Read a utility integrated resource plan (their 15-year plan for the electric grid), and you can see an electric utility wax eloquent about a shiny new 100 megawatt power plant that could provide energy during peak energy periods with zero fuel cost. But if instead of a big utility-built power plant we’re talking about 10,000 individual solar arrays on customer rooftops, utilities lose all perspective.
In Minnesota, for example, the state legislature passed a “value of solar” program that requires the state’s largest utility, Xcel Energy, to calculate how much solar energy is worth to its grid. In 2014 and 2015, the utility has reported that the value of solar energy is higher than the cost to the utility in buying it from customers via net metering. Other studies have shown similar results, including one in Maine, in Missouri, and in many other states.
Faced with compelling evidence of the value of customer-produced solar power, why haven’t utilities come around?
2. The Utility Business Model Seems Broken
For most investor-owned (for profit) utilities in particular, this new data can’t be squared with their old business model. In a study by the Lawrence Berkeley Laboratory, researchers found that the ratepayer impact of lots of customer-owned solar is quite small, but the larger impact falls on utility shareholders. Solar may mean modest revenue reductions for electric utilities, but by offsetting the need for new, large-scale power plants, solar’s real threat is in choking off the for-profit utility’s source of shareholder returns. The following graphic from the report shows the impact of distributed solar on two hypothetical utilities’ shareholders—return on equity (ROE) and earnings—and also on retail electric rates—ordinary ratepayers.
In short, a utility that’s spent the past several decades making money by selling more electricity and building new infrastructure doesn’t look favorably on a competitor. Municipal utilities (owned by cities) and rural electric cooperatives (owned by their members) don’t have this dissonance between shareholders and customers, but the notion of customer-provided power as a resource is often just as shocking. There are a few exceptions (noted later) but not many.
3. It Seems Easier to Fight Than Innovate
In a competitive business it would seem mad to fight your own customers, but most utilities aren’t in competition (even in states where there is competition in selling electricity to ultimate customers, the ownership of the distribution grid remains a monopoly). That means there are only a few prominent examples of utilities—such as Green Mountain Power and Farmers Electric Cooperative—working to change yesterday’s business model to accommodate today’s technology.
For the rest of electric utilities, they’ve largely chosen to fight their customers rather than accommodate the rise of distributed, customer-owned renewable energy. But that choice is because while they see distributed renewable energy as an opportunity, most have no idea how to make a business around it.
In Wisconsin, electric utilities have shifted more of the monthly bill onto fixed charges, reducing the incentive for their customers to save energy with solar (or any other manner). In Arizona, utilities are slapping fees on solar energy producers, to recoup their lost revenue. In over half of U.S. states (shown below in red), utilities have introduced legislative or regulatory proceedings to fight their customers over solar energy.
The state-by-state battles are part of a coordinated effort by utility executives to address what they see as “a serious, long-term threat to the survival of traditional electricity providers.”
So far, utilities have lost more than they’ve won, but even in winning individual battles utilities may still lose the war because their “victories” in containing customer generated solar power are temporary props to an electricity system that is increasingly archaic.
4. The Electricity System is Fundamentally Changing
It’s easy to pick on electric companies for overlooking the value of their customer’s energy (and for lashing out with retrograde policies), but it’s not entirely their fault. The 100-year-old rules of the electricity system—written by legislatures and governed by public regulatory commissions—granted most electric companies a monopoly over their area of the electric grid. Even as some states introduced competition in selling power to ultimate customers, utilities maintain over the distribution poles and wires that bring power to homes and businesses (and thus much of the power). This monopoly made sense in the 20th century to raise capital for large-scale, low-cost power generation. It worked, giving us reliable and affordable electricity (at any environmental price). It gave utilities comfortable, reliable returns on their investments from regulators at Public Utilities Commissions.
In an era of incremental change where stability was prized over innovation, this monopoly was largely in the public interest.
Consider the difference between a 20th century and 21st century electricity system. In the 20th century, power was generated in large-scale power plants at a distance from population centers, sent by large transmission lines to cities, and managed in a centralized, top-down fashion by a monopoly electric company. There was no viable alternative to this model.
Today, we can generate power on rooftops or farm fields, manage it in real-time with smart thermostats or appliances, and control it remotely with smartphone apps and automation software. In this environment, do we need a traditional, top-down electric utility?
Most utilities won’t change by themselves, however. The inertia and cultural stagnation of monopoly make them much better at playing defense than offense. That has regulators in at least one state, New York, saying “no.”
The Reforming the Energy Vision process just released its first orders, and among them the New York regulators are telling utilities that they will no longer own and operate distributed renewable energy resources. It’s the first step toward flattening the electricity system, from a one-way, top-down grid to a massively networked and democratized energy delivery marketplace. Similar processes are underway in Washington, Minnesota, and other states.
Imagine how typewriter companies felt upon the introduction of personal computers, how landline phone companies felt a decade ago. Electric utility executives are in a similar position, locked in an outdated paradigm and without a strategy for reaching a different future.
The key difference is that electric companies wield enormous market and political power over their system. They have publicly-sanctioned monopolies, and huge streams of monopoly-shielded revenue they use to hire lobbyists and lawyers to dominate state legislatures and utility commissions. Open Secrets tracks electric utility lobbying at the federal level and reports that utilities collectively spent $121 million on lobbying Congress in 2014, and an additional $16.5 million in contributions to legislators. Lobbying is even more intense at the state level, where most regulation takes place. For example, Florida’s four largest utilities collectively employ one lobbyist for every two legislators in that state.
In nearly every fight to align the electricity system with the technological and economic opportunity—energy efficiency, renewable energy, net metering—utilities have pitted their resources squarely against progress.
Get to the Root Cause
The best analogy for today’s battle for the electricity system might be the AT&T telephone monopoly. In the early years, users couldn’t even connect third party devices to the telephone network and AT&T could wield its monopoly power to quash market or political competition. In the end, the government rightly recognized that breaking up the monopoly and introducing competition (for long distance service, at least) was the only way to reduce AT&T’s economic and political power.
Electric utilities are right that distributed renewable energy like rooftop solar threatens their business model. But that model is increasingly out of step with the interests of the modern electricity customer, from energy efficiency to clean energy to energy management. States have papered over the inconsistencies with policies mandating renewable energy and energy efficiency—the utility leaders in renewable energy and energy efficiency almost all hail from states with the best policies—but only at great political cost and over the strident objection of utility companies.
The root cause of the battle between utilities and their (captive) customers is the utility monopoly. And the best hope for a democratic energy system may be to smash it.