Three Ways Electric Utilities Can Avoid A Death Spiral RSS Feed

Three Ways Electric Utilities Can Avoid A Death Spiral

In the summer of 2016, two high-profile investment advisors declared “The Sun Will Set on Electric Utilities” in a well-read Barron’s article. Citing rising fixed costs and competition from energy storage and microgrids, Leonard Hyman and William Tilles predicted a “death spiral” for utilities where rising prices create ever-reinforcing incentives for customers to find cheaper power elsewhere.

But contrary facts and opinions surround the level of risk and disruption facing U.S. utilities. Will the utility industry prove unable to adapt to decentralization, suffering the same fates as Kodak to the digital camera, PacBell to the cell phone, or Blockbuster to Netflix? Certainly, new distributed energy technologies create significant risks on par with Hyman and Tilles’ prediction, but utility obsolescence is not a foregone conclusion. Three major opportunities – rehashing utility regulation and business models, electric vehicles, and grid modernization – exist for utilities to disprove the death spiral forecast.

Have Rumors Of The Death Spiral Been Greatly Exaggerated?

“Utility death spiral” was popularized in a paper prepared for the investor-owned utility trade group Edison Electric Institute (EEI) by investment advisor Peter Kind. Focused on net energy metering, Kind cited the one-two punch of sloppy pricing and distributed solar wreaking havoc on utility businesses. Other distributed resources like storage and microgrids could create similar problems utilities may be unprepared to handle.

Some facts support the death spiral theory. Utility bond ratings have slipped gradually since 1970, reflecting greater risk perception in the finance community.

Electric utilities are also selling less power, while increasing capital asset investments that put upward pressure on electricity prices. Retail electricity sales are down 1% since 2010, while annual investor-owned utility capital spending on distribution and transmission infrastructure has doubled since 2006 to $52.8 billion.

But in 2015, Mr. Kind outlined a robust set of solutions for the death spiral, calling for a transition to a “21st Century Utility” where utilities can pivot their business models and reinvent regulations to reward better service and lower costs.

Stock analysts seem to side with Kind and others who see electric utilities as growth opportunities rather than money pits – the stock index of investor-owned electric utilities rose 17.4% in 2016, beating the Dow Jones and S&P. Perhaps utilities are perceived as riskier borrowing partners, but their shareholders’ returns aren’t slowing down.

Utilities Are Remaking Their Business Models

Though it’s happening at a relatively glacial pace due to the constraints of the regulatory process, U.S. utilities are actively remaking their century-old business model of one-way power delivery.

New York, California, and Illinois are furthest along here. New York’s Reforming the Energy Vision proceeding is working to compensate utilities for increasing system efficiency, reducing costs, and enabling transactions between connected customer devices on the distribution grid. California’s utilities are slogging through a distribution mapping exercise that identifies the most valuable locations for distributed solar and storage, enabling customers and innovative third parties to compete to provide services obviating new utility capital investments.

Illinois’ Future Energy Jobs Act allows energy efficiency and smart grid investments to be treated as regulatory or capital assets, meaning utilities can earn returns on distributed solar and efficiency – in other words, pure profit for reducing sales. The CEO of ComEd, Illinois’ largest utility, sees opportunity here: “The platform becomes the place customers can come to acquire the things they need to produce the energy services they want…if the platform remains limited in what it offers, value will be drained from the utility to fill someone else’s value pool. We need to re-envision our platform as the place where customers come to find everything they need to meet their energy service needs, however they want to meet them.”

In these states, utilities become platforms that orchestrate the distribution system, while regulators consider new revenue streams rewarding optimization, rather than narrowly focusing on capital investment repatriation. States like Ohio and Minnesota are following suit, and utilities who participate in remaking their business models can ensure they are rewarded for increasing efficiency and enabling more services to reach customers, pivoting from the century-old model that relied on ever-growing sales and asset investment.

Read full article at Forbest