Causes of a Utility Death Spiral
After 100 years of operating in an environment where the government ensured a reasonable operating profit utilities may now be facing a death spiral.
Under their current regulatory model utilities provide reliable service to their customers and the government guarantees a monopoly service territory and rates that result in a reasonable return on investment. It would appear to be a business model that business would love. Customers receive a necessary service and utility investors receive a steady and reliable return.
But now there is talk of a utility death spiral. A death spiral that can be defined as “a situation that keeps getting worse and that is likely to end badly with great harm or damage being caused.” Is this even possible?
Well the fact is that not only is it possible, it is probably true. Utilities have invested in infrastructure that provides their customers with a reliable service. Their rates, approved by government regulatory agencies, include recovery of, and a return on, that investment in this infrastructure.
But customers are responding to these rates by installing distributed generation like rooftop solar generation. This self-generation reduces, or even eliminates, purchases from the local utility. And even though sales to these customers go down, the fixed costs of the installed infrastructure remain the same. And those fixed costs have to be recovered from remaining customers, whose rates then go up.
As rates go up more and more customers decide to install their own distributed generation. This further reduces purchases from the utility. If nothing is done to check this utility death spiral the infrastructure costs will either be paid by the poorest customers who can least afford to install distributed generation or will not be paid at all sending the utility into bankruptcy.
Utility Response to the Death Spiral
Some utilities have responded to the death spiral by seeking to hold on to the status quo. To retain sales, some utilities have tried to end government incentives that tend to overprice the value of distributed generation. And to make sure that they recover their fixed costs, some utilities have sought to “decouple” recovery of fixed costs from their per-kWh charges. Where implemented, decoupling results in most of the infrastructure costs being recovered through a fixed customer charge paid by all customers no matter how much electricity they use.
Both of the utilities’ tactics will force customers to disconnect from the grid if they hope to get the full benefits of distributed generation. At one time disconnecting from the grid would have been almost unthinkable. However, now more and more customers can disconnect by joining a micro-grid that is not operated by the local utility. The following video describes the operation of a micro-grid:
If the utility tactics operate to force customers off the grid they will not stop the utility death spiral. They will only delay it.
As described in the Post entitled Distributed Generation – An Old Idea Reconsidered, the utilities will be able to achieve significant efficiencies for the entire system if they use a smart grid to gain access to customer owned distributed generation. In other words, it is in the public interest for the utilities to keep customers on the grid and to embrace their efforts to use distributed generation. It will be up to utilities and policy makers to determine how the utilities will be able to both meet the public interest and to thrive financially in an environment where their traditional source of revenue (selling and/or transmitting energy) is shrinking.
For more information on utility response to the death spiral see the Deloitte article entitled Beyond the math: Preparing for disruption and innovation in the US Electric power industry.
I. David Rosenstein worked as an attorney and consulting engineer in the electric utility industry for 40 years. When he retired he wrote a book entitled Electrifying America: From Thomas Edison to Climate Change that describes the evolution of the electric industry from the time Edison invented the light bulb until today. Each of his posts in this Blog describe a different aspect of the past, present or future of the electric industry.