The U.S. electric utility sector is undergoing a transformation unparalleled in its history. Extraordinary challenges, driven by the urgency of climate change and other market forces, are compelling the industry to abandon its century-old business model of building large, fossil fuel plants to sell increasing amounts of electricity.
Delivering safe and reliable energy will continue to be the bedrock of what utilities do, but how they do it is changing. That’s because utilities must quickly find cost-effective ways to meet society’s energy needs while slashing carbon emissions in half or more.
National climate legislation that puts a price on carbon emissions may be stalled—momentarily—but that doesn’t mean utilities should abandon efforts to retool for the 21st century. The transformation of our electric power industry is already well under way, the result of tougher air pollution requirements for aging power plants and growing attractiveness of energy efficiency and renewable energy.
Use of coal is already declining, reaching its lowest level in 15 years in 2009. Bernstein Research recently forecast the retirement of about 20% of U.S. coal-fired capacity by 2015.
Wind, solar and other forms of renewable energy are becoming more cost-competitive with fossil fuel‚Äìbased generation and are now the fastest growing source of new power production in the United States. More than 9,500 megawatts of wind-based generation was built in 2009 alone.
Energy efficiency is also gaining traction as the lowest-cost option for meeting energy demand while also reducing carbon pollution. Twenty-two states now have some sort of energy savings goal or energy efficiency resource standard. Massachusetts’ cutting-edge policies have put it on track to meet 30% of its energy needs through energy efficiency by 2020.
A growing number of utilities are responding to these trends and seizing the opportunities, but all must get on board to succeed in the 21st century. The path forward is outlined in a new report from Ceres and Navigant Consulting, The 21st Century Electric Utility: Positioning for a Low-Carbon Future.
The report identifies five key elements for utilities to minimize costs, risk and environmental impact. Those five elements include managing carbon emissions enterprise-wide, pursuing all cost-effective energy efficiency, integrating renewable energy resources into the generation mix, incorporating smart grid technologies for consumer and environmental benefit, and conducting robust and transparent resource planning.
More fundamentally, utilities need to prudently deploy capital in ways that provide affordable and reliable electricity, while simultaneously de-carbonizing their generation sources. Pursuing overly capital-intensive or higher-carbon approaches will increase the risk of unfavorable cost recovery, which in turn could lower a utility’s credit rating and increase its cost of capital.
In contrast, utilities that pursue diversified strategies using energy efficiency and distributed resources will reduce capital investment risks, which should be rewarded by the financial institutions that rate and lend to electric utilities.
Moving forward, utilities will need to boost their use of wind, solar and other forms of renewable energy, implementing them on a large scale as well as encouraging small-scale efforts from solar rooftops to fuel cells. And they’ll have to do it better than the third-party providers offering the same services.
The report also illustrates that solar PV systems could approach parity with average electricity prices in many parts of the U.S. by 2015, which will pose real threats to utility revenues. This is why many utilities are beginning to pursue strategies to own both large-scale and distributed solar installations.
They’ll also need to revolutionize their old business models of depending on sales to drive profits by doing something counter-intuitive: getting their customers to use less of their product—while staying profitable and attracting investors.
Utilities cannot make these changes alone. They’ll need federal and state regulators at their side, implementing critical measures like decoupling, which separate utility profits from sales, removing the disincentive to helping customers save energy. Decoupling is in force in 11states and pending in nine others, and is credited for keeping California’s energy consumption flat the past few decades.
But decoupling alone does not provide an incentive to help customers reduce energy use—it merely removes the disincentive. Electric utilities should be offered real financial incentives if they achieve aggressive energy efficiency goals, thereby enabling the demand-side to compete more effectively against supply-side resources.
Utilities will need other regulatory changes, such as net metering, which allows customers to feed their solar or wind powered energy back into the grid. In Colorado, for example, net-metering policies boosted solar PV capacity 88% to 22 megawatts in 2008.
Our energy and climate challenges are tremendously urgent. Scientists’ warnings grow ever more dire. The National Oceanic and Atmospheric Administration recently announced that the past decade was the hottest on record, while fires ravage drought-stricken Russia and an iceberg four times the size of Manhattan broke free from Greenland.
Our responses must be equally urgent, and matched to the scale of the challenges before us. It is only a matter of time before the U.S. Congress heeds scientists’ warnings and passes national legislation to reduce carbon emissions. Turning a blind eye to the future won’t stop change from coming—and utilities, which produce 40% of the nation’s greenhouse gas emissions, should be out in front today preparing for a carbon-constrained future.
Those that are the quickest to respond to the paradigm shift sweeping the industry will be best positioned for success in the 21st century.
—Tom King is president of National Grid US, which delivers electricity and natural gas to nearly 8 million customers in the northeastern U.S. Mindy Lubber is president of Ceres, a leading coalition of investors, environmental groups, and other public interest organizations working with companies to address sustainability challenges such as climate change. This commentary first appeared in The Energy Daily.