To the list of industries at risk of complete obsolescence – which at the moment includes daily newspapers, government postal services, and men-only barbershops, among others – you can add U.S. power utilities. The creeping sense of impending peril that has enveloped the power sector was made explicit earlier this year in a widely distributed, and remarkably candid, report from the Edison Electric Institute entitled “Disruptive Challenges.”
Warning of “irreparable damages to revenues and growth prospects” of utilities due to the spread of distributed power generation from renewable energy sources, the report foresees “a day when battery storage technology or micro turbines could allow customers to be electric grid independent.” The result: a “cycle of decline [that] has been previously witnessed in technology-disrupted sectors (such as telecommunications) and other deregulated industries (airlines).”
A Bloomberg BusinessWeek story last week put an even finer point on it: “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.” NRG Energy NRG -0.12% CEO David Crane told the magazine that microgrids, small wind and solar, and net metering constitute “a mortal threat to the existing utility system.”
In the Kubler-Ross end-of-life model, U.S. utilities are still mostly in the denial stage. Utility executives spend a lot of time these days decrying government subsidies, particularly for rooftop solar. To be sure, several big utilities have at least hedged their bets by investing in alternative forms of power generation; Duke Energy DUK +0.09%, for example, entered the renewables business in 2007 and has built some 1700 megawatts of renewable capacity since then.
Sabotage in the Suburbs
Gloomy prediction aside, it’s worth remembering that this transition is sure to be prolonged, that the utilities, in their respective regions, often enjoy quasi-monopolies, and that they have ample resources, both financial and political, to draw on to protect their positions. Power from wind and solar still accounts for less than 1% of the electricity generated in this country. Southern Company has a market cap of $37 billion. This is not a sector that is going to meekly fold its tents and retreat.
Think of Big Oil. The “End of Oil” has been forecast now for decades, and oil consumption in many developed countries peaked in 2007 and has not yet reached those heights again. It may never. Nevertheless, the shale gas boom has given petroleum companies an unforeseen boost, and world petroleum use set a new record last year. Many major oil producers are enjoying record profits. The forces at work in the utility sector are very different (for one thing, technology advances, which are fueling the current oil and gas boom, are likely to work against utilities, not for them), but in times of upheaval and transformation, incumbents tend to do well, at least for a time.
What’s more, the recent glowing news in the renewable-energy business — which has seen prices for solar power approach grid parity as adoption by consumers, encouraged by no-money-down leasing arrangements, accelerates — is not guaranteed to last. In fact, there are indications that solar markets in key states are slowing, as prices drop to levels unsustainable for providers. “It is getting difficult to deliver a good product and still be profitable,” an executive with REC Solar told Greentech Media last week.
At the same time, the industry is fighting a delaying action on the policy front. “The future of net metering in Arizona is under attack,” SustainableBusiness.com reported last week, “with the state’s largest electric utility Arizona Public Service (APS) proposing changes that undermine cost benefits for residential solar installations.”
Pushing back on net metering, investing in renewable capacity, and building new fossil-fuel plants are likely to buy the utilities some time. And they may just figure out how to thrive in the new era of distributed generation. But the threats they face are not going away – and they’re not just economic. The FBI said last week it is investigating an act of industrial sabotage in Arkansas, in which an unknown monkeywrencher climbed a 100-foot transmission tower, cut a supporting cable, and brought down a 500-kilovolt power line. That’s at least the second instance of destruction of utility transmission infrastructure this year. When suburbanites putting solar panels on their roofs are joined by nighttime saboteurs, it might be time to rethink your business model.