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Feb 6, 2014

Let’s Celebrate, Not Lament, Renewables’ Disruption of Electric Utilities

 

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 cameras largely obsolete? Shouldn’t print newspapers have to invent new business models to confront the rise of the Internet?

Of 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

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). Unsold American coal flooded European markets, temporarily displacing higher-priced gas. Meanwhile, solar power took the utilities’ profitable afternoon-peak market and slashed its price premium. And since Germany, among others, gave renewables both full grid access and dispatch priority (logically, because they’re cheaper to run than any fueled generator), low loads coinciding with high renewable supplies sometimes make wholesale markets clear at negative prices. This further distresses utilities that must pay to keep their inflexible old plants running—much as they’d prefer to shift all the costs of adaptation to their new competitors. Their distress will rise as renewables keep getting cheaper and as old contracts to sell electricity at well above today’s prices expire.

Renewables Are Advantageous

The Economist article stated, “The growth of renewable energy is undermining established utilities and replacing them with something less reliable and much more expensive.” Undermining stubborn established utilities? Yes, to achieve important public benefits. But shifting to less reliable and much more expensive generators? Hardly.

Well-stoked fears of grid instability and unreliability due to renewable power are as widespread as evidence for them is unfindable. In the Central European grid, where pervasive electricity trading helps operators choreograph the ever-shifting mix of renewable and nonrenewable supplies, German electricity (23 percent renewable in 2012) and Denmark (41 percent) are the most reliable in Europe—about ten times better than in the United States (whose 2012 electricity was 6.6 percent hydro and 5.3 percent other renewables). Even on the edge of the European grid, Spain (48 percent in the first half of 2013) and Portugal (70 percent) kept their lights on just fine. This experience might help the puzzled Economist writer who claimed, “No one really knows what will happen when renewables reach 35 percent of the [German] market, as government policy requires in 2020.” Answer: probably nothing except lower emissions and lower prices.

The “much more expensive” claim, too, evaporates on scrutiny. In the U.S., new Midwestern windpower now sells at a 25-year fixed nominal price (thus a declining real price) as low as $22/MWh, and new Western solar power at below $70, both net of subsidies generally less than nonrenewables get. In many states, wind and solar beat efficient new gas-fired power plants. In countries like Brazil and Chile, unsubsidized wind and solar power routinely win power auctions. In Europe too, they have a strong business case; cloudy Germany has installed 35 GW of photovoltaics but hasn’t subsidized them since 2004. The Economist agrees that German solar power now costs less than residential tariffs (which are half taxes), and less than the feed-in tariff it still receives (because it still costs more than wholesale prices)—so solar power could keep growing even without the tariff.

“Much more expensive” is a more apt description for much nonrenewable generation, especially as the misdesigned European carbon market gets repaired so emissions are no longer nearly free. Exhibit A is the Hinkley Point nuclear plant that the British government wants 84-percent-state-owned Électricité de France to build, supposedly with part-Chinese financing, to generate 7 percent of U.K. electricity. To get ÉDF to agree, the British government had to offer a 35-year inflation-adjusted fixed power price twice today’s wholesale market level, plus a 65-percent loan guarantee, plus other concessions, many still secret.

Even if this extravagance survives EU scrutiny as “illegal state aid,” the project may not win private construction financing. Investors may reason that nuclear electricity costing seven times the unsubsidized Midwestern-U.S. windpower price (the U.K. has Europe’s best wind resources) or 3–4 times the unsubsidized western-U.S. solar price, both falling, is so ridiculous that a subsequent U.K. government could wriggle out of the deal, putting private capital at risk—or simply that forcing the market to absorb so much extraordinarily costly electricity could prove unworkable. If the British government let all options compete at transparent prices, it could find such cheap efficiency, demand response, renewables, and cogeneration that this year alone in America, five old operating nuclear plants have been terminated as uneconomic just to run, even though their high capital cost was paid off long ago. New reactors’ capital costs are so prohibitive that eight years of 100-plus-percent construction subsidies have failed to make them privately financeable, and nine proposed new units were also terminated this year.

Calls for more nuclear power have largely abated in Europe, where flagship nuclear projects in Finland and France are at least twofold over their budgeted cost and time. Nuclear diehards still pull most policy levers in France, but its national utility isn’t charging enough to cover its nuclear repair costs, is about a trillion Euros underfunded for decommissioning its aging reactor fleet, can’t afford to replace it, and needs to consider what to do instead. Hint: renewables leader Germany, moving off nuclear and beyond coal, is the only consistent net exporter of electricity to three-fourths-nuclear-powered France.

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.

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.

Image courtesy of Shutterstock.

Join the Discussion


Showing 1-3 of 3 comments

February 15, 2014

Thanks much for this refreshing outlook, with supporting data on how renewables are faring across the globe. But I miss one piece, which is: “How do we motivate/incentivize utilities to ‘embrace’ renewables like distributed PV generation, when at this point, the PV-saturated grids with “plain PVs”, i.e. without battery backup, cannot even allow new PVs with battery backup (PVBBs), regardless of whether privately- or utility-owned. This is because the resulting noon-time loss of each conventional ratepayer load would exacerbate the “negative” demand problem.
Technically, such PV-saturated grids need to retrofit storage batteries, it seems to me, either, and most advantageously, on the site of individual PVs or via larger, grid-level battery banks. But can RMI suggest constructive steps on how to get there, beyond the easy-to-make statement “electricity providers everywhere, not just in Europe, need new business, revenue, and regulatory models”? How can we incentivize utilities to invest in grid-level storage only to enable more grid-tied PVs and further tightening the “death spiral”? Can utility-owned roof-top, grid-tied PVs compete on a $/kWh basis, with private PVs, in view of both potentially advantageous economies of scale, while hindered by high overhead and administrative costs? For sure, the wailing about PVs not paying their fair share of grid use is overblown, once we all understand that: (1) The true T&D cost (of capital and maintenance) is as little as 1 ¢/kWh; (2) The addition of grid or individual storage does not add more than a 30-year levelized life-cycle cost of 5 to 6 ¢/kWh; and (3) That in many states the Minimum Monthly Fee (for grid and billing services, which in Hawaii is at ~20 $/month or ~4 ¢/kWh for the average 500 kWh/month ratepayer) should have paid for the utilities’ investment in grid-level storage, starting several years ago.
Aloha, Ulrich Bonne


February 16, 2014

It's good to read an article touting the rise of renewables in a country awash in fossil-fueled propaganda.

Last week I got a flyer in the mail. It looked like a campaign mailer for Governor Hickenlooper- you know the type: a smiling governor seated in front of the Capitol, pristine mountains in the background, "110,000 good paying jobs, $29B in economic output, environmental protections so effective that there has never been a single confirmed case of groundwater from 60 years of hydraulic fracturing", etc. The flyer ends with "Colorado's energy future is in good hands with John Hickenlooper".

Underneath in small print is the statement "Paid for by the American Petroleum Institute".

We're up against a political system awash in petrodollars. Fossil fuel companies are experiencing unprecedented profits, and are using them to buy results; both in Congress and in state politics.
I have a small, admittedly struggling, solar thermal company. Among others, here's one problem we in the renewables industry face: When a solar energy company installs a system, no one will be receiving a monthly charge for the fuel used by the customer, since the energy is FREE. No monthly income stream, no money to buy into our pay-as-you-go political system. Perhaps equally insidious: no money to buy slick flyers to mass-mail to the general public in order to convince them of the benefits of our energy production methods, nor put out our message to an increasingly pay-as-you-go media. Even NPR now takes dirty fossil fuel money (heard the "Think About It" spots lately?).

I predict that the future will be filled with voices asking "What were they thinking! How could they have not seen what damage fracking would do to our water supplies!".

Concerned citizens can still have a voice, but it's hard to be heard against the huge megaphone of the oil and gas tycoons. There are lots of good ways to get yourself heard. Personally, I try to stay engaged with our local environmental organization, the Uncompahgre Valley Association (part of Western Colorado Congress). They struggle financially, relying only on "citizen power", but they are very good at getting the word out; and surprisingly effective at keeping "our" legislature honest.

Capitalism is a great system, but only when it's not allowed to be taken over by huge corporations, companies, and individuals who use their money to create de-facto monopolies on power. That, I'm afraid, is where the United States is right now.

Keep up the good work at RMI, Amory. It's organizations like yours that keep us focused on that "light at the end of the dark tunnel" that renewable energy represents!

Dave Congour
Colorado Clean Energy Systems
Montrose, CO


February 23, 2014

Another excellent collage of information rarely allowed to the general public. It's refreshing to see it sneak through the filters. Learned lots.

Regarding needing a new business model to allow the grids to reach their full potential of being clean and robust, I might remind you again, Amory, of the solution. You can find the "Living Smart Grid" at http://johncarlosbaez.wordpress.com/2012/04/07/the-living-smart-grid/ I encourage you and other readers to review it for critique.

This method incurs virtually no extra cost other than installing smart meters (which are already being done now) to offer a system modeled after the data sharing system of the internet. Remember, the internet is history's most resilient, scalable and cost effective machine. Why not allow that same system to manage the availability, price, incentives, scalability and upgradability of electrical power?

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