A Nonprofit Energy 
Research Organization


The Biggest Risk Yet

If the road ahead for California and the rest of the US simply involved growing existing conventional technologies or their applications, there wouldn't be a need for SEP.  But in our estimation, and in the minds of many others in the energy industry, the next-generation energy systems significantly up the ante – utilities and other energy companies face a real and unprecedented risk of rapid technological advances - overwhelming their efforts to plan and control transitions in their own businesses, and resulting in the loss of customers and revenue.   Past changes have resulted in shifts in the utility business model, and adjustments to how utility costs are classified and collected from ratepayers. But no previous challenge poses the threat, as the current technological evolution does, of significant loss of customers and revenues.

It is tempting to draw parallels between the challenges ahead for utilities and energy companies, and those faced in the past by telecommunication companies. Unfortunately, the parallels are few. Telecommunication companies were faced with new technology that rendered their entire system and suite of services obsolete. There was no middle ground, you either used landline technology and stayed on the old system, or you adopted cellular technology and bypassed the old system completely. Electric utilities and energy companies, in contrast, are facing erosion of their services on the margins of their system. If telecommunication companies faced death by guillotine, electric utilities and energy companies face the death of a thousand cuts.

The grid is expected to play an important role for the foreseeable future, with new technology adoption primarily threatening utility-owned generation, and at the customer site, metering and energy management. Self-generation will erode some demand for grid services, and storage could eliminate a customer’s need for the grid altogether. Utilities will obviously play a pivotal role in the evolution of the energy services industry. Punitive tariffs, designed to discourage customers from adopting new technology, could raise the costs and “hassle” of dealing with a utility, effectively drive customers off the grid. Adoption of tariffs and rules designed to encourage interaction with the grid, on the other hand, could create an orderly transition to a flexible and interactive utility grid, with a minimum of grid flight.

Managing Change

Managing the change from the monolithic, “top down” electricity grid of yesterday, to the multi-faceted and more complex systems of tomorrow will engender a debate, often heated, among the companies vested in the status quo, the companies vested in the energy technologies of the coming century, the consumers and ratepayers of electricity and other energy products, and regulators and legislators. Historically, debates over changes to the utility and energy business have been driven and dominated by the potentially-affected utilities and energy companies – causing, for example, the ultimate failure of California’s competitive electricity markets (due to regulators and legislators ignoring early warnings about how the overly-complex market structure proposed by utilities would invite “gaming”), decades-long delays in the penetration of energy conservation and renewable energy technologies over the past 40 years, and the delay and marginalization of Community Choice Aggregation in California. If this disturbing trend is to be altered, the companies and individuals with an interest in the development and use of sustainable energy systems will need to better organize, communicate more forcefully, and advocate and educate consumers, regulators, and legislators. It’s important to recognize that in a regulated monopoly structure, which describes the majority of US utilities, utilities face change-related challenges on two fronts: 1) change in the marketplace, such as new technology and changing socioeconomic conditions (and changes to utility business models to adjust to it), and 2) regulatory oversight and restrictions that may inhibit a utility’s ability to unilaterally make the desired changes. In a recent industry survey, utility CEOs identified regulatory restrictions as the most significant barrier they face in adapting their companies and business models to changing market conditions. Thus, it is difficult to separate utilities from their regulators, and important to recognize that if effective change is to occur, it will involve a consensus between both utilities and regulators.

The Energy Industry and Change

Sustainable energy systems will combine renewable, customer-sited generation, new control technologies, and rapidly-evolving batteries and energy storage technologies. EV adoption, involving vehicles that could be charged at fortuitous hours, and discharged back into the system when needed, is already occurring and accelerating. These technologies will empower energy users to unprecedented levels – the notion of a customer being “stuck” with their monopoly energy supplier may well become a distant memory. The tumultuous times ahead are viewed by conventional electricity service providers and energy companies as a risk to their businesses unlike any other they've faced before. Oil, gas, and coal companies are the natural allies of utilities in this transition, since power generation is a significant component of their customer base. Thus, the resources and political influence of those protecting the status quo are significant, and they’ve already begun. Full-page ads taken out by California utilities appear at first glance to be feel-good pieces describing their company’s role promoting renewable energy. But a closer read reveals another message: they serve notice that costs, reliability, and safety will be the front-line issues used to erect barriers to widespread renewable development. 

Utilities are at a crossroads – they may either embrace change and facilitate the transition to sustainable technologies while carving out a profitable niche for themselves, or as most seem to be doing, they can delay change as long as possible, thereby buying themselves more time to adjust to the changes ahead. California’s utilities have already begun, and will continue to develop and impose punitive rates and fees (e,g, solar user fees), and promote regulatory rules and policies (e.g. proposed modifications to net metering being considered nationwide) to dampen and discourage customer self-generation. This kind of reaction to technological change, combined with other new rates and fees and other delaying methods, will only contribute to the problem by making traditional grid-supplied power more expensive, disenfranchising customers, and ultimately pushing customers away from flexible (and otherwise mutually-beneficial) relationships with the grid. This push-pull dynamic of largely unintended consequences has been mistakenly coined by “experts as the "utility death spiral". We believe a more measured and considered approach to evolution of the utility services business could avoid the “death spiral”, and allow an orderly transition. Few utilities and energy companies hope for total victory in the war of renewables versus the fuels of the past; most will focus their efforts on slowing new technology adoption as much as possible. Simultaneously, they will pursue initiatives to encourage the deployment of renewable generation and other new technologies by utilities, and not their customers or third parties. If the past is a good indicator, utilities and energy companies will work at the local, state, and federal levels of government to achieve their goals.