Commentary: Why electric utilities must update their business models

Due to a variety of factors, the traditional business model for the nation’s investor-owned electric utilities, such as TXU or Reliant Energy, is in trouble.

In fact, these factors – led by a rapid movement away from the decades-old system of generating electricity from large, centralized power plants and distributing it to customers over an interconnected grid – is rapidly giving way to a new, decentralized structure that features varying types of distributed energy resources (DERs), most notably rooftop solar.

In utility parlance, distributed generation technologies are “disruptive.” Along with the growth in energy-efficiency measures and other technologies, DERs have significantly slowed electric load growth and – though it may not be recognized as such quite yet – could ultimately sound a death knell for utilities that have historically made money based on the volume of electricity they sell.

WE SAY…: Read the latest opinions from the Statesman’s editorial board.

Put another way, utilities may soon face a future in which they will have trouble recovering fixed costs and making a profit.

It remains to be seen how utilities will react to these developments — and how the changing landscape will pan out for consumers. But we all have an interest in a stable model that keeps the lights on. If a local distribution company goes bankrupt, customers would no longer be able to switch electricity providers, even in areas that allow competition. And, since there are only one set of poles and wires, the utility bankruptcies could mean the government would have to take over to ensure the continued operation of the grid.

In response to these developments, several states including California and New York are looking at alternative business models to incentivize and integrate distributed resources into the grid.

Some experts have suggested that the “platform” business model, which creates value by facilitating exchanges between two or more groups, should be applied to the electric industry. Supporters of such a model envision the electric grid evolving into a platform on which DERs – including rooftop solar, energy storage, electric vehicle batteries and energy-efficiency products – bring in new revenue to the utility. However, so far most new products —like the Nest thermostat — save customers money but reduce utilities’ revenue.

During the spring semester, I taught a course with Fred Beach that delved into these issues. The graduate-level class, funded by the Energy Institute at the University of Texas, required students to examine six new and proposed business models and draft a report summarizing their findings.

Students analyzed each of the models to examine how they recovered fixed costs, made a profit, incentivized DERs and engaged customers.

BE THE FIRST TO KNOW: When big news breaks, we send Breaking News emails. Click to sign up.

The report found that although many of the new models appear to be effective in promoting DERs, utilities probably would struggle in a high-DER scenario. Specifically, the students found that most of the cost-cutting benefits would be achieved as DER spread. However, once the deployment of additional rooftop solar, energy storage and other energy resources reached a saturation point, they would no longer benefit the electric grid — while still providing savings to customers who implemented them — and become a cost burden for utilities to integrate.

In the end, the students found that the loss of revenue ultimately could lead utilities to revert to a standard cost-of-service model to recover costs.

Their report also concluded that when rooftop solar and other DERs achieve mass deployment, conventional electric utilities may find that nonprofit business models such as electric co-ops, municipal utilities or nonprofit corporations have the most stable futures. In any case, their future profit potential is very limited in the face of expanding, customer-owned distributed resources.

As for operation of the electric distribution grid, the students’ research suggests that an independent system operator like the Electric Reliability Council of Texas may be a more efficient way to operate the grid on a local level.

Duncan is a research fellow with the Energy Institute at the University of Texas. He formerly served as general manager of Austin Energy, the city’s municipal utility.

Reader Comments ...

Next Up in Opinion

Moms are fighting for gun violence prevention in Texas – and winning
Moms are fighting for gun violence prevention in Texas – and winning

Five years ago, I watched news of the Sandy Hook school shooting unfold in horror. When the scope of the tragedy was confirmed, I got up to tell my husband, only to fall to the floor. Although I didn’t know the families impacted by this devastating shooting, as a mom of two young kids, it felt deeply personal to me. Immediately after Sandy Hook...
Facebook comments: Jan. 21, 2018
Facebook comments: Jan. 21, 2018

As reported by the American-Statesman’s Mark D. Wilson and Sebastian Herrera, Amazon announced that Austin made its short list of 20 cities that could become the site of its second headquarters. More than 238 cities in the U.S., Canada and Mexico submitted applications for Amazon’s HQ2. Dallas was the only other Texas city to make the cut...
Herman: Let’s eavesdrop on two Texas Repubs going at it on Twitter
Herman: Let’s eavesdrop on two Texas Repubs going at it on Twitter

Through the miracle (menace?) of Twitter, let’s eavesdrop on a conversation between two of our duly elected state officials. But first, let’s meet our players. State Rep. Jonathan Stickland (known to some as “Sticky”) is a Republican from the Dallas-Fort Worth suburb of Bedford. He’s a keep-government-out-of-our-lives...
Letters to the editor: Jan. 21, 2018
Letters to the editor: Jan. 21, 2018

Re: Jan. 16 commentary, “Herman: Sen. John Cornyn continues to tolerate President Trump.” Sen. Cornyn does more than “tolerate” President Trump. He voted for him, and by remaining silent when the president lies, bullies someone, insults our allies, makes a racist comment, or attacks America’s free press and all the millions...
‘Oliver Loving’ is a vividly rendered exploration of school shootings
‘Oliver Loving’ is a vividly rendered exploration of school shootings

Ten years later, a school shooting in West Texas is revisited from the perspective of a family it changed forever in Stefan Merrill Block’s “Oliver Loving.” What we know, what Eve Loving, her husband, Jed, and their son, Charlie, know, is this: a recent graduate named Hector Espina Jr. returned to the Bliss Township School campus...
More Stories