Business Week, August 22, 2013
There are 3,200 utilities that make up the U.S. electrical grid, the largest machine in the world. These power companies sell $400 billion worth of electricity a year, mostly derived from burning fossil fuels in centralized stations and distributed over 2.7 million miles of power lines. Regulators set rates; utilities get guaranteed returns; investors get sure-thing dividends. It’s a model that hasn’t changed much since Thomas Edison invented the light bulb. And it’s doomed to obsolescence.
That’s the opinion of David Crane, chief executive officer of NRG Energy, a wholesale power company based in Princeton, N.J. What’s afoot is a confluence of green energy and computer technology, deregulation, cheap natural gas, and political pressure that, as Crane starkly frames it, poses “a mortal threat to the existing utility system.” He says that in about the time it has taken cell phones to supplant land lines in most U.S. homes, the grid will become increasingly irrelevant as customers move toward decentralized homegrown green energy. Rooftop solar, in particular, is turning tens of thousands of businesses and households into power producers. Such distributed generation, to use the industry’s term for power produced outside the grid, is certain to grow.
Crane, 54, a Harvard-educated father of five, drives himself to work every day in his electric Tesla Model S. He gave his college-age son an electric Nissan Leaf. He worries about the impact of warming on the earth his grandchildren will inherit. And he seems to relish his role as utility industry gadfly, framing its future in Cassandra-like terms. As Crane sees it, some utilities will get trapped in an economic death spiral as distributed generation eats into their regulated revenue stream and forces them to raise rates, thereby driving more customers off the grid. Some customers, particularly in the sunny West and high-cost Northeast, already realize that “they don’t need the power industry at all,” Crane says.
He’s not alone in his assessment, though. An unusually frank January report by the Edison Electric Institute (EEI), the utilities trade group, warned members that distributed generation and companion factors have essentially put them in the same position as airlines and the telecommunications industry in the late 1970s. “U.S. carriers that were in existence prior to deregulation in 1978 faced bankruptcy,” the report states. “The telecommunication businesses of 1978, meanwhile, are not recognizable today.” Crane prefers another analogy. Like the U.S. Postal Service, he says, “utilities will continue to serve the elderly or the less fortunate, but the rest of the population moves on.” And while his utility brethren may see the grid as “the one true monopoly, I’m working for the day the grid is diminished.”
No industry as large, long-lived, powerful, and politically connected as the utility industry will simply roll over, disruptive technology or not. Wander into the annual meeting of the EEI, and you can get a sense of the push back. At this year’s event, held in June at the Marriott Marquis in San Francisco, some 950 utility executives, consultants, and support staff talk shop and offer arguments for why the grid will survive. Solar doesn’t work everywhere; it still doesn’t make economic sense in states that have low-cost coal power; microgrids aren’t foolproof. And someone has to pay for those wires used to sell solar power back to the grid.
The big complaint, though, is about subsidies. “I don’t characterize distributed generation in and of itself as a threat,” says Nick Akins, CEO of Columbus (Ohio)-based American Electric Power. “I characterize the regulatory scheme that supports it as a threat.”
Theodore Craver, CEO of Edison International, owner of California’s second-biggest utility, says subsidies create “false economic signals” for rooftop solar. He estimates that 44,000 of his customers got more than a half a billion dollars in incentives to install solar systems, a total that doesn’t include the amounts they’re getting for selling their power back to the utility. California utilities project that under current policies, solar users’ savings add about $1.3 billion to nonsolar users’ bills. In other words, people who don’t want or can’t afford to install solar are paying for those who do. “And that ends up shifting a lot of the costs of maintaining the system to those who do not have means,” Craver says.
“Renewable energy is so unlike fossil fuel energy,” says John Farrell, a senior researcher with the Minneapolis-based Institute for Local Self-Reliance, a group pushing distributed generation. “You don’t need large amounts of capital to build it, you don’t need to produce it all in one place and use high-voltage transmission lines to transport it somewhere else. The idea that we would continue to have a centralized form of ownership and control of that system is really inconsistent with what the technology enables.”
Farrell is a supporter of distributed power. However, the Bernstein energy industry black book, a kind of bible of energy trends published by Sanford C. Bernstein that’s followed devoutly by institutional investors, also predicts that parity in the cost of unsubsidized solar and conventional electricity will radically change the energy dynamic. “The technology and energy sectors will no longer simply be one another’s suppliers and customers,” the report says. “They will be competing directly. For the technology sector, the first rule is: Costs always go down. For the energy sector and for all extractive industries, costs almost always go up. Given those trajectories, counterintuitively, the coming tussle between solar and conventional energy is not going to be a fair fight.”