What’s All This About the Utility Death Spiral?

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A new report from the American Council for an Energy-Efficient Economy highlights the challenges utilities face from increased energy efficiency and distributed generation. Though the report concludes that the future of utilities is unclear, it casts doubt on the “death spiral” model.

For well over a year now, the “utility death spiral” has been a catchphrase in the solar industry. We’ve all used it, and it’s easy to see why it would catch on. But what does it really mean? Are utilities actually going to die? 

As with many complicated questions, the answer is probably Yes and No.

 

Challenges for utilities

 

There’s no question that utilities are facing major changes. A January 2013 Edison Electric Institute report warned of the threat to utility profits from distributed solar. Now, a new report from the American Council for an Energy-Efficient Economy (ACEEE), The Utility of the Future and the Role of Energy Efficiency, takes a look at what that means. The report highlights these issues:

 

  • For decades, rising sales have led to increasing revenues and profits, which utilities and their shareholders have become accustomed to receiving.

  • With increased energy efficiency and solar (plus other forms of distributed generation), these growth rates are now slowing down.

  • This confluence of circumstances could lead to declines in future sales for utilities.

 

The ACEEE report examines several scenarios that could result from further increases in energy efficiency, solar electric power, and electric vehicles. The scenario the authors think is most likely would bring moderate results, with utility sales growing 0.04% per year — hardly death for utilities.

 

What about an extreme case? In the report’s most extreme scenario, energy efficiency would increase to levels now being achieved in only a few states, and solar power would be installed on nearly all available roof space. But even in this “extreme case,” the worst that would happen is that national electricity sales could decrease about 10% by 2040, an average reduction of 0.39% per year. That’s not enough, the ACEEE report concludes, to set off a death spiral.

 

Others have used more forceful, and colorful, language to express a similar position. Warren Buffett may not have used the word “bull$&!#” to describe the utility death spiral, but the sentiment has been attributed to him based on the fact that he’s still investing in utilities.

 

What’s behind the relative optimism about utilities? People need energy, and we won’t stop needing it even if we learn how to use a bit less. As Buffett was quoted as saying, “society will forever need massive investments in both transportation and energy.”

 

Still, utilities have reason for concern. We’re already seeing solar grid penetration of 10% in Hawaii, and as solar keeps getting cheaper it will only spread further. Greentech Media points out that distributed generation is already decreasing the demand for electricity from utilities.

 

Though many of us can’t put solar on our own roof, community solar is providing a path for more of us to participate in distributed generation. That need not be on rooftops but can take the form of all kinds of installations, including ground-mounted arrays or shade structures over parking lots.

 

Opportunities for utilities

 

Even the ACEEE report acknowledges that “the industry and their regulators will need to make substantial changes in the next few years.” That’s because even under the more likely scenario they looked at, sales could remain somewhat flat rather than growing in the manner to which utilities have become accustomed.

 

The report offers a few suggestions for utilities and regulators to avoid the death spiral:

 

  • Offer customers optional energy-related services, including energy efficiency.

  • Adjust rates so that fixed costs are fully recovered as sales decrease.

  • Give utilities financial incentives for meeting energy efficiency goals.

  • Reform ratemaking so that costs are fairly allocated and prices encourage energy efficiency.

  • Develop rules that help utilities offer optional services on a level playing field with non-utility providers.

  • Upgrade the electric grid so it can better handle increased amounts of variable and distributed generation.

 

The report also identifies a few things utilities should not do. My favorite: “When you’re in a hole, the first thing to do is stop digging.”

 

For utilities, ACEEE says, that means don’t invest too much in new generation, transmission, and distribution.

 

It also means finding new ways to operate. Some utilities, like NRG Energy and Edison International, are changing their business model to find ways to benefit from distributed generation. Those are certainly more likely to not only survive but thrive in the coming energy transformation.

 

A murky future

 

ACEEE, while eschewing the death spiral, acknowledges that utilities face serious challenges, and that their future “is far from clear.” As the report concludes, “One thing that is clear is that we are likely to face the old Chinese curse: ‘May you live in interesting times.’”