New business models needed for the renewable energy future

Clinging to and investing in antiquated business models should be neither rewarded nor celebrated. After all, it’s not as if their authors didn’t know big changes were coming. Ordering new coal plants in the face of renewable mandates and emerging carbon trading is akin to buying up carriage-makers just as automobiles began to relieve London’s horse-manure crisis.

Let’s Celebrate, Not Lament, Renewables’ Disruption of Electric Utilities Rocky Mountain Institute, 7 March 14 Renewables are making headway in Europe and bringing a low-carbon electricity system to the forefront. Renewables were 69 percent of new capacity added in 2012 in Europe and 49 percent in the United States. Not surprisingly, this threatens utilities unwilling to let go of outmoded business models and fossil-fuel generation.

Laments for Europe’s money-losing electric utilities were featured in an October 2013 cover story in the Economist. It said Europe’s top 20 energy utilities have lost over half their 2008 value, or a half-trillion Euros—more than Europe’s banks lost. Many utilities therefore want renewable competition slowed or stopped. Indeed, some European giants, like Germany’s E.ON and RWE, are in real trouble, and five of Europe’s top ten utilities have suffered credit downgrades. So have some U.S. utilities—most recently Jersey Central Power & Light and Potomac Electric Power Co.—from the likes of Fitch, Moody’s, Standard & Poor’s, Credit Suisse, and others.

Should old, long- and often still-subsidized oligopolies be bailed out or shielded from competition when they bet against innovation and lose?Those big European utilities were supposed, but failed, to prepare for renewables by reinvesting their hundreds of billions of Euros’ windfall from billing customers for the first decade’s tradable carbon emission credits they’d been given for free. Now they’re griping that disruptive technologies are upending their old models—just as innovators had warned them for the past few decades.

Disruptive technologies are meant to upset the status quo to bring worthwhile change. Should we have rejected mobile phones because they threatened to displace landline phones? Didn’t digital cameras make film camOf course utility companies that refuse to let go of an archaic system are losing investors’ money. To be sure, some market reforms, like a well-designed, technology-neutral electric capacity market, could be worthwhile. But botched investment strategy should not be rewarded. Nor should shareholders be surprised that utility stocks no longer perform like bonds when twenty-first-century technology and speed collide with twentieth- and nineteenth-century institutions, rules, and cultures. Fortunately, those shareholders were already compensated for accepting well-known risks like new technologies, new environmental rules, and other regulatory and policy shifts—and they needn’t be paid twice.

RENEWABLES AREN’T THE ONLY CHALLENGE TO INCUMBENTS

eras largely obsolete? Shouldn’t print newspapers have to invent new business models to confront the rise of the Internet? As the Economist acknowledges, those utilities’ financial crisis is due not only to renewables, which are often scapegoated for trends they reinforced but didn’t cause. Overinvestment in fossil-fueled generation would have weakened utilities’ finances anyway as the global economic slowdown damped electricity demand growth and the efficiency revolution began to reverse it—on both sides of the Atlantic. U.S. weather-adjusted electricity use per dollar of GDP fell 3.4 percent in 2012 alone. In many regions, efficiency is outpacing service growth, shrinking utilities’ revenues.

U.S. shale gas has also displaced much coal-fired generation (though efficiency displaced nearly twice as much in 2012). …….

RENEWABLES ARE WINNING

Utilities’ dwindling profitability is the flip side of renewables’ benefits to customers. As renewables burgeoned, Germany’s wholesale electricity prices fell nearly 60 percent in the past five years. This enriched many German industries—thousands of which also shifted billions of Euros’ annual costs to German households via tripled exemptions from paying grid fees and renewable surcharges. (Only 15 percent of the German renewables surcharge is actually households’ share of premium prices for renewables, mostly for old contracts at higher prices; the other 85 percent reflects falling wholesale prices and industrial exemptions.) But the wholesale price drops are reaching most German households too in 2014, stabilizing their bills.

Moreover, German citizens can choose to microinvest as little as $600 in renewables, locking in a stable and attractive return for 20 years. Most German renewable capacity—investments largely spurned by big utilities—was bought instead by citizens, communities, or cooperatives. And Germany’s 382,000+ new renewable jobs, welfare relief, corporate and export earnings, tax revenues, and wholesale price drops yield not just long-term but current macroeconomic net benefits to the national economy……….

THE NEED FOR NEW BUSINESS MODELS

Rather than lament that traditional utilities aren’t the low-risk investments they once seemed, and asking how we can protect their profits, we should be seeking to help progressive utilities and disruptive upstarts shape a new electricity system powered increasingly by clean, distributed renewables, doing exactly what they were meant to do: provide reliable, resilient, safe, clean power at moderate prices. That is the way the world market is trending.

Not only Germany but also in two more of the world’s top four economies—China and Japan, as well as India—non-hydro renewables now outproduce nuclear power. In 2012, China’s windfarms outproduced its nuclear plants (the world’s most aggressive program), and coal plants were run less: China added more generation from non-hydro renewables than from nuclear plus fossil sources. In the first ten months of 2013, 54 percent of China’s capacity additions were renewable (a third of those non-hydro). The coal-fired fraction of China’s electricity could drop by two percentage points in 2013 alone. Globally, in each of the years 2011, 2012, and probably 2013, renewables won a quarter-trillion dollars of private investment and added over 80 billion watts of capacity. Solar additions are now overtaking windpower’s, scaling even faster than cellphones.

To adapt to these epochal shifts in both supply and demand, electricity providers everywhere, not just in Europe, need new business, revenue, and regulatory models, being developed in efforts like RMI’s e-Lab industry forum. For example, buildings using zero net electricity (an increasingly widespread practice) pay zero net revenue to utilities selling electricity by the kWh. That requires a different revenue model—perhaps like the Fort Collins (Colorado) municipal utilities’ proposed new approach, where the utility can provide a range of services and investments on the customer side of the meter, helping the customer navigate efficiency and distributed generation investments while providing low-cost finance and on-bill repayment. This e-Lab-aided innovation may offer a sound and scalable path beyond net metering, which breaks at scale.

An 80-percent-renewable, half-distributed, nearly decarbonized, highly resilient U.S. grid could cost virtually the same as business as usual, but could best manage its risks—security, technology, finance, climate, health, fuel, and water—and, uniquely, prevent cascading blackouts. Such transformative benefits justify transitional growing pains—not protection for incumbents already paid to accept the known competitive risks they got wrong.

March 7, 2014 - Posted by Christina Macpherson | Uncategorized

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