We are in the midst of a systemic upheaval in how our electricity is produced and distributed, brought about by market forces, technological advancements and policy.
“Utilities will need to establish a new set of business models…and current regulations may not be up to the task,” says Ronald Binz, recently nominated by President Obama to head the Energy Regulatory Commission.
On Wednesday, I attended a conference in Ann Arbor, Michigan, titled, “How will ‘Disruptive Challenges’ in the Electric Markets Impact Michigan’s Energy Decisions.” The word “disruptive” always turns my head, so I had to go. And the presentation Binz gave, Utility Sector Disruptive Changes, really encapsulated the pressures bearing down on the energy industry, demanding change.
Here’s my own personal take on what Binz said…
Growth in electricity demand is flat
If you’re a utility company, you’re looking down the barrel of very little market growth in the amount of product you’re selling: electricity. Back in the 1950s and 1960s, electricity market growth was over six percent per year. That’s good for business! But now it’s under one percent and is predicted to stay there. Folks are conserving more electricity with better appliances and they’re not going back. Even significant growth of electric car use won’t budge demand much.
Utilities have shrinking access to credit
Just at the moment when utilities have the biggest need to change and upgrade, they have the lowest access to credit to do so.
Back in the 1970s, 60 percent of shareholder-owned utilities had an AA credit rating or above, and the other 35 percent had an A credit rating. Today, over 70 percent of shareholder-owned utilities have a BBB credit rating or below.
New technologies are skimming customers off utilities
Already weakened by lower demand growth and and shrinking access to credit, utilities are seeing a rise in “distributed generation” sources, like rooftop solar installations, which are increasingly bypassing utilities altogether. The potential loss of customers through these distributed generation sources is huge. And remember, if it’s more than the one percent market growth, it could easily lead to a market loss. A contraction. Solar is predicted to grow to three percent of national power production by 2016. So the market contraction for utilities may come sooner than the utilities are prepared for.
Lawmakers are seeking realistic responses to climate change
Our planet is warming and nations around the world are struggling to curb the main culprit, carbon dioxide from human activity. On Tuesday, Barack Obama gave the nation’s first ever clear strategy for combating climate change. Two key components: more energy efficiency and regulating carbon dioxide as a pollutant. Translated, even lower market growth (possibly market shrinkage) and massive, costly investments in plant upgrades.
The bottom line is, utilities cannot continue with the same business model they’ve had for the past century. Disruptive changes to the energy sector are already here and their significance is growing fast. Many folks will argue, as they always have, that all that needs to happen is regulations need to be loosened. The argument will be that the EPA and regulatory agencies need to back off, or even be dissolved completely, and the utilities can go on like they always have. But that’s simply not the case.
Consumers won’t go back to using more electricity. New technologies in distributed energy generation like solar aren’t going to disappear or be rolled back in efficiency and cost. Banks and credit rating agencies aren’t suddenly going to turn a blind eye to a utility’s reduced ability to pay them back.
Utilities need to change their business model and regulators and lawmakers need to help make that transition easy and profitable.
The conference was hosted by the University of Michigan Erb Institute, the Michigan Energy Innovation Business Council, the Institute for Energy Innovation, 5 Lakes Energy, Next Energy, and Growth Capital.
[image credit: Liesl Eichler Clark of 5 Lakes Energy]