Could New Technology Spell Doom for Electric Utilities?

utility 300X600From OilPrice.com: A recent survey of electric utility experts unveiled a huge number of headwinds for the industry, but are their worries justified?

Experts, especially in finance, often have a deservedly bad reputation. Their predictions, especially about things like the direction of interest rates or stock prices, are often more than somewhat off the mark. Analysts on the “sell-side” (brokerage analysts) tend to run optimistic while hedge fund short sellers may take the under. In both cases, investors often act on these predictions.

Even if experts are only right about half the time, same as a coin toss, it is far better for investment managers and fiduciaries of all stripes to tell the board or investment committee that you considered a range of expert opinions rather than simply “gambling”. But expert opinion affects how people behave and invest. Humans as investors are inherently crowd followers. And true financial research is beyond the capability of many investors. It’s difficult, time consuming and requires some specialized knowledge, mostly accounting, and some finance.

As a result, experts’ predictions are important whether right or wrong–at least for a while until the paradigm clearly shifts. So, when Public Utilities Fortnightly, a leading trade journal, corrals a bunch of experts and asked them about the future of the electricity business, investors should take note of their views.

Let’s start with distributed energy resources, a rather fancy name for small-scale solar and other renewables. Even diesel-fueled emergency generators at hospitals or other commercial buildings could be deemed “distributed” if the regulatory tariffs were written to allow it.

For electric utilities, the potential widespread customer adoption of distributed, on-premises generation is an existential threat. Customer self-generation by its nature reduces reliance on all segments of an electric utility’s assets, especially generation. Or for that matter, what’s the value of transmission and distribution systems when customers are generating their own power and trading it amongst themselves over your network? How do you price this new type of “go-between” or integration services? Are the margins comparable to matching vacationers with available lodgings like AirBnB? And roles could suddenly reverse, with the local utility limited to providing back-up power, a commodity provider only of last resort. In effect, it becomes a battery, albeit one with an extremely valuable commodity in times of scarcity. No one who can afford it wants to be without air conditioning in a heat wave, for example.

But all this implies a bi-directionality of electricity flows at the retail level. Wholesale power markets and trading among major power generators has existed in various forms for decades.

In a way, electric utilities are experiencing the opposite of what happened with the breakup of the old telecommunications wireline monopoly. It was the lucrative inter-city market that early competitors like MCI were permitted by the courts to enter. For the electrics, unlike tele-communications, their product can be both produced and consumed in the same location. Hence, the new competitive threat is at the retail level.

We certainly believe that franchise owning electric utilities can be successful in renewables installation, financing, and distributed systems integration. But do they want to pursue this type of business strategy? The historical, hierarchical relationship of utility corporation and retail customer may need to change. Up till now, the electrics have retained almost complete discretion over how power is produced. All customer choice was in the realm of pricing. The more you bought the lower the price.

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