"Just three tenths of one percent of Wisconsin homes have rooftop solar panels, yet every 83 seconds a new solar installation is built somewhere in the U.S. -- three times faster than just two years ago," reports Elisa Graffy in a recent seminar for REDA
students sponsored by the Wisconsin Energy Institute
. "If you see that kind of growth you pay attention," she adds, and electric utilities everywhere are doing just that.
Elisabeth Graffy and Steve Kihm
Graffy, a UW alum (AAE MS '93, Land Resources PhD '05) and professor at Arizona State, joined Steve Kihm, an economist with Seventhwave, to discuss their research on how utilities are responding to "disruptive competition" from renewables like solar.
Rooftop solar is growing even without tax incentives in places like California and Arizona, as installation costs keep falling. Graffy sees that demand for solar has "nowhere to go but up," especially in Wisconsin
, which ranks 30th in the U.S. in installed solar systems.
But, as they face prospects for shrinking demand for conventional energy, some utilities are responding defensively, raising fixed rates and otherwise discouraging innovative efforts to move beyond simply supplying electrons using the traditional business models built for regulated monopolies. In Wisconsin, Xcel Energy recently won a fixed rate increase
for its electricity and gas customers.
"When utilities create a disincentive to conserve, people get upset," says Graffy, citing a recent Iowa Supreme Court case
that found it legal for an independent power producer to sell energy from its solar panels on a municipal building to the city of Dubuque. Power purchase agreements from such providers could affect utilities' economies of scale and erode the market power that has protected utilities from competition for over a century.
Reddy Kilowatt was created in 1926 to promote electric power, especially in rural areas.
In the early days of electric power generation at the turn of the 20th century, utilities worked to grow demand for electricity in order to bring down the price per kilowatt hour, explains Kihm. The energy crisis of 1973, when OPEC's embargo quadrupled crude oil prices, marked the first time energy conservation entered the public discourse. As the sole generators of power for their regions, utilities' economies of scale efficiently served the public good until the price of renewables reached parity with fossil fuels in recent years.
This paradigm shift could change the "laws of scale," as investors see new opportunities for distributed generation and improved storage that, among other benefits, increase grid resiliency at a moment when worries are increasing
about cyberattacks that could cause widespread blackouts.
Utilities will have to adapt. "Pursuing strategies that require customers to pay higher fixed charges, reduce their choices, or poorly address their preferences [for clean energy] will likely encourage the development of non-grid alternatives," write Graffy and Kihm in their 2014 Energy Law Journal article1. They point to the cable TV industry which, when faced with a threat from satellite TV, survived by repackaging its bundle of services to include phone and internet.
"Neither regulators nor courts have an absolute obligation to preserve the solvency of utilities," they write, so energy companies will need to offer innovative new bundles of services such as the solar customer assistance program created by Georgia Power
Customers "are not, after all, only buying electrons. They are buying convenience, security, peace of mind, and the ability to engage in energy arrangements that fit their values of sustainability or energy independence but which they cannot do alone," note the authors.
As the UN climate summit in Paris emphasized innovation to slow greenhouse gas emissions, energy utilities can engage in creative adaptation that can either revitalize their businesses or make way for new leaders to emerge.
"If the utilities stand by while the entrepreneurs follow through with consistently lower-cost, reliable, renewable-based supplies along with excellent customer service, then the utilities have essentially surrendered some of their biggest assets," conclude Graffy and Kihm.
1"Does Disruptive Competition Mean a Death Spiral for Electric Utilities?," Energy Law Journal, Volume 35, No. 1, 2014