Energy Industry In Crisis – Utilities Beware

Utilities are set to be undermined by the structural crisis facing the sector unless they adapt to changing market conditions.
Published: Mon 20 Apr 2015

It is by now common knowledge that the energy sector has lacked long term planning and investment: Infrastructure is ageing and new centralized generation is lagging behind the growing demand. Huge capital expenditure is now required in many countries to catch up.

Add to this failure by both regulators and utilities to adapt to the rapidly changing market conditions. Smart metering and smart grid, which has been a partial response, are in some ways further exacerbating the problems. Though consumers generally are little interested in energy use issues, a growing number are.  For example, America’s largest solar panel installer SolarCity claims to sign up a new customer every 3 minutes, and home energy products are now widely available from big name retailers.

Energy consumers empowered

Empowered by the ‘smart’ tools, consumers can obtain energy reports and monitors to save energy. They are being incentivized to become distributed generators of energy, with the opportunity to sell the excess to their needs to their utilities. They are also being encouraged to make efficiency improvements to their homes and businesses. The net result is a double edged sword for utilities, on the one hand a reduction in demand enabling deferment of new generation, but also a reduction in the revenue needed for network investments and for their sustained profitability.

Consumers at large are also affected. With home generators moving increasingly off-grid as home generation and storage costs plummet, and relying on the grid only for back-up, the number of paying customers who contribute to the upkeep and development of the grid is dropping, transferring the burden to the remaining customers.  With ever more aggressive renewables targets – now 50% by 2030 in California, for example – this situation will only worsen.

Perhaps the most striking example of the impact of renewables is that in 2013 the large German utility RWE, servicing more than 20 million electricity customers, reported losses of US$3.8 billion. In the same year, Vattenfall, the second largest generator in Germany, reported losses of US$2.3 billion. Germany is targeting 65% renewable penetration by 2040 and 80% in 2050. Little wonder that RWE's CEO Peter Terium has called this shift to renewables as “the worst structural crisis in the history of energy supply."

Utility response to renewables

So far the utility response  to this “structural crisis” has been generally limited, with many apparently opting to ‘wait and see’, or in some more active cases to push back to cap the increasing numbers of solar generation customers.

One notable exception is Germany’s largest energy company E.ON. Late last year E.ON decided to divest its energy generation, trading and exploration and production businesses into a new company (NewCo), and to focus (under the name New E.ON) on “renewables, distribution networks and customer solutions” for its 33 million customers in Europe, North America and Turkey. The process is now under way and is due to be completed in 2016.

“We are convinced that it’s necessary to respond to dramatically altered global energy markets, technical innovation, and more diverse customer expectations with a bold new beginning,” said E.ON Supervisory Board chairman Werner Wenning at the time.

The previous year RWE was reportedly planning a similar strategy to move away from centralized generation and focus on renewables integration. However, no firm plan has as yet been communicated.

Regulatory response to renewables

The response of European regulators and authorities, collectively at least, has been surprisingly absent and the dominant mood is one of regulatory uncertainty. Each country is proposing its own energy transition bill without any common policy, although such a policy appears to be under way under the new Commission. But while subsidies to renewables are decreasing, their competitiveness and environment constraints make the move towards them unstoppable.

So we turn to the USA, where the regulatory response has been essentially two-fold.

In Arizona utilities have managed to secure two concessions from regulators. In December two of the state’s largest utilities, Arizona Public Service and Tucson Electric Power, were given the green light to enter the residential solar market in competition with third party installers. And in February Salt River Project’s leaders approved a “demand charge” for solar customers based on their peak demand during the month. In November last year Wisconsin regulators had agreed a new rate plan for We Energies solar customers, and similar debates are under way in other states.

Regulators are also taking a proactive approach, with the most advanced example being New York State’s Reforming the Energy Vision proceeding. Under the first phase, which has been given the go ahead, utilities are envisioned to become “distributed system platform” providers. Individual utilities will serve as the platform for interface of customers, aggregators and the distribution system. Technology innovators and third party aggregators (i.e. energy service companies, retail suppliers and demand management companies) will develop products and services that enable full customer engagement. [Engerati-Distributed Energy Resource Markets Coming To New York]

All of these initiatives are new and have yet to play out. Some, such as the new solar charges in Arizona, are set to face legal challenges. But it is clear that whatever solutions ultimately emerge – and there are likely to be several, depending on the local market and regulatory conditions – the winning utilities will be those that are the most forward looking, embracing possible technology and business model disruptions and unafraid to adapt to the changing market conditions or to reinvent themselves. [Engerati-Embracing Market Disruption A Must For Long Term Success]

Find out more in our webinar, From Utility to Energy Services Company-Fighting Back with New Ideas, which will be presented by a team of experts from Capgemini and the Advanced Energy Centre at the MaRS Discovery District. Learn how current technology and market changes are breaking utility models, not years from now but today, and how utilities are working with disruptive technologies and models to change the game.