Utilities under threat

Illustration by Paul Blow
Illustration by Paul Blow

For a glimpse at the legacy of yesterday’s electricity business, one can travel to the Southeastern U.S., where two massive nuclear reactors are being constructed at the 2,400-megawatt Vogtle power station in Georgia.

When completed, they will be the first nuclear units constructed in America since 1979. But getting them built is the problem. The expansion, which will consist of two 1,100-megawatt generating units, is 14 months over schedule and nearly $1 billion over budget. It could be 2018 before either reactor finally starts feeding the grid.

The project has sparked widespread backlash from consumer advocates, environmentalists and even a local libertarian Tea Party group. This summer, an economist working for Georgia’s Public Service Commission slammed the project, saying that if regulators knew how expensive the process would be from the beginning, the expansion never would have been approved.

“If a decision had to be made today to build a new nuclear project, it would not be justified on the basis of these results,” Philip Hayet, a nuclear consultant with the commission, said in August.

Just a week before that rebuke, Duke Energy announced plans to scrap a 2,200-megawatt nuclear power plant in Florida as the projected costs climbed to $24 billion and the estimated time of completion was moved out to 2024. Duke had already spent $1 billion on the cancelled project, which ratepayers will need to soak up in the coming years. In Ontario, ground zero of Canada’s nuclear industry, plans to build new reactors totaling more than 2,000 megawatts were scrapped in October because of the high price tag and falling power demand in the province.

Meanwhile, 2,600 miles away in California, the future of the power sector is starting to emerge. There, in the first half of 2013, more than 7,300 solar photovoltaic (PV) systems were installed on residential rooftops without any help from state incentives. Although the 33 megawatts of systems did qualify for net metering (a payment from the utility for the retail value of the solar electricity) and a federal investment tax credit, installers were able to make the economics work outside the state’s solar promotion program.

“It would be hard to overstate the significance of this,” said Shayle Kann, vice-president at GTM Research, who crunched the numbers (disclosure: the author of this article works for GTM’s sister media division). “This is emblematic of a sea change in the solar industry and, even more importantly, the energy industry.”

Directly comparing the baseload generation potential of a fully constructed nuclear plant with several thousand distributed solar systems would be a stretch. But the juxtaposition of these two experiences – years of delay and billions of dollars in cost overruns for building a centralized nuclear plant versus the rapid installation of distributed solar PV with fewer incentives – offers a look at where the electricity industry is headed.

The last five years have set the stage for a major transition in the U.S. power sector. With natural gas prices still hovering at historic lows, utilities are scrapping plans for nuclear and coal plants in favour of combined-cycle gas plants. And with the cost of wind and solar dropping, renewables are also dominating new power plant development. For example, U.S. utilities could purchase wind power in 2011 and 2012 for an average negotiated price of 4 cents per kilowatt-hour, according to the U.S. Department of Energy’s Lawrence Berkeley National Laboratory.

In 2012, wind was the single biggest source of new generation capacity in America, beating even natural gas. And two-thirds of all distributed solar PV has been installed in the U.S. in just the last two years. The industry is expected to double solar installations in the next two years – deploying between now and 2015 what it previously took four decades to install.

Companies in the power sector are taking notice of these trends, which will bring big changes to the way electricity providers build, own and operate assets on the grid.

“The change is going to be about empowering the end-use consumer to make energy choices for themselves rather than having the government and the public service commissioners tell them how they’re going to get the power,” declared David Crane, CEO of the independent power company NRG Energy, in a recent television interview.

The Edison Electric Institute (EEI), a trade group representing the nation’s utilities, agreed with that assessment. Over the summer, the institute released a landmark report on disruptive energy technologies, declaring a coming transformation in the sector. But its prediction for the future wasn’t nearly as rosy as the one from NRG’s Crane.

“The financial risks created by disruptive challenges include declining utility revenues, increasing costs, and lower profitability potential, particularly over the long-term,” wrote Peter Kind, author of the EEI report.

There’s a much catchier phrase for those challenges that is becoming common in energy circles: “utility death spiral.”

Since the dawn of the electric grid, utilities have been tasked with building ever bigger facilities to meet ever-growing demand for power. In most cases, regulated utilities’ rate of return is tied to selling more electricity, so they have very little incentive to invest in energy efficiency or encourage their customers to invest in technologies like solar. This is the model that allowed large projects like the Vogtle nuclear plant to get financed with the help of ratepayers – even when costs skyrocket.

However, a few things have shaken up that traditional model. The first was deregulation in the 1990s, which broke up utility monopolies in some markets and gave consumers more choice. The second is the falling demand for power in America over the last few years. The third – one that is just now starting to emerge – is the improving economics of efficiency and distributed renewables. Growth is now coming quickly enough that utilities are worrying about what happens when customers don’t need to rely on the grid as much.

While that could be a good thing for people who are able to invest in a technology like solar, it could also lead to a smaller number of customers paying for the upkeep of the electrical grid. And if the cost of paying for grid-based electricity rises, investing in distributed energy looks even more attractive to those remaining customers. This is the iterative cycle known as the utility death spiral.

“We’re not seeing electric utilities pulling down their poles and their wires. We’re a long way from there. But we need to start planning now for when that does happen,” said Richard Caperton, managing director of energy at the Center for American Progress. “The ongoing technological improvements that make these new energy resources cheaper and cheaper will lead us down the path to the utility death spiral.”

Along with this summer’s report from EEI, a number of analysts have written detailed reports in recent months on how utilities can turn this potential death spiral into an opportunity. The latest, America’s Power Plan, was reviewed and authored by over 150 experts in the industry. It lays out a broad range of actions that regulators and power providers can take today to prepare for the future.

One of the most important changes would be to scrap traditional rate-of-return regulation for some kind of performance-based model. Rather than simply reward utilities for selling more units of energy, regulators could reward them for the quality of service they provide. This could enable utilities to use their expertise to manage third-party service providers and not feel threatened when customers consume fewer kilowatt-hours.

“We know that distributed energy resources are taking off so fast – it’s unstoppable,” said Sonia Aggarwal, one of the authors of America’s Power Plan. “We need to look at the way policies and market design can catch up with the technology.”

In theory, many of these policies are quite easy to implement, both in the United States and neighbouring jurisdictions in Canada. But in reality, there is often resistance from vertically integrated utilities, skepticism from regulators and ratepayer advocates, and concerns from policymakers in states with heavy dependence on fossil fuels. However, the conversation is starting to shift.

“The mere fact that we are seeing the beginning of customer disruption and that there is a large universe of companies pursuing this opportunity highlight the importance of proactive and timely planning to address these challenges early on,” concluded EEI’s Kind in his report.

For years, people talked about distributed energy in abstractions. But now that these technologies are growing faster every year, thought leaders in the power business are starting to address the new reality. The question is: will they address it quickly enough?

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