Why electric utilities must update their business models
Due to a variety of factors, the traditional business model for the nation’s investor-owned electric utilities, such as TXU or Reliant Energy, is in trouble.
In fact, these factors – led by a rapid movement away from the decades-old system of generating electricity from large, centralized power plants and distributing it to customers over an interconnected grid – is rapidly giving way to a new, decentralized structure that features varying types of distributed energy resources (DERs), most notably rooftop solar.
In utility parlance, distributed generation technologies are “disruptive.” Along with the growth in energy-efficiency measures and other technologies, DERs have significantly slowed electric load growth and – though it may not be recognized as such quite yet – could ultimately sound a death knell for utilities that have historically made money based on the volume of electricity they sell.
Put another way, utilities may soon face a future in which they will have trouble recovering fixed costs and making a profit.
It remains to be seen how utilities will react to these developments — and how the changing landscape will pan out for consumers. But we all have an interest in a stable model that keeps the lights on. If a local distribution company goes bankrupt, customers would no longer be able to switch electricity providers, even in areas that allow competition. And, since there are only one set of poles and wires, the utility bankruptcies could mean the government would have to take over to ensure the continued operation of the grid.
In response to these developments, several states including California and New York are looking at alternative business models to incentivize and integrate distributed resources into the grid.
Some experts have suggested that the “platform” business model, which creates value by facilitating exchanges between two or more groups, should be applied to the electric industry. Supporters of such a model envision the electric grid evolving into a platform on which DERs – including rooftop solar, energy storage, electric vehicle batteries and energy-efficiency products – bring in new revenue to the utility. However, so far most new products —like the Nest thermostat — save customers money but reduce utilities’ revenue.
During the spring semester, I taught a course with Fred Beach that delved into these issues. The graduate-level class, funded by the Energy Institute at the University of Texas, required students to examine six new and proposed business models and draft a report summarizing their findings.
Students analyzed each of the models to examine how they recovered fixed costs, made a profit, incentivized DERs and engaged customers.