The rapid growth of solar power, and the promise of fuel cells, microturbines, battery storage and other distributed technologies, is engendering change and new opportunities in the utility world. Many are looking at the cell phone in their pocket and wondering what lessons can be learned from the transformation continuing to sweep the world of telecommunications.
The always quotable David Crane, the CEO of the independent power producer NRG, said that thanks to distributed generation, “consumers are realizing they don't need the power industry at all.” In an interview with Bloomberg TV, he said:
“The energy industry is about to make that jump to being an information technology-based industry like the telephone industry did 25 years ago. Thirty years ago the telephone industry and the power industry were considered twins. You don't think that way now because they've done so much and we've done so little.
“The change is going to be about empowering the end-use consumer to make energy choices for themselves rather than having the government and the public service commissioners tell them how they're going to get the power, who they are going to get it from, and how it's going to be produced and delivered to their home.”
The Edison Electric Institute, in their paper Disruptive Challenges, sees the same threat. “Who would have believed 10 years ago that traditional wire line telephone customers could economically ‘cut the cord?’”
They point out that solar is now “in the market” for 16 percent of U.S. retail electricity sales (where rates are at or above $0.15 per kWh), and that this could double by 2017, competing for $170 billion of annual utility revenue.
“When customers have the opportunity to reduce their use of a product or find another provider of such service, utility earnings growth is threatened.”
While their proposed solutions are to undermine distributed generation by changing the rules, we think that is a losing proposition – and not in the public interest. The forces of consumer demand and technological innovation make change inevitable. It is better to plan for it than to resist.
Lowering barriers to entry
And there is plenty to plan for. A power system with much higher levels of distributed renewable generation is radically different in certain ways.
One revolutionary aspect of distributed generation is that it bypasses one of the main barriers to innovation in the power sector – the need for large-scale power plants with high capital costs. The massive investments needed to build new power plants have always been a barrier to entry, limiting competition to regulated utilities and to large independent power producers (so-called “merchant” generators).
To minimize investment risk, these merchant generator companies (some of whom began as affiliates of utilities) have relied almost entirely on natural gas power plants, since the capital costs are low (less than $1 per watt) and the fuel costs set the market price for power. So when gas prices are high, power prices will be high, letting the power plant owner pay for the higher gas prices.
Utility restructuring opened the floodgates for this kind of investment. The uncertainty of the 1990s, as policy makers debated deregulation, gave way to an explosion of construction. Over 50,000 MW of new utility-scale gas-fired plants were built in one year a decade ago. New merchant generation companies like Enron, Dynegy, Calpine and AES rushed to compete with each other for new customers.
Now there is a growing wave of investment in distributed generation. But there are some important, and radical differences.
With distributed generation, there are millions of potential investors and owners. Anyone with a roof, rural residents with an open field, farmers with livestock, military bases, data centers, sewage treatment plants, factories—the list is almost endless.
Their motivations are endless too—to save money, to increase the efficiency of their operation, as a hedge against power outages, as protection against military or cyber attacks or natural disasters, and to reduce their environmental footprint.
Because these investment decisions are individually small they don’t need to amass billions from risk-averse banks and investors. They don’t need permission from financiers. The barriers to entry are only those created by regulators and utilities.
It is also very different for the developers and sellers of the new technologies. With traditional power plants there were few sellers and few buyers. Only a handful of companies could amass the capital and expertise needed to build complicated central station generation technologies, and only a few hundred companies own big power plants in the US. General Electric and Siemens, for example, are among the world’s largest corporations, employing a combined 670,000 workers.
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