The Utility Future is Renewable Energy Distributed Generation

There is a convergence of market, economic, environmental and regulatory forces underway that is changing the way investor owned utilities see renewable energy from something they must do to satisfy their regulators to something they MUST do to survive.

If this sounds like hype to you, consider the following ten factors:

  1. Renewable Portfolio Standards are here to stay.
  2. Carbon emissions constraints are likely to happen.
  3. Consolidation is sweeping the wind and solar manufacturing industry.
  4. De-coupling rules are limiting earnings growth from commodity energy sales.
  5. Efficiency and Demand Response regulations open the door to aggregators.
  6. Home Area Network (HAN) technology threatens control of customer gateway.
  7. Congress allows utilities to earn investment tax credits on renewable generation.
  8. NIMBY is likely to limit or kill most new transmission construction.
  9. Without transmission access renewable energy developer failure rates rise.
  10. Maybe a distributed generation business model based upon renewable energy owned by the utility is not such a bad place to be for an investor owned utility.

This convergence of forces is engaged in a battle to kill the economies of scale for large central station generation from coal and nuclear power.  While wind energy has captured the most renewable energy market share and early enthusiasm for clean energy choices, it is solar power that is the most pernicious threat to the utility business model.  Solar represents the foundation for a distributed generation alternative to the traditional utility.  The only thing standing in the way is cost.

While we can expect to see substantial construction of natural gas fired combined cycle generation to back up renewables, balance load, and follow load, the probabilities of carbon capture and sequestration anytime soon are low given the high costs and unproven technology, and NIMBY problems of siting and permitting.

The utility conclusion: let the government invest in CCS and take the risk.  Except for a few nuclear power specialists like Exelon, Entergy, Southern and a few others, expanding nuclear power under these convergence conditions is not worth the risk especially if inflation is likely during the construction period.  Build new pulverized coal even if it is scrubbed—not a chance.

So if you’re the utility CEO and your shareholders are asking how you plan to grow earnings what would you do?

If you are a traditional Midwestern utility with an established base of coal fired generation you will invest the money to add scrubbers to every plant not so outfitted (about 60% of coal plants are not scrubbed) and do whatever you can responsibly to do clean up plant operations, reduce emissions and run those plans as long as you can to extract their full remaining value.  Then you build renewable energy with natural gas back up.

If you are an investor owned utility with an operating nuclear power plant your choices are more complex.  You likely face a life extension decision, a turbine replacement investment decision—the question is do you feel lucky?  If your engineering analysis says you are more likely than not to recover your incremental investment in the plant you probably will ‘go for it’ and hope for low inflation.  Prudence suggests a well functioning nuke in a carbon constrained market will do well.  Then you build renewables and back them up with natural gas.

If you are an investor owned utility in the California or Southwest, you have no coal, you can’t build more hydro, you can’t build more nuclear, so you build renewable energy particularly concentrating solar power (CSP) and then you build distributed generation solar and some wind in your service territory or close by to mitigate transmission needs.

And then you make it hum like a Swiss watch.  You embrace energy efficiency and demand response with a vengeance, you roll out smart meters and dynamic pricing and you wrap yourself in the green flag of inconvenient truth and use all the available powers of convergence to transform your investor owned utility into a distributed generation utility that strives to engage customers in a process of self-denial, self-control and self sufficiency all with the help of a million solar roofs some of which your utility will own.

And why will you do this Mr. Utility CEO?   Because it will be the best way to make your allowed rate of return on equity; grow your unregulated distributed generation business, and defend yourself against the onslaught of giants seeking to aggregate your customers, bundle commodity energy with other ‘stuff’ and resell it at premium prices you dream to charge in a dynamic pricing world ahead.