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2030 Outlook: A Trillion Dollar Taxpayer Bailout for Electrical Utilities

After bailing out Wall Street in 2008, are Americans ready to provide a one trillion dollar bailout to our electric utilities in 2030?  Even though worldwide demand for energy is estimated to rise 41 percent by 2035, Barclays recently downgraded their outlook for utilities.  The question we should ask ourselves is what does it mean when you downgrade a trillion dollar industry? Will this mean that billions of dollars invested in utilities today through pensions, stock holdings and your bank’s investments will be lost? And can utilities, and the country, prevent this value destruction from occurring?

Renewable generation such as solar power is being produced at costs that are rapidly decreasing. Solar systems are becoming so simple that, with a little instruction, my accounting team was able to install a solar power system. This is good for the world, but not necessarily good for an established industry, like utilities.

Industries are famous for side-stepping large infrastructure businesses and leaving them to wither.

  1. Small, low cost mini-mills replaced large-scale steel makers.
  2. Cell phones replaced standalone Global Positioning Systems (GPSs).
  3. Uber and similar on-demand car services are currently replacing taxis.

Distributed generation is becoming cheaper and easier to install, leading to growth rates in the residential space of 60 percent per year. Installed solar capacity across the U.S. has grown 418 percent since 2010 and could quadruple from today’s level to 50 GW by 2017. The price of solar has come down and technology risk is no longer a concern. If your utility company charges $0.18/kwh and a reputable solar installer sells power at $0.13/kwh, isn’t the preferred option fairly obvious? In short order, solar systems will be as prolific as solar water heating is in Israel.

Utilities, by their very nature, are not creatures of change. Their highly capital intensive investments are depreciated over thirty years – they are used to having a captive, monopolistic audience, and they aren’t known for customer experience or innovation. The way they increase their revenue is through population growth and increased power prices (3-5 percent on average a year). But today, electricity costs from coal are going up and solar power costs are coming down.  Moreover, as people move away from coal power to cheaper solar power, utilities will have to charge their customers more in order to cover their infrastructure costs. 

If nothing changes, this is a losing battle for utilities.  A utility that doesn’t adapt loses credibility quickly, as its customer base dwindles and its highly leveraged infrastructure needs cash. Who would want to invest in a highly leveraged industry with a shrinking market? If current trends continue, many utilities could soon face bankruptcy. It’s a toxic combination of high capital requirements and fading demand. And make no mistake: power infrastructure is not cheap.

While some utilities like Southern California Edison have implemented strategies to capitalize on this shift, most haven’t. Instead, they’ve tried to fight it by appealing to regulators to add additional fees to solar or persuade legislators to overturn renewable portfolio standards.

How can utilities win? 

First, utilities can embrace solar and benefit from the fact that they have a low cost of customer acquisition because they have a captive audience. Utilities can also be the broker of all energy services for the home if they decide to expand their product line. If they invest in providing the funding behind solar financing and owning the generation and storage assets installed in homes and businesses, they are right back in their utility role, but now using a new generation of asset class.

Second, they can continue to secure revenue through grid connection charges for infrastructure use.

Third, utilities don’t have to be innovation leaders; they can use their current asset base and low cost of capital to either partner with or purchase companies who can innovate for them.

Other companies have repositioned and reinvented themselves to deal with technological shifts that threatened their monopoly power. AT&T didn’t vanish after its antitrust suit and the advent of the Internet and cell phones. Railroads figured out ways to survive after the invention of cars, long-haul trucks and airplanes. Utilities can make it if they adjust to the changing environment. However, if they don’t, there is huge potential for another major bailout that would not only impact utilities, but also the pensions that invest in them, the taxpayers who would have to provide their bailout, and the homeowners who might encounter energy instability and insecurity. As with the banks during the financial crisis, the most successful (and innovative) members of the utility industry will buy up struggling utilities at a discount and then use them as channels for their services.

Whatever happens, there will be winners and losers. Those utilities that lose will be bought at a discount by the dominant players, rolled up, and optimized to drive product effectively through their channels. As these aged and debt-laden structures attempt to adapt, we may see a bailout or debt forgiveness, similar to that of the banks in 2008. Or it may mean that like other industries, the unsuccessful are bought by the successful, debtors negotiate what they can, and the channel is optimized with new services, processes, and fees. 

Lead image: Bailout sign via Shutterstock