electric-utilities_464338

Eli Forrester

Survival of the Fittest: The Evolving Utility Business Model

Since the modern electric utility was developed around 1900, it has been granted a service area in which they reside as the sole provider of power. This system is known as the Regulatory Compact. It is the traditional mode of regulation for electric utilities. Utilities invest in massive, long-term infrastructure projects and slowly pass along the costs to ratepayers in the form of energy bills, along with a return on the investment. Through most of the 20th century, this was a fine model: utilities were growing at an unprecedented rate, millions of Americans had power, and investors were able to recover the costs of the rapid growth of the electric power grid without worry. The regulatory compact came out of the Public Utility Holding Act in 1935 and was designed for a different era with vastly different power needs. They have created unintentional barriers for the deployment of smart grid technology, and a retooling of regulatory policy is necessary in order to properly suit today’s growing and changing energy economy.

There is an increasing amount of time and resources going towards research and development of new technologies, energy efficiency, and improved systems and, in turn, distributed energy resources have helped to decentralize the way electricity is created and consumed. As consumers gather knowledge and control of their energy, utilities must look to emerging technology and new marketing strategies in order to avoid becoming obsolete or outdated. If electric utilities are going to stay profitable and relevant, they must take a closer look at their model, and re-evaluate their role as service providers.

Among the emerging technologies that pose a threat to the conventional utility business model, the most intimidating is distributed solar installations. Because solar panels are an exponentially growing technology that has increasing efficiency and decreasing cost, it is only a matter of time before cost of solar drops below the current price of energy from the utility. This is known as grid parity, and once it occurs, the traditional utility business model will not be able to compete with solar. As we near grid parity, more and more residential, commercial, and industrial buildings will adopt rooftop solar as an energy source, while cutting the utility out of the picture, slashing the utilities’ profits.

One step further than rooftop solar as a way to disrupt the utility’s revenue is the effect that solar will have on the wholesale electricity market. Roughly two thirds of the country’s power is distributed through independent system operators (ISO’s), which act as a middle man to connect privately owned power plants to the utilities who own and operate the transmission lines. Solar power plants are about to cause a major disruption to the wholesale energy market for the same reason rooftop solar is disrupting utility sales: the cost of solar is dropping rapidly. As solar approaches grid parity, the solar power plants are going to be able to sell their power for less than commodity-based power plants (coal, natural gas, oil, etc.). While there will be significant resistance to change by the traditional energy providers, those who choose to incorporate renewable energy and new practices into their business models will survive the inevitable shift that is well underway. Utilities, should they choose to adopt emerging smart grid technology and weave it into their current models, offer the chance to shape, and in some cases, reinvent the electricity system of the future.

The wave of change that has occurred in the last few years has been exciting, but this is just the tip of the iceberg. As population and energy demands continue to grow, so will the utilities. The question remains: how will electric utilities adapt their business models to incorporate the disruptive technologies that threaten their traditional operation? Different companies will handle this situation differently, and while some will adopt changes more gracefully than others, all will face significant challenges and benefits before the dust settles in the next chapter of our energy future.

1 reply
  1. Chase
    Chase says:

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