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Three Big Shifts in America’s Electricity Landscape — in the Past Three Weeks

Grist’s David Roberts recently finished a 9-part deep dive on America’s utilities and the future of our electricity grid. I didn’t agree with everything in it, but it’s absolutely required summer reading because (1) so few of us really understand how utilities operate and their financial incentives, and (2) because we’re way past due for something better (cleaner, more efficient, more affordable) than last century’s grid. Best of all, Roberts managed to make a bunch of wonky stuff actually feel like summer reading, perfect for sitting by the pool with a koozy-wrapped beer.

And as summer gets underway, the grid is changing as fast as it ever has.

We’ve all heard about the growth of rooftop solar companies, which now empower utilities’ captive customers with the choice to buy cleaner, cheaper electricity. But we still live in a largely centralized utility world, where things usually change so slowly you might not be able to see them changing at all.

That’s what has made the last three weeks so interesting:  the most seemingly immovable facts of the energy sector are suddenly evolving into actual questions and debates, illustrating several of Roberts’ core insights and explanations about where the grid should go in the 21st Century. Among them: 

1. Point of no (guaranteed rate of) return: Two weeks ago the Hawaii Public Utilities Commission (PUC) dropped the hammer on the state’s largest utility, Hawaiian Electric Industries Inc. (HECO), reducing the guaranteed rate of return for one of HECO’s subsidiaries (Maui Electric Company, Ltd.) by a full percentage point, and explicitly cited HECO’s lack of a business strategy as a reason: “From the Commission’s perspective, the HECO Companies appear to lack movement to a sustainable business model to address technological advancements and increasing customer expectations.” 

Ooof. This is huge deal. Investor-owned utilities (IOUs) like HECO make money by justifying capital investments in infrastructure — say, a new power plant or power lines — that the ratepayer pays for and earns the utility and its shareholders a guaranteed rate of return of 8-12 percent. When it comes to building stuff, the utility is guaranteed a stellar profit. And therefore the incentive is to keep building stuff. Unlike in most businesses, utility costs equal utility revenue: the more they spend, the more they make.

Is the Hawaii PUC’s decision a signal that the gravy train of unending growth yielding automatic profits for the investor-owned utility and its shareholders is coming to an end? In its place, utilities may be forced to compete, with rooftop solar and others, to actually satisfy their customers beyond simply keeping the lights on.

2. One less really expensive nuclear plant. After nearly a year and a half of dormancy and huge costs to ratepayers, Southern California’s San Onofre Nuclear Generating Station is set to close.

Did I say the costs were huge? They’re enormous:

  • Since the reactors were turned off in January 2012 following a radiation leak and the discovery of structural damage, ratepayers have paid $1.2 billion -- $68 million per month -- for something which gave them no power and more than a bit of worry.
  • In 2009 and 2010 ratepayers paid $670 million for the upgrade that produced the problems and have forced the reactors to be shuttered. In hindsight, it was not a great investment.
  • Now residents have to pay to decommission the facility. These decommissioning funds are built up over time by mandatory charges to ratepayers, so that by the end of the plant’s lifespan, the costs to tear it down or dispose of it are covered. In the case of San Onofre, however, the whole thing broke down before the decommissioning costs were fully funded. Ratepayers can expect a bill shortly, likely in the hundreds of millions. Not that they had anything to do with this mess.

As LA Times columnist Michale Hiltzik put it, “There are train wrecks, and there are train wrecks. Then there's San Onofre.”

During this fiasco, neither Southern California Edison nor San Diego Gas & Electric, the utilities that utilize San Onofre, have said much about these costs to ratepayers. Instead, they are publicly fretting about…rooftop solar.

These two IOU’s and their Northern California ally Pacific Gas & Electric (which has other infrastructure problems) would like to eliminate California’s Net Metering policy, which requires utilities to provide solar customers with fair credit for the surplus electricity their systems put back on the grid for neighbors to use.

What they dislike about rooftop solar is precisely what the rest of us love: one of the many ways net-metered solar offers net benefits to non-participating ratepayers (which will soon total more than  $92 million per year is that it reduces the need to build more infrastructure — again, good for us, but less profit for the utilities. But the utilities’ incentive is to Build More Forever. Distributed solar makes the grid cleaner, more resilient, and more efficient.

Solar is no longer a boutique energy source for the wealthy. Two-thirds of California home solar installations since 2009 have occurred in communities located in zip codes with middle and lower median incomes, largely due to innovations in solar financing which have allowed middle class homeowners to go solar for little or no money down.

Thus the incredible disconnect between how the utilities talk about something like San Onofre, and how they talk about rooftop solar. One earns them profit, while costing the ratepayer lots. The other makes the grid more efficient, thereby saving the ratepayer money and reducing future utility profit.

3. “Customers have it their way everywhere except here.” 

Last week I attended a session at the Edison Electric Institute (EEI) annual conference: “Visionary Perspectives on the Electric Business Model”. EEI was the organization that authored the bombshell  report describing the “death spiral” that utilities face with the rise of distributed solar and other forms of energy. It provided a revealing contrast with their public pronouncements: Although EEI would like the public debate to be a referendum on distributed solar, in the report privately they acknowledge that the pull of a distributed future calls into question the viability of the centralized utility business model.

So perhaps it’s unsurprising that the session wasn’t visionary so much as it was spooked and uncertain. Edison Electric’s David Owens strained a little too hard to turn everyone on the panel’s answer back to an endorsement of the centralized utility model and condemnation of a distributed. I lost count of the number of times he said fairness and complicated.

Owens was trying to suggest that rooftop solar is unfair to non-solar utility customers, but the irony may not have been lost on even this utility-centric crowd.  

The other panelists representing utility and energy interests — Paul De Martini of Newport Consulting Group, Clark Gellings of Electric Power Research Institute, and Dick Rosenblum of HECO — seemed to have far less fight in them, perhaps because of the HECO news, and perhaps because they are closer to the on-the ground-realities and the opinions of their own customers. (SunPower CEO Tom Werner represented distributed energy on the panel.)

Maybe they didn’t quite believe industry messaging that FAIRNESS was a winning argument for them. As Owens thundered away at what he perceived to be huge costs for solar, Rosenblum appeared to glimpse the future: “There’s a need to transition, so that customers get to have it their way. I don’t think that’s unreasonable, they have it their way everywhere except here.” 

It’s not unreasonable. In fact, for the ratepayer who pays for essentially everything, that’s fair.  What’s in question is the current utility model: Is it fair to allow a monopoly to continue to enjoy a guaranteed rate of return even if it does not meet adequate standards of reliability, safety, social responsibility and customer service? Is it fair for the primary beneficiary of last century’s utility model to prevent that model’s evolution? 

At least now it’s an open question, and the debate is on.

Lead image: Train tracks via Shutterstock

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