Navigant Research Blog

In 2014, Utilities Must Adapt or Retreat

Dexter Gauntlett — January 8, 2014

In 2013, the majority of utilities could still afford to keep their head in the sand, ignoring the crisis presented by distributed renewable generation to their bottom line now and in the future.  In 2014, this will not be the case.  Electricity sales of centralized utilities will continue to decline because of continued investment in energy efficiency and onsite distributed renewable energy generation from both residential and commercial and industrial customers.  This erosion of electricity sales will cause utilities to recover their costs by adding fees and/or increasing rates, which will increase the cost of utility-delivered power.  As a result, the economics of distributed generation will potentially be even more attractive to end users, further accelerating the deployment of renewables.  This is the utility death spiral.

As covered in Navigant Research’s report, Distributed Solar Energy Generation, distributed solar PV deployments in particular will continue to accelerate, including in nontraditional markets such as the southeastern United States.  The low cost of electricity in the Southeast has hampered wider adoption compared to the West Coast and Northeast, where high-cost retail electricity rates have made renewables more attractive.  In conjunction with falling renewable technology costs and incentives reduction on the horizon, many customers are making their moves, presenting a great opportunity for forward-thinking utilities in both the residential and commercial markets.

Adaptive Action

Meanwhile, financing has made solar PV available for little to no money down.  Advanced module-level power electronics – as covered in Navigant Research’s report, Microinverters and DC Optimizers – are bringing more rooftops into the fold and increasing the overall energy harvest.

Those utilities that have grasped this threat are taking action to adapt to the changing market environment in the following ways:

  • Taking their case to the public utility commission and requesting fees on those customers with onsite renewables
  • Limiting net energy metering (the ability to send power back to the grid and be compensated at retail rates)
  • Getting into the distributed generation business themselves

Some utilities are doing these things in conjunction.  Utilities have many of the most important components that are required to make the latter option feasible, including a captive customer base, generally high trust among their customers, access to low-cost capital, and solid expertise in operations and maintenance and customer service.  Taking this plunge is no easy decision for companies that are traditionally slow-moving.  But there are few other options.  Utilities may have noticed the writing on the wall during the past few years, but 2014 is the year they will have to do something about it – or it will be too late.

One Response to “In 2014, Utilities Must Adapt or Retreat”

  1. Raguram Sellakkannu says:

    It will be interesting to see how utilities would react if the utility death spiral were to resurface again. Limiting net metering can of course cause a setback to renewable investors. However, as you mentioned, renewable will look more attractive in case retail electricity prices were to go up significantly.
    Nice insight. I did not know that distributed generation would trigger the utility death spiral.

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