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Richard Martin

A View from Richard Martin

Why the Hodgepodge U.S. Utility Industry Needs a Ma Bell

Troubled power companies are adapting, slowly, to the transformations roiling their businesses.

  • November 2, 2015

Last week, San Diego Gas & Electric agreed to meet with solar industry representatives and environmental groups to discuss a new system for compensating customers who have solar panels installed on their homes for the excess energy they generate and send back to the grid. In place for more than 20 years, California’s solar program provides incentives for customers who install clean energy systems, including retail rates for electricity they sell to the grid under the state’s net metering regulations. That program, however, has a built-in self-destruct mechanism: it will end in a utility’s service territory once solar power reaches 5 percent of local peak energy demand in the area.

San Diego is nearing that cap and could reach it early next year. The California Public Utilities Commission is working on an updated program, but it could be next summer or even later before new rules are in place. That has led to fears of a “solar gap,” when the absence of government-mandated net metering regulations could allow utilities to pay less for solar power and solar power companies could face a drastic drop in business. San Diego Gas & Electric executives have so far declined to commit to continuing under the present system once the government program lapses—leading to protests outside the utility’s headquarters, with crowds shouting “Don’t block our sun!”  

Meanwhile, on the other side of the country, Princeton-based NRG Energy said in September that it will reorganize, creating a “Green Co.” that will house its clean energy business and leaving its traditional generation plants, mostly fossil fuel-powered, in their own unit. NRG CEO David Crane has been the most vocal utility executive championing renewable energy, and had bet the company’s future on an expanding portfolio of solar and wind assets—a strategy that, as last month’s announcement made clear, is now deemed a failure. Unmollified by the new plan, investors continue to flee the company: NRG’s shares have lost nearly half their value in the last three months, and Wall Street analysts have speculated that Crane could be ousted in the coming months.

NRG is a publicly owned, independent power producer, while San Diego Gas & Electric is a regulated investor-owned utility that serves a specific geographic territory. But the travails of both companies highlight the turmoil in the energy sector, as utilities faced with increasing amounts of distributed power generation, tightening rules on emissions that could force hundreds of coal plants into retirement, and flat energy demand try to figure out how they can adjust their business model to adapt to the rapidly changing environment.

Many companies, such as the largely coal-based utilities of the Midwest, have chosen resistance and litigation as they attempt to hold off dramatic change. Others are still studying the issue while trying to milk their existing (again, largely fossil-fuel-based) plants as long as possible. Others, spying an opportunity to be leaders in the emerging energy economy, are trying to transform their businesses as rapidly as possible. The irony of the San Diego clash is that San Diego Gas & Electric is squarely in the latter camp. The company says it now has 64,000 customers producing their own power from solar arrays, representing more than 450 megawatts—the capacity of a good-sized conventional power plant. Saying it is committed to enabling the spread of rooftop solar, the company recently introduced a “Renewable Meter Adapter,” a device that quickly connects solar panels to the home’s electric meter, avoiding the need for costly upgrades. The new devices “will help to put solar within the reach of more of our customers in a way that is efficient, safe, and reliable,” Caroline Winn, the utility’s chief energy delivery officer, said in a statement. Critics, who include the Sierra Club, quickly pointed out that the adapters cost $1,300 apiece.

In January 2013 the Edison Electric Institute published a much-discussed report, “Disruptive Challenges,” that concluded that the threat of customers producing their own power “raises the potential for irreparable damages to revenues and growth prospects,” and could send today’s utilities off a cliff similar to the chaos that roiled the airline and telecommunications industries in the wake of deregulations in the late 1970s. Since then the transformation has accelerated; earlier this year a report from the Rocky Mountain Institute found that “load defection” could cut in half the amount of power utilities in the Northeast sell by 2030.

In some ways the transition facing the energy sector would be simpler, if not easier, if there were a Ma Bell for energy—a ubiquitous nationwide provider that could be sliced up however regulators and politicians decided. The U.S. utility industry is a hodgepodge of publicly traded producers, investor-owned utilities, coöperatives, and publicly owned municipal utilities. Regulated utilities, which are guaranteed a certain rate of return based on the power they provide, are particularly ill-suited for the new era: they are rewarded for selling electrons and building new infrastructure, which is clearly not what society and the economy needs going forward. Equity markets, meanwhile, have punished risk-takers like NRG that are trying to actively reshape their business models. What’s clear is that a clear national discussion involving customers, utilities, and government officials is necessary to create a new model of power provision in this country. Maybe the upcoming talks in San Diego will be a start. 

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