NRG Energy (NYSE: NRG ) has made some fascinating moves recently that suggest it's written the first few drafts of a Dear John letter to utilities. It's not the only one disrupting the status quo, either. As energy demand surges in response to a growing global population and emerging-market development, and a changing climate forces us to get serious about constraining greenhouse gas emissions, all signs point to an energy future that bears little resemblance to what we know today.
Renewables are making tons of headway lately, and 2013 promises to be a very good year for energy sources such as wind and solar. Their growing share of generating capacity presents challenges to the old-school utilities, though: Given that solar photovoltaics and wind are randomly variable energy sources, traditional power plants and transmission lines that were designed for steady supply struggle to accommodate the power fluctuations of renewables.
This means that as companies such as SolarCity (NASDAQ: SCTY ) push their sun-powered energy systems further into the marketplace, they do so at traditional utilities' expense. In furnishing consumers with their own generation capacity, SolarCity bypasses utilities. The company's partnerships with electric-vehicle manufacturers further subvert the legacy systems.
This process of cutting out the middleman is one we've seen before. If you have doubts, ask yourself this: When was the last time you used a travel agent? Exactly. As companies like SolarCity offer customers renewable energy that is typically cheaper than power from the grid, they erode the need for utilities at all. And utilities have noticed.
In an interview with Bloomberg, Duke Energy's (NYSE: DUK ) chairman and CEO, Jim Rogers, directly acknowledged the trend's potential threat to his company over the long term. Duke is the United States' largest utility owner, and Rogers conceded that businesses like his could become less important in the long run.
"If the cost of solar panels keeps coming down, installation costs come down, and if they combine solar with battery technology and a power management system, then we have someone just using us for backup,” Rogers said. He also said Duke was considering a move into rooftop solar, describing it as a short-term opportunity.
At a 2012 energy conference, Susan Story -- CEO of Southern's (NYSE: SO ) services division -- directly acknowledged the shifting energy landscape. Southern, the United States' largest vertically integrated utility, has been making strides toward a smarter grid and has dramatically shifted its fuel sources. Traditionally coal-reliant, Southern burned more natural gas than coal for the first time in 2012.
But are companies like Southern and Duke moving quickly enough to survive the disruption that appears to be under way? Incumbents tend to weather disruptive events poorly, and this could be no exception. Especially when you consider "edge power."
Edge power is a new and evolving concept, but its core components are distributed generation, distributed storage, and distributed energy management systems. The idea is to enable customers to generate their own power or use stored power when centralized grid facilities become unreliable, such as in the case of a major storm or heat-wave demand surges.
Smart-grid expert Steven Collier explains that edge-power players are "willing to provide customers with things that incumbent utilities are unwilling or unable to provide." Collier predicts that "[e]dge-power players will eventually bypass the traditional vertically integrated electric utility business model to participate directly in regional, transactive energy markets."
EnerNOC (NASDAQ: ENOC ) is just such a player. The company offers demand response solutions, which essentially allow end-users of electricity to reduce their energy use, either actively or automatically. EnerNOC provides its services to PJM Interconnection, a regional transmission organization that coordinates the movement of wholesale electricity. These activities are precisely the sort that subvert the legacy, vertically integrated model that Southern and other utilities follow.
Takin' it to the streets …
Let's circle back to NRG, the biggest power provider to U.S. utilities. The company has begun providing electricity directly to consumers, bypassing its traditional clients. NRG has gotten into the rooftop solar business for both residential and commercial customers and intends eventually to offer natural-gas generators to pick up the slack when the sun don't shine.
In an interview at a recent MIT energy conference, NRG CEO David Crane said consumers are figuring out that "they don't need the power industry at all." Crane has bigger plans, too. "The individual homeowner should be able to tie a machine to their natural gas line and tie that with solar on the roof, and suddenly they can say to the transmission-distribution company, 'Disconnect that line.'"
If I were an operator betting on the status quo, I’d be very nervous. Companies such as NRG and EnerNOC are making all the right moves, and utilities are going to have to get nimble if they want to survive in the long run.
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