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Electric utilities face a cloudy future as revenues fall and alternatives multiply

Among the challenges facing utilities: Fixed and capital costs will increase as limits on greenhouse-gas emissions are tightened and "massive investment" becomes necessary to maintain and upgrade transmission lines and distribution networks.

Xcel Energy's request this week for a $291 million rate increase, the largest in Minnesota history, underscores the relevance of "The Future of Minnesota's Electric Utilities," a discussion held on Friday about the current and future challenges of utilities. 

Because the discussion was convened by Environmental Initiative, a solutions-oriented outfit above all, I was hoping to come away with something like a roadmap, or two or three, that I could share with you for the journey we are all making together into a world of more renewables, higher efficiencies, and fading distinctions among power producers, distributors and consumers.

But I came away thinking that it's pretty much anyone's guess how utilities and their customers are going to make their way in the coming world, and how they're going to rise above a set of present-day challenges that seem dauntingly large, complex and urgent.

And that ought to be of highest concern to all of us, because however we may feel about big utilities and the energy systems centered on them, it is hard to put too high a price on their delivery of pretty much all the power we need, at a price we're more or less willing to pay, in a system where our only responsibility is to flip the switches up and down.

The revenue 'death spiral'

Let's start with the utilities' present-day problems as outlined by Bill Grant, the Minnesota Department of Commerce's deputy commissioner for energy resources.

Chief among these problems, he said, is long-term revenue erosion, traceable primarily to steadily declining electric consumption.

U.S. electricity demand growth, 1950–2040

Source: Minnesota Division of Energy Resources
Electric consumption has been declining steadily. (Shown in percent growth.)

In the 1980s, when Grant was working in state's Department of Public Service,  the forecast was for U.S. electricity consumption to climb at a steady, straight-line rate of 7 percent per year ... forever.

However, growth rates have been falling steadily for some time, and the most recent forecasts of the U.S. Energy Information Administration show the trend line for demand growth flattening out at around 1 percent from now through 2040, with actual demand growth falling into negative territory in recent years.

This would be an unhappy circumstance for any business, but it's especially problematic for utilities because in their century-old model, today's rising costs are recovered with tomorrow's growing sales — especially increased capital costs, whether the coal-fired power plants of yesteryear or the new transmission lines of tomorrow.

If costs rise and demand doesn't grow, the utility has little choice but to raise rates — which continues to drive down demand, especially as customers find new ways to conserve or even make their own power.

You often hear it said that declining electricity demand in the last handful of years is all about economic slowdown. Grant said, however, that recent data suggest many conservation and efficiency measures adopted during the recession will outlive it. Meanwhile:

  • The cost of customer-owned generation continues to fall, especially for solar-powered systems. One of Grant's slides showed the cost of systems smaller than 10 kilowatts falling from above $10 per watt in the year 2000 to as little as $1.50 in 2020 — a year in which, he said, some forecasts suggest such small power plants may provide 10 percent of our electric power.
  • The technology of energy efficiency continues to advance, on everything from LEDs for interior lighting to "smart grids" that fine-tune the balance between electricity production and consumption.
  • Utilities' fixed and capital costs will increase as limits on greenhouse-gas emissions are tightened and "massive investment" becomes necessary to maintain and upgrade transmission lines and distribution networks.
  • Because these costs can't be recovered by raising rates as sales decline, utilities face long-term revenue erosion on a scale that could become a "death spiral."

If there is a clear pathway out of this predicament, neither Grant nor the speakers who followed him has found it, and there seemed to be general agreement with an observation offered by Lena Hansen of the Rocky Mountain Institute (RMI) — that "the problems in this sector are much better understood than the solutions."

'Decoupling' is only a start

One starting point seems to be breaking the relationship between utility revenues and electricity sales, or what policymakers call "decoupling." And while some early experiments with decoupling are under way at Minnesota utilities, Grant seemed to voice a consensus in saying that decoupling was but a first step, necessary but not sufficient to creation of future business models for today's utilities.

Hansen, who specializes in electricity matters at RMI — the progressive research and policy outfit founded by Amory and Hunter Lovins near Aspen, Colo. — said that "distribution is where the action is" in emerging energy technologies. That's because we're moving rapidly toward a system in which many businesses and households will no longer be simply consumers of electric power, but "prosumers," both generating and consuming it.

Therefore, today's utilities would be smart to transform themselves into coordinators, stewards and integrators, focused on making sure the electricity made by their own big power plants and a growing network of small-scale producers is delivered reliably over networks, which they may or may not own.

One such transformation has just occurred in Germany, she said, where RWE, the nation's second-largest electric utility, has announced a new strategic plan in which it will become a sort of consulting company, linking and advising other entities who take over its working of making, distributing and pricing electric power.

The point is, somebody has to take over the utilities' role in ensuring the reliability, resilience, security, environmental responsible and social equity of electric power systems — factors that in themselves are going to be more complex as new systems evolve.

Another cornerstone of the old utility model — providing electricity to everyone in a given service area — is also going to disappear, Hansen and Grant both said.

New technological divide

And just as the rise of the Internet created a "digital divide" between people who could afford to participate in the new world of the Web and others who couldn't, Hansen believes that advances in small-scale generation raise the prospect of a similar divide between "some who can afford to do all the cool new things and others who are stuck with the old stuff."

And she thinks addressing that prospect could actually be a good business for a utility interested in serving as a "financial aggregator" to help provide financing for homeowner and small-business investment in systems that, while increasingly affordable, can be enabled or accelerated by loan programs and the like.

Representatives of all the state's major utilities were present on Friday morning, and talked about their different views of the future, as well as certain steps they're taking to modernize. I would like to say I heard the glimmer of a vision of a new business model in their comments, but I did not.

And this is really kind of worrisome, given Grant's dire trend lines on downward demand and revenue, combined with Hansen's stirring examples of new possibilities for electric-power systems immeasurably better than those we have now.

Because somehow we have to get from here to there, traveling in the company of (mostly) private entities whose bedrock business models haven't changed or needed to change for a hundred years, and are now being forced to change by factors outside their control and perhaps, in some cases, their understanding.

Regulation, you may be thinking — that must be the answer. After all, utilities are closely regulated, and surely the regulators can figure all of this out.

Hansen's view is that deregulation is happening and happening rapidly right now, not because of changes in the government sector but because "we're seeing deregulation by default, as customers decide to do their own thing anyway."

Grant, answering a question from the audience, observed that while Minnesota's Public Utilities Commission does many things quite well, it ranks in the bottom quartile among the states in the key resource of staffing.

Should utilities be nimble?

But the most quotable take came from Mike Bull, a longtime state official focused on energy matters who now works for Minneapolis-based Center for Energy and the Environment.

He praised Minnesota's utilities for their embrace of state laws and policies that have made the state a national leader in renewable power sources, emissions reductions and conservation programs, but then said:

"Utilities are not nimble. They're not designed to be nimble, and we haven't really wanted them to be nimble. We have set up the system in this way because we want to be sure that if a utility makes bad decisions, it makes them very slowly," leaving time for course correction.

Problem is, we seem to be entering a world in which we need our utilities to make very good decisions, not necessarily in line with self-interest. And to make them in a hurry.

 * * *

Environmental Inititiative does not make audio or video recordings of its meetings available for viewing afterward — which might be worth rethinking on a topic of such high public interest as this one — but the speakers' slide presentations and bio materials can be viewed here.

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Comments (4)

Decoupling electric sales from profits

A couple of decades ago, an idea was brought to the Public Utilities Commission (PUC) by the Citizens Federation and others to decouple electric profits from the volume of sales, by means of a variable rate of return based on the energy efficiency of each residential and business customer. In other words, the utility is rewarded with higher profit per unit sold if its customers use less electricity, so the overall profits stay about the same; and they'd get a lower profit on electricity that was not used efficiently. This would give a powerful incentive for utilities to engage in "demand-side management" and efficiency of their customers.
It could also include incentives for customers to use solar or other alternatives. This system would set the stage for utilities to finance the efficiency improvements for their customers, with long term amortization on the customer's bills. The scenario would be that the customer uses less energy than before due to the improvements, but pays off the cost of the improvements, so that the overall customer bill remains about the same, until the improvements are fully paid off.
Unfortunately, these ideas did not garner much interest from either the PUC or the electric utilities.

They fundamentally don't make sense

The fact that people using less energy is bad for their business only underscores how the entire premise of energy for profit has backwards incentives, since any sane society should be tryng to use not only less, but much less, energy in the coming decades.

A wind turbine in every backyard?

Take away the massive direct subsidies to wind and solar and utilities will be just fine. And Excel Energy has integrated a higher percent of expensive wind power than any other US utility. That's one reason that they need a rate increase.

Not so much

The trend line in the demand graph above has been on a steady decline since the 50's. The issue cannot be pinned on wind and solar, which in any case need to be nurtured in order support a gradual move away from fossil fuels, to the extent possible. That is what subsidies are for, to nurture new techs and new industries that would otherwise be too expensive to compete early on, and is an essential role for government to play. It will do us little good to protect a fossil fuels based industry when the cost is an ecosphere choking on pollutants and a planet that is warming to the extent that it will be impossible to support 7+ billion people. Society needs to be focused on the big picture, not on protecting an industry with an outmoded, 100+ year old business model. And while some might favor nuclear, in the wake of Fukushima it's just not going to happen. Adapt or die.