Threats to the Utility Business Model Future

The forces of disruptive technology are reinventing the energy future through the clash of policies and players at work today.  This is not one contest but a series of battles that seek control over the gateway to customers.  The battles will not always be about energy directly, but will include communications, entertainment, broadband access and the networked use of information, security, mobility, convenience and value.

Defining the Smart Grid Future

Players focused on the energy space will likely take aim first at commercial and industrial energy users (C&I) especially in states with direct access.  There are plenty of experiments including one interesting utility example at ActewAGL, an Australian utility expanding its services beyond energy.[1] Xcel Energy’s Smart Grid City[2] and Austin Energy-sponsored Pecan Street Project[3] are also good demonstration examples of new tactics.  In the UK and elsewhere utilities are trying to improve customer service with more home energy management services. [4]

C&I customers are the most profitable customers and often will be willing partners if cost savings and environmental benefits can be shown from making a change. We see this happening before our eyes with the M&A bulking up of EnerNOC (ENOC)[5], Comverge (COMV)[6] and others moving into the energy management space to combine with their existing energy efficiency, demand response and other products into more complete solutions.

Scalable Growth and Sustainability

Some of this is a tactical search for near term revenue but increasingly it is a strategic move to carve out a place in the battlefield that is difficult for others to capture or hold. In doing so these companies are bulking up their valuation ‘putting lipstick on their pig’ making them scalable seductive acquisition targets by larger—much larger players like IBM, Accenture, CISCO or others as the smart grid enabled market segment consolidates.  Bigger players in the energy management space partnered with Fortune 500 global corporate giants mean bigger risks for utilities.

It is no coincidence that these energy management players are going after Fortune 500 firms and their quest for a greener footprint, reduced carbon emissions bragging rights, and cost savings.  As a tactic this looks like going after low hanging fruit.  As a strategy it opens the door and builds alliance relationships to gain wallet share and market share traction across the supply chains.  The strategy of Wal-Mart partnering with the Environmental Defense Fund to develop a supply chain strategy of forcing its vendors and suppliers to get with Wal-Mart’s program of emissions reduction, cost savings and environmental sustainability is the gold these energy management players seek.[7]

Convergence Forces of Change

Non-energy players will likely approach the battle or try to shape the field by targeting other pain points for customers both business and residential, fixed and mobile, big and small.  The biggest impediment to scalability of smart-enabled energy markets are issues of network fragmentation and interoperability.  Non-energy players such as IBM [8]can make some of these problems go away through the use of middleware to overcome technical issues or structured financial transactions or trading to overcome physical market barriers by converting commodities into financial products. Wireless communications, nationwide or even global broadband access, multi-tasking devices like iPhone, iPad, DROID and other devices serve as the improvised explosive devices (IEDs) for this battle by the insurgents.  They bring new technology, new services, new options that no utility can match.  They seek energy to power their applications and services and they will use energy as a sticky commodity addition to their bundled solutions to reduce churn and make their solutions easy, fast, convenient and competitively priced.

Bundling Distributed Energy Resources as Virtual Power Plants

What is at stake is the traditional utility business model of central station generation and its average cost economies of scale.  One challenger will be proponents for a distributed energy resources (DER) business model that combines both clean, renewable energy sources with energy efficiency, demand response, dynamic pricing, smart grid and control of the home area network gateway to customers introducing sensors, dashboard, and other gadgets to seduce and enable aggregation of customers on a mass scale creating among other products virtual power plants (VPP) whose output is then sold to the utilities or directly to end use customers.

The gravest threat to the utility future is they will be stuck as the one trick pony commodity vendor of last resort in a multi-tasking world driven by apps and options.  This is the rate regulated wires and pipes energy delivery business except that the rise of DER and net zero energy buildings combined with direct access and customer aggregation puts its revenue base at risk forcing higher rates to cover its fixed costs thus creating a spiral of defections.

Yes!  We have an App for That!

Other battles will be provoked by cleantech players who will use information technology and “cool” gadgets and services to aggregate customers by segment around bundled solutions that likely will include energy but may not be driven by the energy purchase.  By converting energy commodity into something embedded in a value added bundle of business or personal services depending upon the segmentation analysis, the players seek to grow market share and, as a consequence, will deprive the utility of its traditional control over the gateway to customers and with it control over its supply and demand future. This is a global battle field with US and EU clean and renewable energy market share growth dependent upon China for production of wind turbines and solar photovoltaic panels in quantities that continue to drive down the production costs of these new technologies to grid parity prices.[9]

Will Growing RPS Goals Undermine the Utility Business Model?

Necessity has always been the mother of invention, as the saying goes.  So the pressure on utilities in states with renewable portfolio standards is getting intense to meet the deadlines for compliance–or else!  It has been a tough slog for most.  If states had just stuck with their typical 20% RPS goal we would be celebrating victory in a growing number of markets.  But the expansion of the RPS target to 33% to 40% of energy is more daunting and may even be unachievable in some markets at electricity rates and reliability levels acceptable to customers.  While there is popular support for clean and renewable energy there is growing pushback over rising utility rates and just as many NIMBY problems when a project is proposed in a specific location. The more the utility is required to do to meet the RPS aspirations of state politicians and regulators the fewer options and more risk it faces in preserving the traditional average cost monopoly service territory-based utility business model.

So what?

The traditional central station power generation utility business model is under assault on many fronts.  It has endured for 100 years because of its reliability and low average costs.  But today the marginal cost of new clean energy resources exceed the average costs for most utilities, are dependent upon fickle subsidies, feed-in tariffs, and government stimulus grants.  The strategic advantage of the traditional utility business model is that we know it and trust it and it offers few ugly surprises.  It’s weakness is its inability to adapt to the rapidly changing technology and policy aspirations of politicians and regulators at prices ratepayers find reasonable and with earnings shareholders find acceptable compared to alternatives.  Hunkering down and letting the infidels kill each other off may be a useful strategy for utilities on a high risk technology battlefield, but it could also be the riskiest strategy of all if you have no Plan B.


[1] http://www.greentechmedia.com/articles/read/bundling-energy-and-telecom-down-under/

[2] http://www.intelligentutility.com/article/10/04/smartgridcity-drivers-and-business-cases

[3] http://pecanstreetprojectaustin.org/?p=197

[4] http://www.greentechmedia.com/articles/read/are-telcos-eyeing-home-energy-management-5926/

[5] http://seekingalpha.com/article/187132-who-will-be-the-smart-grid-s-billion-dollar-winners

[6] http://seekingalpha.com/article/195084-comverge-from-demand-response-to-ongoing-energy-management

[7] http://www.greentechmedia.com/articles/read/walmarts-journey-to-sustainability/

[8] http://seekingalpha.com/article/199107-is-ibm-s-future-in-middleware-software

[9] http://seekingalpha.com/article/196812-getting-the-u-s-clean-energy-on-china-time

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6 thoughts on “Threats to the Utility Business Model Future

  1. Mr. Hunt has shown very important facts on the obsolescence of the utility business model, which I understand can be complemented to favor government restructuring in the power industry as soon as possible. Giving the benefit of the doubt to that business model, he writes that “[t]he traditional central station power generation utility business model is under assault on many fronts. It has endured for 100 years because of its reliability and low average costs.”

    However, that apparently enduring front has also been already lost. I do not remember where I learn that the utility business model is nothing more than winning rate cases to the regulator. The main problem is that state regulators instructions need to change to enable business model innovations. The value destruction associated with extending business as usual regulations is not longer advisable for all stakeholders.

    As Mr. Hunt will see in the post “The ‘Genius’ of the Macrogrid ‘And’ Truly Fair Microgrids ( http://bit.ly/ajQLs8 ),” it is not longer true that the business model can endure “because of its reliability and low average costs.” He will also see that microgrids are here to stay.

    The conclusion of that post reiterates that: “[s]tate Legislatures need to give a new mandate to state regulators to enable truly politically correct (or better yet truly fair) microgrids. By trying to go the easy way out, microgrid proponents’ ongoing strategy won’t work; it will reveal state governments’ lack of vision that sets the poor to bid against the microgrids.”

  2. I am of the opinion that we will see a thriving business in microgrids and that they will become a key strategy of both C&I and residential energy consumers. Back when I was running Austin Energy in the mid-1980’s we developed the concept of the Conservation Power Plant combining many demand side management programs into one strategy designed to produce enough energy efficiency to offset the need to built the next 200MW power plant. It proved a very useful and popular marketing strategy for our DSM programs. Today that same concept is being re-introduced as a “virtual power plant” by new entrants like EnerNOC, COMverge, CPower and others for use initially with commercial and industrial customers. Eventually I believe we will also see it used to aggregate residential customers.

  3. I am part of an MBA program that has assigned me to assist a power company look at its sustainability and the future. Needless to say, there are not cleft notes with regards to regulations and compliance. Unfortunately, I am left reading volumes of code and still am lacking in a common understanding of the oversight of power companies. Would you be willing to point me to a place that has in nailed down in laymen terms?

    1. My suggestions for sources of information include:

      *Edison Electric Insitute. *(EEI) This is the trade association for the investor-owned electric power industry.

      *American Public Power Association.* (APPA) this is the counter-part trade association for the municipal or public power side of the electric power industry.

      *National Regulatory Research Institute*. (NRRI) This is the research organization of state regulatory agencies.

      *National Association of Regulatory Utility Commissions.* (NARUC) This is the national trade association for he public utility regulatory agencies.

      *Utility Sustainability Reports.* If you Google “utility sustainability reports” you will find many examples of utility reports on sustainability perhaps one from the utility near you.

      If none of these satisfy your need we can talk by phone.

      Gary

      nt-reply@wordpress.com> wrote:

      > New comment on your post “Threats to the Utility Business Model Future” > Author : Scott Brown (IP: 174.27.103.142 , 174-27-103-142.bois.qwest.net) > E-mail : sbrown@sterlingconsulting.net > URL : > Whois : http://whois.arin.net/rest/ip/174.27.103.142

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