Change or Die: Why Big Electric Needs to Think Small

Community and Economic Development – Blog by UNC School of Government

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Change or Die: Why Big Electric Needs to Think Small

By CED Guest Author

Published February 25, 2014

The business model of electric utilities has remained largely unchanged in nearly 100 years. Until now, this capital-intensive industry has primarily recovered revenues through the sale of energy units, or kilowatt-hours: a use more, pay more approach. Most electric utilities operate as state-regulated monopolies because of the amount of capital required to build energy generation and distribution (in other words, it’s not an easy entry market). But an increase in electricity costs combined with increased capability and decreased costs of decentralized generation solutions (like rooftop solar) threaten the way in which big utilities conduct their business. Electric utilities, as currently structured, have little to no incentive to embrace solar panels on every rooftop. First and foremost, when customers use fewer kilowatt-hours, utilities lose dollars. And while this may postpone or even negate the need for new generation, it doesn’t help to cover the costs of the existing generation that needs to be there. That’s some of the reason for the pushback on net-metering laws. (Net-metering basically means that a distributed generator can sell their power back to the utility.)Additionally, if not properly done, a bunch of small generators across the grid can pose safety problems for utility workers and the public.

But the flip side is that the many distributed energy resources are much cleaner and help avoid utility investments to meet demand. For example, solar power is available when the sun is up, which can be a major driver of peak demand of energy. So it can help avoid the utility investments needed just to meet demand during those brief times.

A distributed approach also implies entrepreneurial opportunities. In 2013, there were over 2,400 solar jobs in NC, according to the North Carolina Sustainable Energy Association (NCSEA)[1]. Furthermore, a distributed system is a competitive one, which can drive innovation in the marketplace. According to the Solar Electric Power Association (SEPA), there were 200,000 distributed solar customers (aggregating 2,400 megawatts or MW) in the United States as of 2011[2]. In the same year, there were 800 solar project in North Carolina, according to NCSEA[3]. Thus, the largest near-term threat to the utility model represents less than 1 percent of the U.S. retail electricity market, but it’s growing. And programs like NC WARN’s “Solarize Durham” are pushing for sooner rather than later.

So what’s a poor monopoly industry supposed to do? They can transform the business model or likely go the way of Piedmont Airlines and some of the huge telecommunications companies that didn’t foresee wireless[4]. In a recent article, Rob Lehr and Bentham Paulos (of America’s Power Plan) project that there are two directions that electric utilities can go in transforming their business model. They can become a “wires company” that simply sells the distribution of energy. Or they can become a complete “energy service utility” that owns and operates all necessary systems to deliver energy services to customers. Many in the industry are calling for a regulatory restructure to help grant energy utilities the flexibility to finance and plan for smaller energy projects. With more than 2,000 cities and towns across the United States being served by “public power,” local governments must re-evaluate their business model alongside the investor-owned utilities. But even those local governments that don’t provide power need to think about how to deal with distributed energy resources, like solar.

Regardless of the changes by electric utilities, one thing is clear – the solar industry is growing in North Carolina. Cities and counties across the state are planning and zoning to reasonably accommodate rooftop solar and solar farms. The School of Government will host a webinar on March 24^th on planning and zoning for solar in North Carolina where Adam Lovelady of the School of Government and Tommy Cleveland of the NC Solar Center will explore how North Carolina communities are responding to the rise of solar. A free online publication will also be published covering the topics of the webinar.  

Mary Tiger was formerly on staff with the UNC Environmental Finance Center.