Disruptive Technologies and Business Models
To quote from my prior article, though many utilities saw PURPA as an existential threat to their traditional business model, it turned out not to be the Trojan horse many of them warned of. Now, once again, they see an existential threat to their traditional business model, and it is distributed power, best represented by rooftop solar.
The growth of the rooftop solar market in the U.S. has been explosive, growing from approximately 15,500 homes in 2004, to over 600,000 homes by 2014 – and this growth rate continues to increase exponentially. Prices for residential solar on a per watt basis have dropped from over $8 per watt in 2007 into the $3 range by 2015. Commercial utility scale solar prices are now in the range of less than $1.60 per installed watt. The city of Austin, Texas recently signed a solar power purchase agreement (PPA) for under $0.05 per kilowatt hour, and in July of 2015, Nevada Power entered into a PPA to purchase solar for $0.0387 per kWh from an independent power producer. This is on par, if not a bit less, than electricity from natural gas or coal.
The decrease in the cost for solar has no doubt fueled its growth, but the introduction of the Solar City Corporation (another Elon Musk-financed company) business model was a shot of adrenalin. Rather than selling solar systems outright to customers, Solar City gave the customer the option of having the systems installed for no money down and simply purchasing the electricity from Solar City under a PPA, at a rate less than what was being offered by their local utility. Founded in 2006, Solar City has grown in revenues to over $255 million in 2014, with a market cap of over $4.68 billion, and an installed base of 1.4 gigawatts.
In Florida, this model isn’t allowed under its constitution, but there is a movement afoot to get a measure on the 2016 ballot that would overturn this prohibition, and an unlikely coalition has formed to back the measure. Tea Party, Evangelical and Libertarian organizations, have teamed with liberal-leaning organization such as the Sierra Club and the Environmental Defense Fund to pass this initiative. Not surprisingly, the utilities are backing a competing ballot measure to maintain the status quo.
Storage of electricity has been the Holy Grail for the renewable energy industry. The intermittent nature of some renewables, such as wind and solar, has necessitated the interconnection to the grid where uninterruptable power is required. Battery storage or backups can address this issue. Such installations coupled with a backup generator are the basis of micro-grids.
The advent and growth of the electric vehicles market has spawned a growth industry in storage battery technology and manufacturing efficiencies. Tesla, the electric automobile manufacturer, recently announced their intent to market a battery backup system specifically targeted at the rooftop solar market, further stimulating the discussions relating to the battery storage market, which has been projected to be an over $1 billion market within the next few years. Initial projected costs for these units is in the $350 per kWh range, but within five years they forecast being able to bring this down to $100 per kWh.
Fuel cells costs have decreased by over 50 percent in the last 10 years. Already, such companies as Bloom Energy offer PPAs for their “Bloom Box” fuel cell in the range of $0.08 to $0.10 per kWh, and lists such stellar customers as Apple, EBay, Google, Walmart, Coca Cola and FedEx. At $5,000-7,000 per installed kW, fuel cells are somewhat pricy, but recent research and development on new technologies project the cost of fuel cells to descend into the $2,000 to $1,000 per kW price range within the next five to10 years. This could reduce the cost of energy from fuel cells to less than $0.06 per kWh under certain conditions, half the current national average price per kWh.
The attractiveness of having on-site power generation where backup power is a necessity, is not lost on installations such as data centers, hospitals and cold storage facilities. The fact that fuel cells emit few if any greenhouse gases and operate extremely quietly, enables them to be used in environments where an internal combustion engine or gas turbine would be impractical or difficult to permit. The South Coast Air Quality Management District (SCAQMD), which is the agency monitoring and regulating air quality in Southern California, has no permit requirement for the installation of fuel cells.
In the not too distant future, homes and businesses may opt to become power self-sufficient, disconnecting completely from the grid.
Confronting the New Paradigm
Utility executives are well aware of these disruptive technologies and business models. At least some of them recognize that in the not-too-distant future, it will be economical for a high percentage of their customer base to self-generate a large portion, if not all, of their electrical power needs. Some are preparing for this in the near term, others are looking to forestall this into the future through regulatory and legislature interventions.
Increasingly, utilities are petitioning regulators to dramatically increase the grid interconnection fixed fees charged for self-generators to make up for the anticipated revenue loss from lost kWh sales. For large users of electrical energy wishing to disconnect from the grid, many utilities have been successful in demanding large exit fees to discourage such exoduses. In Nevada, where three large casinos petition to self-generate, the Nevada public utilities commission calculated their exit fees at $128 million.
In a 2013 study commissioned and published by the Edison Electric Institute (an organization representing over 70 percent of the U.S. electric power industry), “Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business,” the author warns of the imminent threat of these new technologies and business models and the changing utility’s role. He points to examples of such industries as telecommunication, airline, photography, postal and package delivery, where what he terms “disruptive challenges” totally changed how these industries functioned and the resulting financial impact to the traditional players.
In warning of the imminent danger to their traditional business models, he recommends the industry take proactive measures within the regulatory environment to protect their interests, defensive moves to protect their territories and traditional monopolies. In the final paragraph of the paper, he ends with the sentence, “Ultimately, all stakeholders must embrace change in technology and business models in order to maintain a viable utility industry.”
Disruptive technologies and business models for the most part have proved beneficial to society in the long run. Long regulated and protected monopolies for delivery of mail, telephone, transportation and shipping have been transformed by new technologies and business models. If the U.S. Postal Service had provided better service, United Parcel Service (UPS) and FedEx wouldn’t be the multi-billion dollar companies they are today, and the USPS would not have been forced to innovate. With deregulation, telecommunication has improved and costs have come down precipitously (virtually free in many cases). Wireless technologies and the Internet offer communication enhancements of video, messaging and document transfer that analogue telephone technology generally could not. The cost of air travel dropped more than 50 percent (as has the comfort, as many might say) since deregulation. We don’t even think about the cost of developing film, thanks to digital technology. The world seems to have embraced Uber and Lyft (except for the traditional taxi driver), and almost everyone knows someone who has used Airbnb. The rapid development of drones or pilot-less aerial vehicles may be transformative in the way packages are delivered. Already, the technology has proved itself in delivering medicines to remote, difficult-to-reach locations.
If the utility companies fail to recognize and acknowledge that their traditional business model is obsolete, it is incumbent upon the various State legislatures and public utility regulators to recognize this and refrain from propping them up and implementing band aid fixes to an obsolete business model. Public utilities are often a necessity, and in some cases natural monopolies, and have a place in society, but their structure and mandates need to be adaptive, responsive to changing technologies and societal needs.
It is imperative that the traditional utility monopoly be redefined for the 21st century. Smart grid technologies, demand side management, distributed power, solar, wind, fuel cells, micro-grids, all need to be brought to bear in defining the utility grid of the future. What seemed logical and necessary in 1907 may not be appropriate 108 years later.
Rethinking the Electric Utility Model Series: