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.
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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