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CNBC Article Highlights Why Utilities' "Own and Control" Mentality Needs to Change

2 min. read

There have been numerous articles written about the possible future for electric utilities in a world of rapidly growing distributed power, including David Roberts' three-part series in Grist. Here are a few key paragraphs from that article (bolding by me for emphasis).

Regardless, for almost all utilities the problem is the same: The regulatory structure in which they operate incentivizes them to sell more electricity. They make long-term investments in power infrastructure and then charge customers a per-kilowatt-hour rate based on “cost plus” pricing, i.e., a rate that covers the cost of the investments plus a reasonable return. (For municipal utilities, the returns go back to the city or county rather than to investors.)

You see the simple incentive created by this arrangement. If the utility sells more kilowatt-hours than expected, it must make more investments, thus increasing its returns. Conversely, if customers start buying fewer kilowatt-hours, the utility risks having its investment costs stranded.

All of the blooming, buzzing innovation happening in distributed energy, at the distribution edge of the grid, is geared toward reducing the kilowatt-hours customers need to buy, through utilities, from distant power plants. Ergo, distribution-edge innovation and the basic incentive structure of utilities are at odds. That is the nut of the problem.

That problem certainly hasn't gone away in the 9 months or so since Roberts wrote his series. In fact, continued price declines for rooftop solar power, along with advances in battery technology, threaten to kick the rate of change into overdrive. What should electric utilities do about this situation? An excellent new article in CNBC explores that question and finds:

  • "The "own and control' mentality and earnings model of regulated utilities is being threatened in an unprecedented way. And it's not just about solar on the rooftop."
  • "As distributed generation technologies become cheaper and more widely adopted, regulated utilities need to find a way to adapt to customers being owners, or, according to some critics, go into a death spiral."
  • Utilities, as regulated monopolists,  "tend not to lead," but instead to "do safe things."
  • The problem with playing it safe is that the situation is only likely to get "worse for regulated utilities: capital intensive costs on top of less sales means passing on higher rates to consumers and that will only push more consumers to look for alternatives like rooftop solar."
  • Increasingly, as Jigar Shah points out, "the battle isn't between solar and utilities, it's between utilities and their increasingly empowered customers, and that isn't going to change."
  • The bottom line question is whether utilities will adapt to this rapidly changing world before they become dinosaurs. Jigar Shah is not particularly optimistic, pointing out that "pension funds have started divesting shares of utilities saying they are no longer reliable because they are losing growth and now with solar energy on rooftops and other distributed generation and energy efficiency, the only way to protect themselves is by investing in opportunities their mindset and business model is not designed to accommodate."

Stay tuned; this story is certainly not going away anytime soon!