The Edison Electric Institute (EEI) recently published a report titled “Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business”. Peter Kind, Executive Director of Energy Infrastructure Advocates (an investor lead initiative to educate and advocate public policy that is supportive of infrastructure development) and Senior Advisor to Macquarie Capital’s U.S. Utilities and Power industry group authored the report. In it, Mr. Kind predicts dire consequences for retail utilities and their investors from “distributed energy resources” (DER) and demand-side management (DSM).
Mr. Kind sounds the alarm from, predominantly, the utility’s point of view, drawing on investor behavior. His analysis of the likely outcomes matches what I have been writing, as do many of his recommendations. Perhaps his focus on the financial aspect will light a fire under utility CFOs to do something.
Competition For Existing Utilities – It Is All About Price
A lot of people think of SolarCity as a solar company. According to their CEO, Lyndon Rive, that is a mistake. They are not a financing company, either, although many have called them that because they finance the installation of solar panels with no money down. They are, instead, an energy company, and one that has big plans to compete for the customer electricity dollar.
In an interview with Fortune Magazine, Mr. Rive talked about what SolarCity is trying to do and how. His statements in the interview indicate how focused the company is on (1) clean energy, (2) competing with electric utilities for customers, and (3) the huge potential for solar growth in the U.S.
Electric utilities need to gear up for competition at the point of use. They need to look at their prices and determine when they will be subject to retail competition from solar. They need to figure out the best ways to meet that competitive threat. Time is very short; the utilities need to act now.
Lyndon Rive on the type of company SolarCity is:
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.
Lower sales, lower prices, lower profits, disruption on all sides. What is a utility to do?
This is a follow up to my post Just The Beginning Of The Awakening To Disruption From Alternative Energy. It turns out that last month Germany drastically reduced its forecast for grid expansion.
In my original post I talked about how a consultant told the NARUC conference “that cost alone will drive the power industry toward “non-transmission alternatives” (NTAs).” (NTAs include all forms of distributed generation plus energy efficiency.) Quite simply, energy efficiency, solar, combined heat and power (CHP), and load response will make additional new transmission unnecessary. Now that has occurred in Germany.
The Network Agency in Germany had projected an urgent need for 74 new power lines spanning 3,800 km. Now it thinks the urgent need is only for 51 lines of 2,800 km. Though not explicitly stated, it could be that the slowing in the development of offshore wind reduced the urgency of the lines necessary to carry the power from north to south.
One key result is that “two of the main cost drivers in the energy transition have been reduced considerably: offshore wind and grid expansion.” With the continued, electrifying growth of solar power in Germany, I expect urgent transmission need to further decline.
On October 25, 2012, the Texas Public Utilities Commission (PUC) decided to rely on market prices to provide adequate capacity instead of creating a capacity market to reward central station power plants, opening the front door for customer participation in the market through load response, energy efficiency, and solar.
On October 25, 2012 the Texas PUC decided to rely on market energy prices to provide adequate price signals to customers and producers with regard to the value of electricity in ERCOT. The Texas PUC voted to allow price caps to increase to $9000/MWh by 2015 from the current maximum of $4500/MWh. For reference, the average daily market price in ERCOT typically is $25-30/MWh and the average daily peak price typically is $40-50/MWh.
Texas faces a potential shortage of electric generating capacity, which could cause brownouts or rotating blackouts in two or three years. The Brattle Group presented three alternatives: 1) keep the current energy-only marketplace, 2) keep the current energy-only marketplace but add administrative programs to encourage demand response to help ensure adequate generating capacity, or 3) create a capacity market, similar to PJM, to pay central station power plants for existing and being able to generate power if needed.
The Brattle Group’s evaluation all but recommended door number 3; the Texas PUC chose Continue reading
Non-Transmission Alternatives (Distributed Generation, Energy Efficiency) Take Spotlight At NARUC Conference
A consultant from Synapse Energy Economics, Doug Hurley, tells the National Association of Regulatory Utility Commissioners (NARUC) “that cost alone will drive the power industry toward “non-transmission alternatives” (NTAs).” NTAs include all forms of distributed generation plus energy efficiency. The FERC Chairman and state commissioners recognize regulatory rules do not give economically correct signals, and instead favor the existing paradigm.
That’s getting pushback from traditional transmission suppliers who see themselves left providing the backup power for consumers who expect to pay little each month but be able to turn to the grid on the hottest summer days or during blizzards.
Speakers said major transmission providers are already asking state regulators to require users with larger on-site generation capacity to pay grid stand-by charges. They also worry large new investment in transmission lines may end up being stranded as more areas find ways to meet their electric needs with NTAs.