The participants in a panel this week put on by the California Public Utilities Commission and En Banc, “The Business Model for the Electric Utility of the Future,” might have been mistaken for a bunch of aristocrats at a tribunal during the French Revolution.
The panelists included the top executives from California’s leading investor-owned utilities, including Southern California Edison, Pacific Gas and Electric Company, San Diego Gas & Electric, and Southern California Gas Company, and while the guillotine is unlikely to be in their immediate future, they are faced with an uncertain strategic future and a market landscape that is transforming far more rapidly than they, or most of their regulators and customers, grasped even a year ago.
That uncomfortable truth was underlined by this week’s release of a report entitled Energy Darwinism, produced by a star chamber of analysts and managing directors from the energy practice at investment bank Citi. Its conclusions are stark: “A combination of energy efficiency and competition from new technologies … collectively could impact [utilities’] addressable markets by 50% over the next two decades.” That’s right, one of the world’s major investment banks believe that the business of conventional power utilities could be cut in half by 2033.
“Consumers face economically viable choices and alternatives in the coming years which were not foreseen 5 years ago,” according to the report, and the pace of change is likely to accelerate. “Investors, companies and governments must consider the sea change that we believe is only just beginning.”
To be sure, today’s utilities have established customer bases and billions in infrastructure that could enable them to weather the coming storm: “There are opportunities for new avenues for investment and growth in terms of smart grid, storage, and downstream services,” the Citi authors maintain. “The question is whether utilities grasp that opportunity and evolve themselves.”
Unfortunately, the evidence to date is discouraging. As you might expect from an industry with a business model that has changed little in a century, utilities are mostly fighting a rearguard action to delay change, not adapting to capitalize on it. A July feature in The New York Times described how “in almost panicked tones, [utilities] are fighting hard to slow the spread” of distributed renewable generation and the market mechanisms, in particular net metering, that are enabling it. Standing athwart history and shouting “Halt!” is seldom a winning strategy in today’s globalized, technology-driven economy.
“We did not get in front of this disruption,” Clark Gellings, a fellow at the Electric Power Research Institute, told the audience at a panel discussion at the annual meeting of the Edison Electric Institute in June. “It may be too late.”
Surf or Drown
Actually, it’s not. Utility revenue streams are likely to decline gradually, not suddenly, and the big utilities’ unique capabilities (well-described in a recent blog by my colleague Bob Lockhart) give them the opportunity to become the service providers, architects, and delivery mechanisms for all of the new forms of energy transmission and generation, from rooftop solar panels to microgrids to virtual power plants. Some utilities are trying to surf the waves of innovation and disruption rather than be swamped by them.
The municipal utilities in Los Angeles and Glendale, California have adopted decoupling mechanisms that should allow them to make money even as customers adopt energy efficiency measures and rooftop solar. A group of utilities that includes Duke Energy and Edison International have backed Clean Power Finance, a San Francisco-based startup that offers financial services and software to providers of rooftop solar. San Diego Gas & Electric has become a pioneer in the establishment and support of microgrids in its service area.
“But those are exceptions,” notes New York Times energy reporter Diane Cardwell. And they are not nearly enough.
Tags: Conferences & Events, Distributed Generation, Finance & Investing, Net Metering, Renewable Energy, Smart Utilities Program, Utility Innovations
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