Utilities: Reports of my death have been greatly exaggerated

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Chorus calling for the demise of traditional utility has become deafening. But it is wrong to assume utilities will disappear with growth of distributed generation.

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Tesla-hysteria

utiltiesWith renewable energy now reaching households in the form of rooftop solar and battery storage (like Tesla’s new Powerwall), the chorus calling for the demise of the traditional utility has become deafening.

The rise of distributed generation will cause massive load and grid defection that will lead to a loss of revenue by the utilities. As a result, utilities will be hobbled by the democratisation of electricity generation or so the narrative goes.

Rising self-generation from increasing solar rooftop penetration and load shifting via home batteries will lead to a utility death spiral from an ever-shrinking customer pool. These disruptive impacts are indeed occurring, but we believe it is too early and also unlikely to say traditional utilities are dead men walking.

An analogy to the current situation is the evolution of the telecom sector. Back in the late 1990s, wireless communication and the Internet was going to relegate the incumbent telcos to the history pages as their fixed line customers all switched to wireless and consumed media via the internet.

Fast forward nearly two decades and the incumbents are still here and in fact thriving. Indeed, wireless communications and services like Netflix have become mainstream but the incumbency adapted and embraced changed. The same will happen again.

Distributed generation needs more connectivity not less

By its very nature distributed generation needs flexibility. There is an increased need for interconnects between suppliers and consumers of electricity, with energy flowing both ways. This is in contrast to the traditional hub-and-spoke utility model where energy is essentially delivered in a linear fashion. Increased connectivity is preferable to islands of generation assets because it is simply more efficient.

An example of this efficiency (or lack thereof) was recently reported by the Business Times where the Danish Energy Association said that up to 71% of its clean energy is being rejected by Germany because of a lack of transmission capacity.

This problem of missing connections will extend even at the neighbourhood level where we see the rapid penetration of solar rooftops take hold. This is where the Utilities can take advantage of their existing market positions; by providing these neighbourhood connections.

Utilities will leverage off their strengths

Utilities have numerous strengths so that means they should not be written off:

  • Huge balance sheets – Transforming the power sector will need investment and these companies are already in a position to be able to do this on a large scale.
  • Ready access to capital – Whether through new equity or debt, utilities have no problem accessing the capital markets for funds at very attractive rates. Their size and history afford them a cost of capital advantage over newcomers to the sector.
  • Existing customer relationships – A good idea still needs a path to market otherwise it will remain unfulfilled. Utilities have that path in that they already have a commercial relationship with virtually every household and business in their geographic area.
  • Technical expertise – Having built and managed the biggest piece of machinery in any country (the grid network), they have an intimate and deep understanding of how it all works and where the existing problems are.
  • Existing regulatory and political relationships – Utilities have been operating under the same regulator, in some cases, for decades. These relationships are critical at a time when the status quo is being challenged as utilities can speak to the key decisions makers in a language they understand.

Live examples where utilities are doing something

With all these strengths, there are already examples where utilities are adapting to their changed circumstances.

New Jersey Resources, a natural gas distribution utility, started offering residential solar solutions in 2010. The company now has new commercial relationships with over 3,000 customers who save on average $25 a month on their previous electricity bill.

About three years ago, NRG Energy launched a solar leasing product and has deployed over 53 megawatts so far. This year they target to exit with approximately 40,000 cumulative customers, more than doubling the number of customers it had at the end of 2014.

In November 2014, Southern California Edison contracted for 250 megawatts of distributed solar, behind-the-meter-batteries and automated demand response system from numerous vendors as part of its 2.2-gigawatt grid modernisation plan. In effect, SoCal has partnered with the technology disruptors in a commercial fashion that is beneficial to all.

Pinnacle West was one of the first utilities to get regulatory approval to apply a monthly charge to customers who had installed solar on their roof.  Shortly after that in December 2014, the utility followed up with another approval to be allowed to rent an existing customer’s rooftop space so Pinnacle could install their solar equipment. Households will earn a rental fee as long as Pinnacle’s panels are on their roof, and Pinnacle is free to direct this electricity back into its network.

This year in Australia, AGL has launched a solar rooftop and battery storage product. Customers agree to sign-up for either a seven or 12-year contract thus ensuring AGL retains these customers as the industry environment evolves.

The focus will be on reliability

Solar panels, batteries, smart meters, wind turbines and demand response were all vague and distant threats to the centuries-old utility business model only just a few years ago. Seemingly overnight, these “science experiments” have asserted their rise and now threaten to topple the incumbency.

This does not mean the traditional utility will disappear. Rather, we can expect the most progressive ones to evolve with their changed circumstances and embrace these new technologies. Simultaneously, regulators will be rewriting industry rules to correctly compensate all participants.

We believe First Solar’s CEO, Jim Hughes, said it best when he recently suggested the future compensation for industry participants will be driven by what they add to system reliability. This perfectly captures the essence of the trend towards distributed generation. Ultimately the customer does not care how electricity is delivered, just that it is and when it is needed.

Instead of writing off the incumbency, be ready for their response because it is coming.

Nathan Lim is a portfolio manager with Australian Ethical Investment.

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15 Comments
  1. Sunbuntu Ltd 4 years ago

    Some of the better utilities may transform into Energy Service Providers but most will not. The European utilities such as RWE / E.on / Vattenfall lost over Euro 500 Billion in market cap in the last few years. That is more than the banks lost.

    As to their so called “Ready access to capital” just wait until they have to write-off 75% of their assets then we will see how much capital they can raise.

    AOL was just sold for USD 4 Billion and 15 years ago it purchased Time Warner for over USD 160 Billion. AGL and others may survive but they will only be a shadow of their current structure.

    TL; DR – The existing utilities are dead and corporate zombies walk in Australia

    • Nathan Lim 4 years ago

      AGL is an interesting example because they have committed to decarbonise their asset portfolio by 2050. I can not think of any other utility to have done this. This mean they will operate their existing coal fleet to the end of its life and will not commit further capital to new coal-fired generation. All its current cash flow gets directed to expanding its renewable fleet that includes its rooftop solar product and building more wind farms. This is a perfect example of a company getting on the front foot and dealing with its changed competitive environment.

      • Sunbuntu Ltd 4 years ago

        What a total load of rubbish. The AGL owns old and inefficient coal plants that most are already running past their designed life.

        So what they are saying that over the next 35 years they will not replace any fossil fuel generators that are already out of date.

        In 2018???, the stock market will realise that all fossil fuel is worthless. The ‘value’ of proven reserves will be less than the cost of extraction.

        Energy deflation is already occurring, the legacy providers will not be able to compete due their cost structures.

        The entire $40 Billion spent on the Network over the last few years needs to written-off. Every single day the value of both generation and network assets are falling.

        Almost overnight the financial world will change as oil and gas companies will only be large companies not valued in the hundreds of billions. (trillions??)

        • Nathan Lim 4 years ago

          Energy deflation is occurring, sort of. We wrote about this previously at http://www.australianethical.com.au/system/files/documents/International-March-14.pdf (start from page 4). To your point that asset values are falling, consider this is occurring because less power is being consumed. Consumption is down because of solar and efficiency. The current regulatory model for utilities is largely based on volume assumptions so if volumes are down, values fall. That said, the value of the grid today is its ability to connect suppliers and consumers and ensure reliability. As we note in the article, we think reliability will be metric to drive revenues going forward and thus lead to regulatory changes. An example of this would be the creation of a capacity market. Another use for the grid would be to facility trading between all parties so a homeowner could sell his/her power back on the grid to the highest bidder, for example.

  2. Jacob 4 years ago

    Electricity is like water rather than data.

    We can store water, transport it using trucks, recycle it.

    We can go off the water grid too if we collect rain water from the roof and continually recycle it.

    It all depends on how much the electricity grid decide to rip us off.

    • Nathan Lim 4 years ago

      There are benefits associated with scale. While the old “hub and spoke” model is not efficient neither is putting a battery and solar panel on every single household and going off grid. Having every single consumer self generating misses the benefit of sharing excess energy or spare battery capacity. Neighbourhood batteries and community solar (for those in apartments or roofs facing the wrong way) would be far more efficient as resources get pooled and there would be less waste.

      • nakedChimp 4 years ago

        Sure, but all those efficiencies are moot if the savings they bring are being thwarted by the rent that’s being asked for those centralized systems.
        Customers will have a choice and incumbents will face competition..
        And while one can’t just run his own tier-1 backbone connection to the WWW, people will be able to run their own personal energy storage system that doesn’t need connection to the world.
        Good luck cornering that.

        • Jacob 4 years ago

          Exactly. The issue is the rip off.

          The grid should pre emptively cut prices this year. But I bet they will not.

          And then in 2016 the grid owners will wonder why people are quitting the grid.

          • BarleySinger 4 years ago

            For centuries people have been more and more interested in ANYTHING that means they do not have to THINK (especially about the repercussions of their actions) or do a thing on their own. Everything is to be done by some other person.

            For the last 300 years of industrialization, businesses have poured poisons into the water supply and the air (in order to not have to THINK enough to NOT have the pollution in the first place) and people have let them…and the idea of not needed to think or place or be a decent person has caught on in a big way. All unwanted items are teleported to the magical land of “away” (or as as I call it – to the land where our chronically ill, and pissed off, descendants live).

            At the start of the last century most western people still lived on farms (producing most of their own food) and long distance grids for power, water, sewage (etc) were rare. People supplied their own water, sewage and power (they had whatever they could save up to buy). That’s not much fun, but it does not give people an unrealistic picture of their impact on the rest of the world.

            Now we’ve been obsessed with “but I want it NOW daddy” (with billions of people sounding like Verruca Salt in “Willy Wonka and the Chocolate Factory”) that we have a bad legacy already, and are doing nothing to slow it down. We have Roundup, “2,4-d”, Diazinone, Triclosan and DDT in the breast milk of very woman on the planet. We have a huge floating mass of plasic that stratch from just off of Califormia to just off of Japan. Yet nothing is changing. The items we have the choices to buy, still nearly all ‘suck’ as choices, as consumers can only consume what is available to buy.

            And so it goes. most people in the western world have huge credit card debts, drive cars that are too expensive for them (and dive a lot more distance than they need to), and if they buy a house they get a far larger one than they can afford and do so on a Zero down 30 year mortgage (a house all built out of materials that are bad for living things – serious indoor air pollution). Passing their financial woes on to the economy as a whole (and their kids).

            The funny thing is … as technology has moved forward… I have watched as the the cost advantages of NOT being responsible (centralization of all services) … with a huge network infrastructure for water, power, sewage (etc) … it has decreased. In point of fact the advantages of old style centralization (and complete dependence on the utilities for everything) have dwindled away. Right now it costs less to go your own way.

            If you honeslty can afford to rent then you can afford to buy (even if the first mortgage is a bad one, and you pay for two years and then ‘buy up’ to a better mortgage). Furthermore if you can afford to buy a house then you can definitly afford to put solar on it (more than you can afford not to).

            Unfortunatly the last several decades have made a huge portion of the US so impoverished (wages not keeping up with inflation) that 1 in 6 kids in the USA goes hungry every day. There are also a huge number of people in the USA, who are full time employed and STILL can’t afford to pay for food and rent.

            This is one of the many reasons I’m glad I left (though it was not an easy decision).

            Regardless, people are just not thinking straight. After all, your utility providers **are** very wealthy. Where exactly did you think they got that all of that $cash? From you of course.

            Most of the time when folks who want to ‘debunk’ the value of a grid
            connected hybrid system (PV + battery + smart inverter + grid), they
            pretend that households are being changed the LOWEST tier (for every Kh
            hour)… and this is not the truth.

            In 2009 here in South Australia my lowest tier WAS $0.1724 per KwHr, but in 2015 it is now $0.2672

            However when I allow for averaging all the “tiers” in my bill I pay an average of about $0.31 per Kw/hr. If I had solr I would get back about 6 cents a KW hour. That’s a 27 cent difference between what I would get paid for the power I make (and send on to the utility) in the day, and what I would have to pay for it at night.

            And that makes batteries a very good idea.

            Right now the cost of a 10Kw monocrystaile system with 10KW of Li-ion batters on two Solax inverters is about $23,500.00

            Even with very low usage our yearly bills are a minimum of $800 a quarter (with wood heat, no reverse cycle at all, etc).

            It does not take much ability with math to see that my entire system
            will be paid for in 6 years, leaving me 4 years to save up for
            replacement batteries (about $3200 a year I no longer pay for my
            energy, for a total 4 year saving of $12,800). My new batteries will cost NOTHING close to that amount – especially with tech quality rising and costs falling.

            ** SO WHO DOES NOT BENEFIT **

            The only people who do not seriously benefit from this sort of hybrid-solar power generation (battery and grid), are those who OWN BIG “GRIDS” (which all will need to be properly updated; there is no escaping it this time, though they have been dodging the idea for 50 years & have never fixed up their grids because that would have ruined the last quarterly report).

            And of course also those who live too tightly packed together in large cities to Have any roof space to put PV onto. People who rent, and those who live in large cities (tall buildings blocking the sun and placing each other in shadow).

          • Jacob 4 years ago

            That is a very high off-peak rate for electricity!

            If you have a big enough roof, it would probably make sense for you to go off-grid with a Tesla battery.

  3. lin 4 years ago

    The grid has a bright future IF grid owners and governments play fair and don’t try to screw consumers. Falling battery storage costs mean that consumers now have a viable option, but an integrated distributed generation grid is the most sustainable and efficient option, I would expect.

    • Nathan Lim 4 years ago

      I look at the evolution of broadband pricing in Australia. Competition and regulation brought it down. I expect utilities faced with a the loss of monopoly power will need to change their playbook as well. I would be looking at the leadership of each utility and see how they are dealing with this change. I agree with the sentiment in other posts that utilities as a group probably have their collective heads in the sands but this will not persist forever.

  4. Ken Dyer 4 years ago

    The SRMC (short run marginal cost) of Australia’s coal fired power stations, Hazelwood, Loy Yang A and B, are revealing.

    According to the “Fuel resource, new entry and generation costs in the NEM” report
    prepared for the Inter-Regional Planning Committee in 2009, the SRMC without carbon
    costs in 2014-15 for Hazelwood was $2.30 per MW generated (with carbon cost $43.57), Loy Yang A, $2.08 without carbon, $35.30 with, and Loy Yang B $ 5.70 without carbon cost and $40.23 with carbon cost included.

    In other words, the cost of carbon per MW generated in 2014-15 is expected to total for these three power stations, a total of $119.20. What is worse, this cost is estimated to increase to $156.54 in 2020, and $210.63 in 2029.

    The recent closure of Anglesea power station brings these costs into focus. Anglesea’s
    SRMC without carbon was $5.73, and its SRMC with carbon was $38.40, which is very
    close to Loy Yang B’s costs. After Angelsea, it is the highest polluting, highest cost power station in Victoria, although Hazelwood is still the worst in terms of volume of CO2 emissions.

    By closing, Anglesea receives approximately $53 million in compensation. In
    comparison, closing Hazelwood, Loy Yang A & B woulld attract nearly $1.25 billion in
    compensation under ESAS (electricity sector adjustment scheme), which has a $5.5 billion kitty, most of which will enhance foreign balance sheets.

    Who is going to pay this price in 5 or even 10 years time? No one! Solar PV has almost reached grid parity with coal, and its operating marginal costs (SRMC) are nearly NIL, because they have to employ someone to polish the solar panels. When the point is reached that AGL is not making a profit from coal, and that time is fast approaching, they will bail out so fast with a bucket of Government cash, you wont see them for dust.

  5. Objectif Terre 4 years ago

    If 50% of the customer base is getting almost (80%) self-sufficient with solar+powerwall, the cost of the grid would be x2 / kWh (and the thermal-power production cost would also rise). So it would be attractive to add a decentralized Combined Heat and Power (Stirling) system and get 100% OffGrid. It’s really a death spiral for grids + centralized power systems.
    During a transition period grid will help as back-up and exchange tool (trading with RepositPower in Australia or Lichtblick in Germany etc.). But it’s only transitional.
    A Bus Line loosing 50% of its passengers (electrons) is no longer profitable. And rising prices (whereas solar+battery cost will decline) would lead to more defection. Local micro-grids will survive. But the future of the big-grids isn’t sunny.

  6. Paul Turnbull 4 years ago

    Yes the utilities do have strengths and driving change to ensure that increases in grid reliability benefit the community is the key policy driver. Your overseas examples shows how the rules are being changed – utilities renting roof space, automated behind the meter response systems …- we need to ensure changes provide for a balance between a rapid transition to more renewable energy and cost. Does our energy regulator do Our energy regulator has work to do.

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