Report: Electric Utilities Need to Keep Pace with Change

Tom Johnson | April 19, 2013 | Energy & Environment
Embracing new energy technologies called crucial to financial viability in the future

Is the electric utility sector’s traditional business model economically viable in the face of rapid innovations in the industry?

An industry-funded study suggests that the advent of cleaner technologies, such as solar energy, as well as aggressive efforts by states to curtail energy consumption, pose financial threats to the sector, which has mostly been a pillar of fiscal stability for more than a century.

Many of the disruptive forces identified in the study released early this year by the Washington, D.C.-based Edison Electric Institute, an industry trade group, have long been embraced by New Jersey.

The state already has more than 1,000 megawatts of solar-energy systems installed. It hopes to build another 3,000 megawatts of offshore wind capacity, as well as adding another 1,500 megawatts of capacity from new and more efficient power plants serving hospitals, manufacturers and other large users of electricity by 2020.

All of the above fall under the rubric of distributed generation, industry jargon meaning that the electricity the consumer uses is produced locally, instead of coming from a centralized power plant typically located many miles away, and delivered over the local utility’s transmission and distribution system.

The growth of distribution generation, and efforts to promote energy efficiency projects, present a host of unwelcome outcomes for the utility industry, according to the study, including declining revenues, increasing costs, and lower profitability potential, particularly over the long term.

“These things do have impacts,’’ said Paul Patterson, an energy industry analyst with Glenrock Associates in New York, “and this is not an industry that is generally known for being nimble.’’

Part of the problem is tied to the fact that the utility’s distribution structure is typically based on a single-way “highway” system, with electricity flowing one way. With distributed generation, the system becomes a two-way “highway,” requiring upgrades to accommodate new sources of producing electricity like solar and combined heat and power plants, generally a more efficient way of producing electricity favored by large energy users.

Who pays for those upgrades is a source of dispute, with some saying that those who remain with the incumbent utility should not have to shoulder the entire cost. If there is continuing migration off the incumbent’s utility system, the remaining customers likely will face higher electric bills, according to the study.

“As the cost curve for these technologies improves, they could directly threaten the centralized utility model,’’ according to the report titled “Disruptive Challenges: Financial Implications and Strategic Responses for a Changing Retail Electric Business.”

The study also raises the prospects of “stranded costs” for the utilities, an issue that has been a particularly sore point in New Jersey, with customers paying nearly $3 billion to Public Service Electric & Gas for power plants deemed non-competitive in a deregulated energy market.

Whether the current utilities could face financial problems was an issue raised by the report. Does it seem unthinkable? The report cites other blue-chip companies and the telecommunications industry, which were roiled by major innovations.

“Who would have believed 10 years ago that traditional wire line telephone customers could economically ‘cut the cord?’‘’ the study asks.
In the last five years, Verizon Communications has lost 45 percent of its wire line customers, according to the report.

It also mentioned Kodak, once the dominant force in the photo business, which was crippled by the advent of digital technology. The company filed for bankruptcy last year.

At the same time, utilities in New Jersey face pressure from state regulators to modernize their power grids to prevent the sort of widespread outages that occurred during Hurricane Sandy, which left more than 2 million customers without power, some for more than a week.

Industry executives in New Jersey conceded the electric-utility sector faces challenges.

“These new types of distributed resources do present challenges to the traditional model,’’ acknowledged Tim Fagan, director of public policy for Public Service Enterprise Group, owner of the state’ largest gas and electric utility, Public Service Electric & Gas.

The study recommends utilities try to be more proactive in dealing with emerging trends. PSE&G has not shied away from adapting the new technologies, and it has been by far the most aggressive utility in the state in installing solar-energy systems. It also has a non-regulated company seeking to build offshore wind capacity off the Jersey Shore.

“These are things that the 21st century customers desire and would like to have,’’ Fagan said. “We see this as an opportunity to improve customers’ satisfaction.’’

New Jersey Division of Rate Counsel Stefanie Brand did not dispute that the utilities face challenges in a changing landscape.

Still, she argued utilities remain incredible investments for shareholders.

“They are still guaranteed returns that other companies would die for,’’ she said.

However, Brand said utilities should not have to absorb costs associated with distributed-generation projects.

Scott Olson, a Byram Township councilman who was a highly vocal foe of PSE&G’s plans to build a high-voltage power line through the New Jersey Highlands, said the EEI study seems to confirm many of the arguments against the project.

“It looks like the industry is agreeing with what we’ve been saying all along,’’ said Olson, referring to the impact of renewables, energy efficiency and other issues reducing the need for new high-voltage power lines.