Energy efficiency is already cost-effective, solar on rooftops increasingly so. Energy efficiency lowers sales. Solar on rooftops lowers sales. Lower sales mean lower prices and profits for generators without rate base regulation, lower profits for generators with rate base regulation, and lower sales and profits for all utilities.

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Lower sales, lower prices, lower profits, disruption on all sides. What is a utility to do?

Clayton M. Christensen, author of the Innovator’s Dilemma, thinks he has the answer. In recent his article, Surviving Disruption (with Maxwell Wessel), he posits that existing industries facing disruption must evaluate it carefully (note that careful evaluation means understanding your customers’ wants and needs, not the financial indicators) and then do two things. First, identify where your advantage is likely to persist and take actions to defend that advantage. Second, where your advantage is under the most threat, become a disruptor yourself.

Defending Existing Advantages

For utilities, to keep the existing paradigm alive, they need a way to keep up demand for lots of electrons that will require their power plants and grid. The only new application on the horizon to do this is electric vehicles (EVs). So, just as utilities used to lease water heaters and refrigerators and other appliances that consumed their output, now utilities must do an all-out promotion of EVs.

First, they should lease EVs as cheaply as possible to broaden penetration, piggybacking on finance offerings of the manufacturers. They should not limit themselves to just cars for residential customers. They should focus on electric buses, electric garbage trucks, and other municipal vehicles. Initially, they should not try to make money on the lease, just break even as the goal is more electricity sales.

Second, they should make their territories EV friendly by saturating them with EV charging stations. These stations should work like a parking meter; you put in a fixed dollar amount for up to a fixed quantity of kWh (e.g., $2 for 10 kWh). They should not try to meter the output and charge per kWh; the goal is to provide a service, not a commodity.

The parking meter approach will encourage more sales at higher margins. People will want to completely “top up” for the simple convenience factor, which means they will purchase whatever quantity they need to top up, even though it may be more than they actually need. With the parking meter, most people put in a couple of extra coins “just in case”; the same will be true here.

Fully backing EVs will help forestall the decline of existing central station power plants, transmission, and distribution. However, it will not stop it. Ongoing, increasing research into solar and batteries, especially, is bound to make distributed generation more attractive and to reduce utility kWh sales. The same is true of energy efficiency. As more of the public gets behind addressing climate change, both these trends will accelerate.

Becoming The Disruptor

To become a disruptor themselves, utilities must become the fulcrum for energy efficiency and solar distributed generation. Utilities need to stop thinking of their product as kWh and start focusing on what the kWh do for customers. There was a time when electricity brought new products and solutions to people: light, refrigeration, washing machines. Utilities knew electricity was just a means to provide these things and they happened to settle on charging for the input, kWh, instead of the output. Over time, they came to think of their product as kWh and their customers as “ratepayers”. This is the source of their dilemma today.

Some utilities still identify their customers real needs and try to serve them in the best way possible, whether that means supply in kWh or energy efficiency, or solar. All these utilities are municipals or coops, which clearly have different drivers than investor-owned utilities (IOUs) (see Munis and Coops Interested in Low Costs For Customers, Palo Alto Solar, and Austin Energy). IOUs must re-adopt this customer focused approach if they are to disrupt the disruptors.

The place to start is with solar and storage. Some buildings will be more favorably situated to produce solar power and will be able to produce more than they need, while other buildings will be unable to produce solar power, or to produce it only at an expensive price. Utilities should start identifying the best buildings in each neighborhood and installing solar on them for free. They should meter the power and charge the host and subscribers at a price that provides an adequate return. The host would be allowed to contract to purchase whatever share of the output they wish with the remainder offered to neighbors at either a fixed price or through an auction (depending on the cultural environment). There will be no net metering; unused excess would be purchased at a contracted price that mimicked a feed-in tariff and was calculated to ensure profit on the resale of the excess.

As an additional feature, the utilities should offer a lease for on-site storage for customers. This storage would be used to bank unused shares of solar output and as a source of power during outages. Initially this storage likely would be small because storage is expensive, but as storage costs dropped over time, it could become a significant portion of monthly use. The back up power feature during outages would be especially attractive and would allow additional value pricing.

Once utilities have set up the internal systems and hopefully minimal legal requirements for solar and storage, they can extend themselves to leasing energy efficiency. Where solar and storage would have a small number of types of installations, energy efficiency is a house by house, building by building battle where each skirmish is different. Additionally, by being inside living and working spaces, the chances for dissatisfaction are much greater. Offsetting these issues is the much greater potential profitability from energy efficiency. Energy efficiency has to be part of the overall plan for becoming the disruptor.

A prominent European analyst notes “As energy markets migrate more towards fixed-cost structures, energy utilities need to migrate towards fixed-cost pricing models.” Distributed rooftop solar, energy efficiency, and electric storage are all fixed cost structures. They have, essentially, zero variable costs. They offer additional services customers value highly, i.e., outage protection.

If utilities do not take an active role to address disruption, they will be doomed to a few decades of fighting a losing battle against renewable energy and their own customers. This is bad for society and certainly no fun for the people who work at the utility. Why not return to serving customers’ needs in the best possible way instead of fighting a rearguard action defending the past?

Change is hard, but running and working for a dying company is harder. The first utilities that take this step will get the best deals from their regulatory agencies. The time is now.

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