Is Energy Efficiency Disrupting the Electric Utilities' Business Model?
We live in an age of disruption. The word denotes an undesired consequence, as in climate disruption, but it often is a powerful, if still painful, force for positive change, growth and transformation.
Research by Shakeb Afsah and Kendyl Salcito with the CO2 Scorecard Group, and Nicola Limodio, a doctoral candidate at the Department of Economics at the London School of Economics, have analyzed 40 years of end-use electricity data using a time-series filter to expose a 25-year trend of declining electricity use in the United States due to increased energy efficiency.
Decreased demand should dictate a contraction in generation sector, but the situation is made more complex by seasonal fluctuations and changing demographics. Warmer summers and a population shift to warmer states in the south and west run counter to the general trend with increasing peak seasonal load, making what the authors of the study call a “perfect storm for the finances of utility companies.”
“While warmer summers require utilities to maintain generation capacity, warmer winters and energy efficiency starkly reduce demand the rest of the year, cutting into utility companies’ cash flow and bottom line. This may be good news for consumers who watch their electricity bills drop, but it’s a real problem for power companies”
The diverging trends between overall and seasonal demand require utilities to maintain peak demand capacity on the one hand, but adversely impact cash flow and the bottom line on the other. If the situation persists, say the authors, utilities “will be forced to increase the price of electricity to cover costs.”
“But increased price will only strengthen the incentives for more electricity conservation and boost the demand for rooftop solar with net metering. We see this action-and-reaction as a disruptive force that could trigger radical reform of the power sector’s obsolete business model.”
The irony of maintaining a growing peak demand capacity in a landscape of increasing energy efficiency, and thus lower overall consumer costs to consumers, has forced the hand of many utilities stuck in a 20th century business model. Utility companies in Hawaii, Texas, Arizona and Louisiana have begun efforts to eliminate or reduce credits their customers receive for installing rooftop solar systems. Oklahoma takes it a step further in an effort to actually charge customers a premium for using off-grid renewable energy systems. Florida, the sunshine state, has cut its energy efficiency goal by 90 percent.
These “protectionist measures” may put a temporary challenge to the continued adoption of energy efficiency measures and renewable energy technologies, but it is a last gasp effort, says the authors of the report:
“…they are strategies in a losing battle in a lost war. Energy efficiency has worked at the national level despite the halfhearted support it has received in many states. Industrial opposition to renewable resources may slow the revolution in US power generation, but it is very unlikely to stop it.”
The disruption of the old business model didn’t start overnight. It was triggered by energy efficiency more than 20 years ago, and is only accelerated today by the rapid growth of clean energy technologies. Resisting the clear trend toward greater efficiency and cleaner, more distributed energy production will only work for so long. Some utilities understand this and are moving in the right direction, among them Xcel, Edison, and others.
The plight of the US electricity sector can serve as a model for developing countries. The lesson for them is not to get stuck in a fossil fuel-based electricity generation infrastructure. Adopting energy efficiency and clean energy technology early in their economic development paves the way for much more climate friendly growth.
Read the entire report published on CO2 Scorecard.
Main image credit: Jack Zalium, courtesy flickr; graphs courtesy of CO2 Scorecard
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