Due to a variety of factors largely outside of their control, the traditional business model for the nation’s investor-owned electric utilities is in trouble. Deep trouble.
In fact, these factors – led by a rapid movement away from the decades-old system of generating electricity from large, centralized power plants and distributing it to customers over an interconnected grid – is rapidly giving way to a new, decentralized structure that features varying types of Distributed Energy Resources (DERs), most notably rooftop solar.
In utility parlance, distributed generation technologies are ‘disruptive.’ Along with the growth in energy efficiency measures and other technologies, DERs have significantly slowed electric load growth and – though it may not be recognized as such quite yet – will ultimately sound a death knell for utilities that have historically made money based on the volume of electricity they sell.
Put another way, utilities will soon face a future in which they will have trouble recovering fixed costs and making a profit.
In response to these developments, several states, including New York and California, are looking at alternative business models as a way to incentivize and integrate distributed resources into the grid. Non-profits like the Rocky Mountain Institute and Lawrence Berkley National Labs also have speculated on what future electric business models could look like.
Some experts have suggested that the ‘platform’ model, so successful in business recently, should be applied to the electric industry. Adherents of such a model envision the electric grid evolving into a platform on which DERs, including rooftop solar, energy storage, electric vehicle batteries, energy efficiency products and other services, bring in new revenue to the utility. So far, however, most new products, like the Nest thermostat, save customers money but reduce utilities’ revenue.
This spring semester, I co-taught a course with Dr. Fred Beach at the UT’s LBJ School of Public Affairs that delved into these issues. The graduate level class, funded by UT’s Energy Institute, required students to examine six new and proposed business models and draft a report summarizing their findings. Their report is a part of a comprehensive study coordinated by Institute, titled the “Full Cost of Electricity,” (FCe-) an interdisciplinary project that synthesizes expert analyses from faculty members and other researchers across the university – from engineering, economics, law and public policy.
Students analyzed each of the models with respect to how they recovered fixed costs, made a profit, incentivized DERs, engaged customers, and other issues.
The report found that while many of the new models appear to be effective in promoting DERs, utilities likely would struggle in a high-DER scenario. Specifically, the students found that most of the cost-cutting benefits would be achieved as DER spread, but once the deployment of additional roof-top solar, energy storage and other energy resources reached a saturation point they would no longer benefit the electric grid (while still providing savings to customers who implemented them) and become a cost burden for utilities to integrate.
In the end, the students found that the loss of revenues ultimately could lead utilities to revert to a standard cost of service model to recover costs.
Their report also concluded that when rooftop solar and other DERs achieve mass deployment, conventional electric utilities may find that non-profit business models, such as electric co-ops, municipal utilities, or non-profit corporations, have the most stable futures. In any case, their future profit potential is very limited in the face of expanding, customer-owned distributed resources.
As for operation of the electric grid, the students’ research suggest that an Independent System Operator, such as the Electric Reliability Council of Texas (ERCOT) may be a more efficient way to operate the electric distribution grid on a local level.
For more, read the LBJ School students entire report on the FCe- site.
Roger Duncan is a Research Fellow with UT Austin’s Energy Institute. He formerly served as General Manager of Austin Energy, the municipal utility of the City of Austin, Texas.