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Threat to Electric Utilities – Pass the Lemonade

Threat to Electric Utilities – Pass the Lemonade, Michaels Energy

Nothing lasts forever, or in some cases, even a couple years.  The race to displace current products and services of any stripe is rather obvious, except there will never be a replacement for the McDonald’s hamburger, and running shoes haven’t improved in 20 years.  In recent weeks, I have seen perhaps a half dozen articles regarding growing threat to electric utilities.  In the most recent article I’ve seen on the subject from The Wall Street Journal, Nick Akins, Chief Executive with AEP, sums it up cleverly and succinctly: “Am I going to just sit here and take it and ultimately be a caretaker of a museum, or am I going to be part of that business?”

The Wall Street Journal article describes the threat to electric utilities as numerous forms of distributed generation, or DG.  Large and small companies, and even residential end users, are installing their own power generating equipment in many forms: photovoltaic, combined heat and power, and biogas power generation.  Kroger, the giant supermarket chain sends their expired food to gasification plants to generate their own power.  That is pretty radical.  Food is distributed to supermarkets and on the trip back to the distribution center, fuel, in the form of dated donuts and unused fried chicken, powers their refrigerated warehouse.

Other articles published in Fierce Energy, authored by guys from E Source, and in Business Week, by NRG Energy Executive David Crane, explain the situation for utilities a little further.  Utilities have their fixed cost in the form of rate base, discussed in Utilities – A Formula for Contraction.  Rate base is the capital on which utilities are allowed a rate of return.  This fixed cost is blended in the utility bills of hundreds of thousands of customers, enormous and tiny.

Once DG begins to erode sales, regulated utilities still have all the hardware for which they need to be paid, and so the reaction is, beg the regulators to raise rates to cover their costs.  Result: tilts the financials to be even more in favor of DG.  Result: more DG.  As Mr. Crane calls it, a death spiral.

Not So Fast

There are distinct challenges and issues that must be addressed for any type of DG.  First, consider renewable energy – photovoltaic (PV) and wind power.  The sun doesn’t always shine, and the wind is erratic and unreliable.  I don’t believe Walmart,  with 65 MW of PV installed, will shutter its doors when the sun goes down.  However, PV would have major implications since it tends to produce peak power when it is needed most, and thereby flattening the load shape for utilities during a significant portion of the day.  On the third hand, as the sun sets at 7:00PM on warm September evenings,  people are shopping like crazy, swilling beers, cooking, and washing clothes, while the television is blaring away and kids are running around the house with all the lights on.  The impacts on peak grid demand may not be that significant, but it may shift an hour or two later in the day.  Thus, there is a significant need for standby power[1].

Another issue with renewable energy is the massive cash incentives and tax favors that shower down on owners of this stuff; not to mention they pay nothing for standby power at this point.  In a recent AESP newsletter, John Hargrove from NVEnergy (also Chairman of the AESP board), indicated a photovoltaic system to take care of his electric loads cost $28,000 and after a list of incentives, the remaining cost: $12,500. Well jeez man, if you gave me a 55% discount on a Toyota Prius I might buy one of those too.

Natural gas prices are making DG, and in particular combined heat and power, much more cost effective.  But even so, I recently spoke with a major engineering firm that does a lot of DG design, and here in the upper Midwest, they indicated that it would be very difficult to install a natural-gas fired CHP plant with a simple payback under five years.

What may happen is the centralized utility business will convert to more of a standby power provider. Right now, early DG adopters have it easy peezy lemon squeezy[2].  Except for major DG applications, customers pay little or nothing for these standby power supplier charges.  Once millions of rickety DG plants are up and running, standby power will become much more expensive, and I would guess customers can either live like the Amish and pay nothing for standby charges because they don’t use it (won’t happen), or charges become very expensive eroding DG cost effectiveness, particularly when the massive subsidies go away.

Speaking of lemons, the opportunity for utilities is to get in the game and provide DG for customers, as Nick Akins implies.  I would say utilities can ignore the threat and stick to their business model at the risk of becoming the next Blackberry – THE dominant smartphone player at one point that refused to acknowledge the changing landscape and is now on the brink of collapse.

Don’t shoot the messenger(s).

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[1] Standby power is essentially backup power provided by the utility when DG is not available for any reason.

[2] A client wanted me to work this phrase into a post, so there you are.  Customer service!

Jeff Ihnen

Author Jeff Ihnen

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