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Forces Are Mounting Against Utilities Like Never Before

Change is sweeping across the planes of our energy landscape. The combination of solar leasing, advances in renewable energy storage, and the brave new world of the "Internet of Things" spell doom for utilities as we know them. Utility shares could be worth a lot less, and sooner than investors would care to recognize. 


The electric utility business model has remained stubbornly unchanged for much of the last 50 years. While telecoms, health care, and other industry structures have hurtled ahead -- for better or worse -- in response to our modern technological and regulatory framework, the system that powers our homes and businesses seems almost anachronistic at this point. Utilities invest in building large-scale generation plants and a transmission and distribution architecture to move power from source to end user, and then recoup costs through the rates they charge customers.

Changes in production
Change is coming, not in a trickle but in a tidal wave. Many energy industry observers predict the end of traditional utilities as part of this transformation. Upstarts like Solar City (NASDAQ: SCTY  ) are disrupting things from the energy production side. Solar City explicitly markets itself along these lines, saying it has "disrupted the century-old energy industry by providing renewable electricity directly to homeowners, businesses and government organizations for less than they spend on utility bills."

Solar City isn't just blowing smoke. The company is describing a phenomenon called disintermediation. Consider that in the traditional model, one company generates the electricity you want, another transmits from where it was generated to the residential and commercial hubs of demand, and a third distributes it to those last few miles to your home or office. Solar City is basically giving you the power to do all three of those things yourself, cutting out the middlemen or intermediates. Scaled up enough, this is bad news for the old model.

What's more, Solar City is offering new financing models that help to soften the up-front costs associated with distributed solar installation. Not only does the company provide solar leasing programs to its customers to defray what would otherwise be a large initial capital outlay, but also, just this month, Solar City announced a new online investment platform for investors to trade on the debt associated with these leases.

Changes in consumption
Now, companies like start-up Verdigris could pose problems on the usage side. As part of the "Internet of Things" phenomenon, Verdigris uses the intercommunicative nature of modern buildings and their appliances to provide electricity consumers with deep insight into where they are wasting energy, allowing them to eliminate that waste.

This vice might be clamping down too tightly for utilities to escape. Energy experts estimate that buildings consume 11,700 terawatt-hours (TWh) of energy per year, more than half of which is wasted. It seems unreasonable to believe that utilities could survive if half of the energy "consumed" is suddenly no longer needed. While the sudden removal of 50% of energy demand is hard to fathom, a recent Forbes article says that even a few thousand TWh reduction could save billions, if not trillions, of dollars. The majority of this savings will likely come from utilities' top lines. 

More to the story
So are utilities really just a bunch of dinosaurs, munching on grass while the meteor speeds toward them? Well, no, not exactly. It turns out that there are some smart cookies in the utility sector, and many of them have a pretty clear view on where things are headed. They have some serious obstacles in their way, but they're getting involved.

Duke Energy (NYSE: DUK  ) has seen the light on renewables, and has a new unit dedicated to utility-scale solar development. Similarly, while Southern Company (NYSE: SO  ) has so far been buying solar energy from others, that company is also moving into large-scale solar farms.

This flies in the face of a significant school of thought that sees solar expansion taking place in a distributed generation framework. That framework is closely in line with our earlier disintermediation example, and sees homeowners and businesses installing solar panels on their roofs and selling excess energy back to the grid.

Many think that distributed generation itself will destroy utilities, in that it destroys much of their value. However, the distributed generation model still relies on the grid itself for backup power. Furthermore, distributed solar remains a tiny sliver of the broader solar landscape, which still predominantly features large-scale generation plants, just like the legacy model.

Utilities can also purchase solar power more cheaply from a big plant than from a homeowner. For instance, Duke Energy has to pay North Carolinians $0.10 to $0.11 per kilowatt-hour when they sell their energy back to the grid, as compared with the $0.05 to $0.06 they'd pay to get it from an industrial solar farm.

Still kickin'
Utilities undoubtedly face tremendous challenges, and some will likely fall in the coming transition. Still, it's not yet time to sound the death knell. A recent PwC survey of global power and utilities found that 82% of respondents viewed distributed power generation as an "opportunity." A Southern Company spokesman describes the company's belief that "renewable energy holds great promise," and that "solar is a very important resource as part of the full portfolio in meeting our customers' energy needs moving forward."

And so I circle back to the conclusion I always reach on this topic. The surest strategy for securing our energy future is a blended one, using diverse energy sources, technologies, and distribution models. Utilities that continue to generate value by meeting the shifting and variable needs of the electricity market will be around for a long time to come.

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Read/Post Comments (10) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 30, 2014, at 11:54 AM, CJ52 wrote:

    This article is shortsighted on energy volume needs. Go figure how many square feet of solar collectors it will take to replace one nuclear plant or one coal plant. You'd be better off building generation using tidal wave energy / tidal flow. If anything disrupts utility company viability it will be politically inacted extortion in the name of ecology.

  • Report this Comment On January 30, 2014, at 7:28 PM, CaptGene wrote:

    Sorry but conventional energy generation and transmission is here to stay. The lesser evil way to power the lights is already in place. Clean burning natural gas, cheaper in the USA than anywhere else in the world, realistically, is an insurmountable hurdle to change except in the minds of Liberals .

  • Report this Comment On January 30, 2014, at 8:30 PM, stevews99 wrote:

    Sara: I was very excited to see your article, anticipating a thoughtful discussion on our antiquated, and highly vulnerable, power distribution system. But no. I got yet another dose of EPA/Green renewable waste products. Reality: the sun doesn't always shine and the wind doesn't always blow. Until we develop an energy storage system that works on a large scale we will continue to rely upon fossil fuels. If you would like an economic rebuttal to your premise please contact the Germans...they are in the midst of building coal power plants and shortly will generate more energy from coal than they did in 1990. So how did the billions they invested in renewable energy work out? Not so well especially for the German people who saw their power bills sky rocket (cue Barack the Unicorn Prince). In reality the biggest threat to the utility industry (and we, the people) is the EPA and the messiah.

    Be well...

  • Report this Comment On January 30, 2014, at 8:47 PM, cmalek wrote:


    I live in the vicinity of a nuclear power plant that generates 2500 megawatts. At today's efficiencies and output levels it would take AT LEAST 500 wind turbines to replace the nuke. In the New York City suburbs where the plant is located, there is no land available (other than county and state parks) to site 500 wind turbines. There is room in the Catskill Mountains but the same people that want the wind power, are the first ones to object to siting turbines on any green space. Then there are the monied NIMBY's who will not allow turbines in THEIR neighborhoods. (Just Google the wind power projects off the coast of Cape Cod and the Kennedy's strong opposition to them)

    Alternative power generation, be it solar, wind, geothermal, tidal, is still a boutique application. It is too unreliable, too expensive, and, most of all, too inefficient to replace current methods of power generation.

  • Report this Comment On January 30, 2014, at 8:58 PM, cmalek wrote:


    Natural gas may be cheaper for now because it is not widely used. Already the sudden increase in demand because of the Arctic temps in Northern US has caused the price to spike significantly. If we start to replace existing nuclear and coal fired plants with gas fired ones, the demand and the price for natural gas will rise dramatically which will make much less desirable to use.

  • Report this Comment On January 31, 2014, at 6:11 AM, gkirkmf wrote:

    @CaptGene: Not to mention the extraordinary depletion rates being experienced with shale gas wells. The entire enterprise survives on cheap borrowed money... how long will that last? When it is gone, and the cost of drilling doubles I sure wouldn't want to own a gas fired plant...

    @TMFSMurph: Your numbers are way too optimistic for "rooftop" solar. As a person who has a medium size array installed in my back yard (15KW) I can tell you that the economics of solar are miserable... unless electric rates double or triple over the next 10 years, my payback will be on the order of 15 years.

    If you understand climate science, going solar is the last thing you can do to avoid dumping carbon back into the atmosphere, after doing all the other things on the check list to cut energy use. I'm there.

  • Report this Comment On January 31, 2014, at 7:51 AM, Yoshimaroko wrote:

    I am in firm agreement with theabove posters. Nuclear is the most effective and efficient power generaton. Unlike so called "renewable energy" nuclear can "stand on it's own". No back-up power plant required.

  • Report this Comment On January 31, 2014, at 8:09 AM, sevenheart wrote:

    Current solar panel technology has a useful life of 25 years, electrical generation starts to decline from the first day until they have to be completely replaced. The waste stream as panels wear out will be significant, and the installation cost repeated over and over and over............

  • Report this Comment On January 31, 2014, at 9:15 AM, onwardupward wrote:

    For those interested in clean, safe, sustainable, 24/7 energy, we need to get informed and appeal to policy makers and industry for IFR technology to be developed for new nuclear plants.


  • Report this Comment On January 31, 2014, at 10:27 AM, cmalek wrote:

    The most reliable method of alternate energy generation is the hot air coming out of Washington and all the climate control conferences. If we can harness that, many fossil fuel-fired plants can be decomissioned.

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Sara Murphy

Sara has been writing about and analyzing companies from a sustainable investment perspective for the last 15 years. An ardent optimist, she believes that it is entirely possible for all stakeholders to benefit and profit from companies' ingenuity and innovation.

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