By Peter Fox-Penner
In today’s economy, the business climate for all industries has become more challenging. For a moment, imagine you produce a commodity that is vital to the national economy and used by everyone in U.S. Unfortunately, your production methods pose widespread health and environmental risks to the entire globe. You have some great ideas about how to produce and deliver your product in more sustainable ways but the technology is still costly and unproven. Legislative mandates will soon make these new technologies mandatory, but there is great uncertainty over what these regulations will look like and when they will take effect. To top it all off, you are asked to encourage your customers to use less of your product while charging them higher rates to recover the costs of your investments. These are the business challenges facing the utility industry today.
Multiple policy options to address the impact of climate change are currently under debate in the U.S. and many will significantly impact the energy industry. Even in the absence of comprehensive climate legislation, utilities need to shift their focus to the development and acquisition of new sources of renewable energy and low-carbon power. To do this, the utility industry faces investments on the order of $1 to 1.5 trillion to retool its infrastructure at a time when energy efficiency goals are increasing and electricity sales are declining – taking utility profits down with them.
As the industry adjusts to these technology and paradigm shifts, the foundations of the original utility business model are becoming obsolete. As I review in my recent book, Smart Power: Climate Change, the Smart Grid, and the Future of the Utility Industry, the utility business was built with the goal of obtaining higher and higher sales to sustain profits. In place of the traditional sales incentive, the mission of individual utilities should mirror the larger energy mission of a sustainable business practice: provide the greatest level of services using the lowest amount of energy possible. While challenging, a business model directed at this goal is not impossible. By making energy efficiency one of their core business missions, utilities can boost the Triple Bottom Line for everyone: fueling economic growth, promoting environmental stability, and changing social attitudes towards energy usage.
For utility executives, a key strategy for surviving the business climate described earlier is to focus on becoming the trusted, go-to source for the lowest-cost energy services. Utilities are well suited to manage energy efficiency programs and advise customers on the most energy efficient technologies. As Smart Grid technologies become available to homes across the U.S., they will represent additional opportunities for utilities to provide customers guidance on new programs and technologies, yielding even greater energy efficiency savings.
There are some policy changes that can aid this transition as well. One positive step towards making energy efficiency work for utilities is the adjustment of regulated utility tariffs, called decoupling, which allows utilities to still receive the profits that they sacrificed when implementing specific energy efficiency programs. More recent developments, such as programs that treat utility expenditures on successful energy efficiency programs the same way they treat expenditures on a new power plant, are also realigning business interests with the public goal of saving energy.
In short, the combined impacts of climate policies, the Smart Grid, and energy efficiency will prompt utilities to undergo the largest and most significant changes in their history, transforming them from regulated commodity energy firms to low-carbon network operators. Making energy efficiency a profit center and a core mission of utilities is one key to this transition.
Peter Fox-Penner, principal and chairman emeritus of The Brattle Group, specializes in economic, regulatory, and strategic issues in network industries. His recent book, Smart Power: Climate Change, the Smart Grid, and the Future of Electric Utilities, examines innovative business models for the changing utility industry.