Utilities are Fighting the Last War

The Maginot Line was backwards thinking on a grand scale

Military analysts are fond of pointing out that generals tend to focus future strategy and acquisitions on what was needed for success in previous conflicts.  Called "fighting the last war", it seldom works out well to look in the rearview mirror to see what is coming ahead on the road.  A modern military example of wrong way planning is with the Maginot Line in France following World War I.  The horrors and technology of trench warfare pushed French military planners to build a massive network of fortifications along the border of France and Germany.  While the Maginot Line did prove to be an effective barrier, it didn't account for the Germans to decide to just go around it.  The mental energy and commitment of resources to a static defense completely paralyzed the French army's ability to adapt to a rapidly changing set of circumstances.

I see a similar situation in the US energy sector today.  While at a recent energy conference, I learned that utilities fear two major disruptive forces that have hit the energy market in the last few years--impending carbon emission regulations and the collapse of natural gas pricing.  EPA regulations will force power plants to operate cleaner but added costs may be mitigated by reduced operating costs and/or offset by short term government incentives to switch.  Natural gas prices fell dramatically due to the unexpected rise in hydraulic fracturing and has made the economics of power generating technologies using other fuels hard to justify.  Because of the long timeline for power plant construction and operation for cost recovery, the precipitous fall in gas prices puts utilities in a dilemma since quickly switching fuels is not easy. On the bright side though, we already see natgas generation beginning to displace coal generation both saving money and reducing pollution in a win/win scenario ("clean coal" is also officially dead).  While these two effects throw utility forecasts for capital expenditure and price prediction into turmoil, they are being planned for and even have potential upside benefits to the utilities and ratepayers.

Clinging to centralized power generation may be as backward as the Maginot Line

The future that utilities don't seem to be prepared for and one with much more downside risk is a loss of ratepayers to distributed generation systems installed behind the meter (i.e. not connected to the grid).  Combined Heat and Power (CHP) systems run on natural gas and are now viable for a large number of building owners to replace their electric supply from utilities.  If electricity costs rise, more and more commercial and industrial utility customers will opt for CHP. Solar PV is also rapidly approaching grid parity much faster than anticipated.  The danger these two technologies pose to utilities is that they open up ratepayers to the option of completely disconnecting from the grid--something entirely new.  With even losing a small fraction of their ratepayer base to distributed systems, the utility revenue models significantly change for the worse.  Less utility revenue means more pressure to raise rates to maintain the grid and thus pushes more ratepayers away towards distributed systems.  A most unvirtuous cycle indeed.

Distributed generation of electricity for utilities is the Blitzkrieg that the French did not anticipate.  I talked about this in previous article about how solar PV (and CHP) represent a mortal threat to the utilities.  Unfortunately it seems that not all utilities recognize it as the existential threat that it is.  Progress happens and outdated technologies get replaced with better ones.  Unlike with the transition from regulated, wired telephone service to deregulated, wireless service, electricity infrastructure has safety (nuclear plants and superfund sites) concerns that can't be overlooked.  If fewer people are paying for the same grid infrastructure, where will the money come from to keep it working?  How will keep electricity both reliable and affordable if the utilities can't keep up with the trends?