Suddenly, electricity appears too important to be managed by traditional electric utilities alone. The barriers to entry have fallen; a large number of new and old companies have entered the power generation business. How should the existing utilities respond? I believe they should enter the distributed solar-based generation business and offer new grid-integrated services.
Numerous and diverse competitors – non-utilities – have already entered the electricity business. Real estate companies and builders are offering rooftop solar, particularly on new homes. Schools, government buildings, and businesses are deploying their own solar panels. Chevron Energy Services, a division of the oil and gas giant, has begun installing solar panels in parking lots of California schools. Early adopter households are becoming their own micro-utilities and are moving toward energy self-sufficiency.
I have argued in earlier REW articles that IT and telecom companies have assets that position them as future energy companies. NRG Energy, with a solar division in California, is developing electric charging stations for automobiles – a new kind of “gas” station. A Deloitte paper has rightly observed that every company either is, or soon will be, an energy company.
Pressures: Technological Advance, Regulatory, and Climate Change
Significantly higher costs held back widespread deployment of distributed generation until now. Regulations set the benchmark for “grid parity” costs. Solar companies, on average, have now breached those costs, thanks to global scale manufacturing of solar panels. This has opened the gates of competition. The well-recognized triggers of industrial mutation – technological advance, clustering of innovations, entrepreneurship, new opportunities, and the resulting creative destruction, now drive the competitive activity.
A worrisome driver affecting electric utilities might be the loss of their “natural monopoly” status from a regulatory standpoint and the benefits that derive from it. The classical arguments favoring it, namely, high barriers to entry, and “a single producer will be able to produce [electricity] at a lower cost than any two other producers” do not hold. This has to be regarded as a distant threat.
Climate change arguments too may not be ignored any longer. The global boredom that greeted the recent Rio+20 Conference resulted from people’s feelings of impatience. People wondered what steps governments, corporations, or individuals would actually take to move us into the clean energy future. There is weariness with public policy; little has happened except talk for twenty years. In fact, of all players in the energy domain, existing electric utilities are best positioned to usher in the low carbon future, and they might do so as they pursue their self-interest.
Electric Utilities: Well-positioned but Handicapped
Charting this course would represent a major shift in strategy for utilities. Yet they should pursue distributed generation for several reasons. They have a) databases on customers and their usage, b) the infrastructure deployment and monitoring, and c) an understanding of solar and conventional technologies.
The business logic is clear, too. Utilities should enter distributed generation for defensive reasons – to sustain their revenue base. On the positive and leadership side, they have the opportunity to augment present revenue through tapping new customers, even outside their service territories, before others do. Can utilities offer solar deployment, monitoring, and maintenance at a competitive price? Can they define a business model that works?
If, however, the utilities adopt a wait-and-see approach, the solar behemoth will chip away at their revenues, household by household, at an accelerating rate, with the best customers going first. The best customers, of course, are those that pay higher bills because their consumption exceeds basic usage. These customers, sizeable in number, matter most to utilities. Unless the utilities retain their revenue, this loss will upend their economics.
Why haven’t the utilities entered the solar distributed generation business, both inside and outside their territories? My conjecture is because the changes in the industry have been too fast the past two years; there has not been enough time to digest the pace of events. Besides, whichever company embraces distributed solar first would be a pioneer; caution is understandable.
Business courage is needed. Legacy mindsets stand in the way – organizational histories, long-standing business cultures, and institutional memories. The past offers limited guidance, though appreciation of recent telecom history helps.
About six weeks ago at my home in California, I received a call from a start-up headquartered many miles away, in the service territory of a different electric utility, asking if I would like to install solar panels on my rooftop, with no upfront capital cost, to reduce my electricity bill. They offered to qualify me and schedule installation on the spot. I expect many such calls from new and existing providers. That call should have been from my own utility, but they don’t have such a program, at least not yet. The call reminded me of the 1990s when phone companies used to call incessantly, hoping to persuade me to choose a new operator or international dialing plan.