Deadly Shock: The Coming Devastation of Power Utilities

by senior futurist Richard Worzel, C.F.A.

Something strange happened in July of 2014 in Queensland, Australia. The wholesale price of electric power, which normally runs around AU$40-50 per megawatt-hour (MWh), dropped to below zero. Nobody wanted to buy electricity in the middle of a business day. Why? Because solar power installations have grown so quickly in Australia over the past few years, and enough homes and offices were generating enough of their own, cheaper power that no one wanted to buy power from the grid.[1]

But of course, this is sunny, hot Australia. That’s an exception, right? Not really, because July is the dead of winter Down Under, which means the shortest days and most indirect sunlight.

But can this happen elsewhere? Or does it require a tropical or semi-tropical location? Actually, what it may require is time, and not too much of that, either, because the cost of solar power is coming down at technological speeds – not quite as fast as Moore’s Law, but approaching it.

This will put a major dent in the business model almost all power utilities use, and will eventually put many of them out of business. But there are opportunities here, too, for utilities that are nimble enough to recognize an unstoppable change, and adapt to it before it’s too late.

Let’s start by identifying where the change will come from.

Renewables Are Almost Ready for Prime Time

At the moment, renewable energy is not-quite ready for prime time. According to the U.S. Department of Energy (DOE), here’s how the so-called levelized cost of energy compares to more traditional sources:

Power Type            $/kWh

Coal            10-14¢ (US)

Natural gas            7-13¢

Nuclear            10¢

Wind            8-20¢

Solar photovoltaic (PV)            13¢

Solar thermal            24¢

Geothermal            5¢

Biomass            10¢

Hydroelectric            8¢

 

A levelized cost is the estimated, average cost per kilowatt-hour (kWh) based on the total cost of construction, maintenance, and operation divided by the number of kilowatt-hours expected to be generated over the life of a power plant. Obviously, these numbers bounce around a bit, for example when the price of natural gas rises or falls. But this is a starting point, and the numbers are roughly right.

What this shows is that wind and solar are approaching the price levels where they can compete with more conventional electric generation without government subsidies. The lower end of the bracket for wind power, for instance, compares well with natural gas and even nuclear, while solar PV is just scratching the top end of the range for natural gas.

However, that’s where the similarities between wind and solar end. Windmills will evolve gradually, with incremental gains in efficiency and gradual declines in cost. The same is not true of solar; solar is going to be a game-changer of epic proportions.

Solar Comes Out of the Shadows

We’re already starting to see the implications of the DOE’s levelized numbers affect the marketplace, again without government subsidies. In September of 2013, Xcel Energy, a Colorado power utility, announced that it was going to build a 170 MW utility-scale, solar-generating power facility. At that time, David Eves, the CEO of Xcel, commented that “This is the first time that we’ve seen, purely on a price basis, that the solar projects made the cut — without considering carbon costs or the need to comply with a renewable energy standard — strictly on an economic basis.”[2]

Nor is this an isolated case. In 2013, The Economist newsmagazine reported that 29% of all new energy capacity built in America was solar, and that in 2014 the supply of solar-generated power will grow by 26%. So solar is gaining ground rapidly. And at that rate of growth, solar capacity will double roughly every three years.

But that’s not the whole story, because the price of solar PV is plummeting. The chart below, produced and published by Michael Parker and Flora Chang of AllianceBernstein, shows how the cost of solar, the steep, grey line, has dropped from approximately $230 per million BTUs (British Thermal Units – a measure of energy) in 2009 to about $20 by 2013 – a drop of more than 90%. And the drop continues.

According to Citigroup’s energy analysts, the price of solar power drops by about 22% every time solar capacity doubles, partly because of new technologies, and partly because of economies of scale. Given that solar currently produces less than 1% of global electricity, there’s a lot of room for doubling, which means that prices will continue to plummet, and solar will get more competitive very, very quickly.

Solar’s Greatest Advantage…

But even that’s not the whole story, because over time, solar will only need to compete with the retail price of electricity, not the wholesale price because it will be generated where it’s used. And that makes a huge difference. Let me go back to the Australian state of Queensland to illustrate why.

There is now more than 1,100 MW of installed rooftop solar in Queensland on more than 350,000 building. Today it costs Australian power utilities 19¢/kWh just to deliver electricity over the grid, whereas rooftop solar is now producing electricity at a cost of between 12-18¢/kWh. Hence, even if the power utilities could produce electricity at zero cost, their power would still be more expensive than that generated by rooftop panels.[3]

And Bloomberg New Energy Finance is projecting that rooftop installations will increase six-fold within the next decade in Australia, and an Australian forecast projects that by 2024, only ten years from now, 75% of detached and semi-detached houses and 90% of commercial enterprises will have rooftop solar panels. Based on current tariffs, power utilities won’t be able to compete when most of their customers can generate power more cheaply than they can.

Yet, even if you decide that what’s happening today in sunny Australia won’t work elsewhere, say in the northern tier of states in America or in cold Canada, you still have to account for falling solar prices. If solar prices continue to drop, they will soon be competitive in cold climates, too. If solar drops 22% with every doubling in capacity, for instance, as Citigroup says, then solar panels will be producing electricity at a cost of between 7-11¢ within two doublings of capacity, within roughly six years. At that price, it’s competitive with almost any conventional wholesale source of electricity, but with no floor in sight. And if it’s generated where it’s used, then it is dramatically cheaper than other sources of electricity, regardless of location.

The Empire Strikes Back

This means desperate trouble for power utilities. As solar plunges in price, utilities will be priced out of the market. They will literally not be able to compete, and, again, this is entirely without subsidies for solar. It seems to spell certain bankruptcy for an industry currently worth trillions of dollars – and a massive upset for stock market investors, for whom a power utiltiy has traditionally been a widows-and-orphans stock.

But…

There are two major stumbling blocks that will have to be overcome on the way to this green nirvana. The first is the utilities themselves, for they will not go without a fight. This is guaranteed; there’s too much money involved. Indeed, the fight has already begun – starting in Australia.

On July 18th, Australian power utility Ergon Energy changed its tariff for businesses that are on a “demand only” basis – which means businesses that have rooftop solar power that use the grid to top-up their energy needs when solar power’s not available. Ergon increased the tariff for on-demand customers from AU$42 a day to AU$537 a day.[4] This is clearly intended to stop the inroads solar power is making on Ergon’s power sales.

This is perfectly understandable: If you were a power utility, would you stand by as your basic business was being destroyed by people who could, whenever it was financially advantageous for them, draw on your resources, then undercut those resources whenever it was more lucrative for them to do so? Would you allow them to make use of your resources to destroy your business? Obviously not. This is not a big corporation attempting to victimize people by attempting to block solar. It’s a survival move, pure and simple. But will it succeed?

We are just seeing the opening salvos in what is going to be a long, protracted, messy, and highly politicized battle. Utilities will spend billions attempting to persuade politicians that they need to be protected from “unfair” competition from solar, because the alternative is that they stand to lose hundreds of billions and their livelihoods. And many governments will have a lot of sympathy for them, first because lots of governments have big investments in power utilities, either because they own them, or because they are on the hook, directly or indirectly, for sunk costs. And utilities will point out that (a) huge numbers of jobs in the utility industry will be lost if they go bankrupt; (b) millions of investors will be hurt, including pension funds that may then have to appeal for more money from governments to make them whole, and (c) there will be severe economic repercussions because renewable energy cannot function without the grid yet.

Why the Utilities Will Ultimately Lose – Unless They Change

So utilities and many (most?) governments will line up on one side. On the other side are greens – and economics. In the short run, politics will dominate and the utilities will win. But in the medium- to long-term, economics will win, and may bankrupt an entire industry unless that industry takes a step back, and looks at a bigger picture, and a different business model. And the time for utilities to act may be much shorter than anyone expects – perhaps even within the next 5 years, if things break wrong.

Power utilities inhale investment capital like it was air; they cannot survive without it. But Wall Street only invests in companies that it thinks will deliver interest payment on bonds, and profits, dividends, and, preferably, growth on shares. If utilities can’t promise these things, or even if investors start to believe they won’t be able to deliver them at some point in the not-all-that-distant future, investors will dump their power utility stocks, bond markets will stop lending to utilities, and the monetary oxygen will be shut off. Utilities could be driven into bankruptcy before solar energy ever has a significant effect on their revenues.

Greens may think that’s a cause to celebrate because it would remove a significant percentage of fossil fuel emissions. But before the party hats are handed ’round, we need to consider the other major stumbling block: energy storage.

Why We Need Utilities

Everyone knows and acknowledges that the sun doesn’t shine all the time (except in space), and the wind doesn’t blow all the time. Accordingly, the ability to store energy efficiently and conveniently is critical to the future of renewable energy in general, and solar power in particular. (I’ll describe such energy storage as “battery technology” for simplicity’s sake, even though most large-scale storage techniques are not battery related.)

We don’t have good, compact, widely available, economically affordable battery technology yet. There are many organizations working on the problem, and new (and old) solutions will continue to appear – but they can’t possibly be available widely enough, or fast enough, to fill the gaps between the continuous, always-available power people and businesses need, and the lumpy, erratic power produced by renewables.

Until such efficient and convenient battery technology arrives, and becomes widely used, virtually everyone needs the power utility grid to fill the gaps. And that’s a problem, because if the power utilities are seriously undercut by rooftop solar, then the grid may not survive. Even if solar only becomes competitive for part of the year, as it would be in the Canadian summer, for instance, with its long, sunlight days, utilities are so capital intensive that they couldn’t survive summers when users bought almost no power.

Yet, if the grid doesn’t survive, then neither homes nor businesses will be able to manage the transition to renewable energy. We are still heavily reliant on power utilities to fill the gaps between sun, wind, and other forms of renewable energy. But the economically-driven movement towards renewables may destroy the utilities’ ability to fill that function before we have anything to replace it.

In consequence, there’s an economic and temporal gap between the time power utilities are rendered uneconomic, and when renewable energy is as reliable and readily available as the electric power grid. And there’s a perception gap as well: greens will want to shut down utilities immediately to reduce greenhouse gas emissions, but without figuring how we can manage without the grid. And utilities will fight, tooth and nail, to try to stop solar, which won’t, ultimately, be possible. Both sides will be shouting past each other; neither side will want to listen, both believing they are the Guardians of Ultimate Truth.

Filling the Gap

Eventually, I believe that regulators and governments will decide that power utilities need to be sustained and protected, and will finally settle on a cost-for-connection tariff. How this might operate is that anyone who wishes to be connected to the power grid will pay a significant, monthly administrative charge, regardless of how much or little power they use. Usage will be charged by the kilowatt-hour on top of that.

People who advocate renewable energy won’t be happy with this because they will see it as subsidizing power utilities, and that they are being penalized for switching to clean, economical solar. And the utilities won’t like it because it won’t deal with the root problem: that their business model no longer works.

And, ironically, almost every move the utilities make to try to block renewable power will hasten the day when they are driven out of business. The more expensive they make it to be connected to the power grid, the more money that will be invested in ways to escape that connection, especially in battery technology.

So, if I were running a power utility, I’d look at how I could, first, take advantage of the plummeting price of solar energy to create capacity that was cheaper than rooftop solar, and then, look at how to turn the grid into a universally available battery where people could store power until they needed it. I don’t expect that will happen very often, though, because it would require senior executives in a placid, staid industry to change radically, and become drastic innovators.

This is possible. It’s just not likely, even when your survival is on the line.