The North American utility industry is under extreme pressure to re-imagine how the industry will operate in the future. The utility industry is; facing increasingly difficult carbon emission standards, besieged by competition from distributed energy systems such as wind & solar power that are slowly reaching grid parity pricing, watching revenues slowly disappear as consumers take to heart the energy conservation mantra, and; under financial duress as it contemplates the need to infuse the entire North American grid with more than $2 trillion of investment by 2030 just to maintain the status quo.
The industry is facing a sea of change. This begs the question of industry feasibility using the “same-old-tried-and-true” utility formula and follows with questions on what the future will look like, and; how utilities can capitalize on these changes or even if the utility industry can remain relevant.
The electric utility industry is viewed by most consumers as a faceless monolithic entity that supplies electricity. I turn on the switch or motor and it works.
The U.S. electrical utility industry is presently comprised of 3,200 companies that sell $400 billion dollars of electricity/year over 4.4 million km’s of power lines. In Canada, 822 power plants generate $59 billion/year of electricity for Canadian consumption.
In 1859 Charles Darwin penned his famous publication “On the Origin of Species” which explained the concept of natural selection in a way that led to an increased understanding and wider acceptance of Darwinian evolution. The basic premise of his hypothesis being that natural selection would allow favourable variations to prevail as others perished.
As we view our modern-day electrical generation and transmission/distribution system there is a striking similarity to the evolutionary changes in nature identified by Darwin more than 150 years ago. The growth and success of our electrical infrastructure network has been achieved through a series of “events and inventions. In other words; it has evolved. The result of this evolution has been an acceleration of personal wealth as well as an increase to our nation’s long-term growth and prosperity.
We now stand on the threshold of a much less understood phenomenon, namely; the de-evolution of our electricity infrastructure network. We are migrating back in time to one where the generation and distribution of power is controlled at a regional or local level. The gold standard hub and spoke style infrastructure we are now accustomed to will inevitably and inexorably begin to adjust, morph, downsize and may eventually collapse.
In a note to clients, investment bank UBS recently stated that “Large-scale power generation, will be the dinosaur of the future energy system: Too big, too inflexible, not even relevant for backup power in the long run,” UBS goes on to write that “centralised fossil fuel generation will become “extinct” – and it will happen a lot sooner than most people realise”.
UBS goes on to predict that “most large-scale centralised plants could be gone within a decade. “Not all of them will have disappeared by 2025, but we would be bold enough to say that most of those plants retiring in the future will not be replaced.” And; “The closer utilities are to the electricity user (both residential and commercial/industrial), the better they should fare in a decentralised electricity system,” the analysts write.
There is no Silver Bullet
A recent Edison Electric Institute (EEI) report concluded that the electric utility industry is facing many of the same factors that the communication industry faced with deregulation in the 70’s. Many of these carriers are no longer in business and those that remain were forced into a completely new direction. Other examples of this same directional change include airlines and the postal service. In all instances the forces of change were outside of their control and they had to adapt or suffer the consequences.
As electricity consumers tag onto the new sources of energy generation available to them and drain revenue away from the established utility players through reduced electricity purchases, the grid acts more and more like a back-up plan or perhaps a battery. Consumers are drawing from the grid when their own system is unable to generate power or they are exporting power when output exceeds requirements. The major utility is then tasked with trying to maintain and service their generators, wires, circuits and substations with the same diligence as previously when consumers were obligated to buy their power, but; are now forced to do so with reduced revenues.
Consider the difficulty in maintaining North America’s power infrastructure against the backdrop of antiquated systems now in place. Reduced revenues are occurring at the same point as significantly higher costs needed to upgrade the utility backbone of transmission and distribution systems.
The Brattle Group’s report “Transforming America’s Power Industry” pegs the infrastructure investment required to maintain the status quo in the U.S. as being $1.5 to $2 trillion by 2030.
In Canada; The Canadian Electrical Association estimates their investment at $347 billion by 2030.
A further squeeze on revenue generation for the utilities arises from increased electricity consumption on already congested transmission and distribution lines. This means greater power loss through lessened efficiencies. Harris Williams & Co., states that “transmission and distribution system losses increased from approximately 5% in 1970 to 9.5% in 2001 due to heavier utilization and congestion”. The increase in line losses is roughly equivalent to the electrical energy needed to power 13% of all households in the U.S.
The inevitable conclusion to all of these disparate pressures on existing utility infrastructure is that a paradigm shift to the process of powering up North American society is already underway.
Unfortunately; there is no silver bullet that will repair or reinvigorate our existing electrical energy business model. There is no one single technology, regulatory change or simple fix. De-evolution will occur. The primary question is “how can essential networks with an estimated asset value of more than $800 billion devolve to one where power has been democratized
to a greater extent than ever before without cratering the entire system?”
The future utility industry will in all likelihood be comprised of not only those companies identified earlier but can potentially include all 130 million households and 5 million commercial buildings in North America with an ability to generate some or all of their own electricity.
Financial and regulatory decisions made today will impact the electricity grid for the next 40 years before another full reset can occur.
The question now is, “What are we going to do about it?”