Natural Gas

Why the U.S. Power Grid's Days Are Numbered

8/23/13
from Bloomberg Businessweek,
8/22/13:

There are 3,200 utilities that make up the U.S. electrical grid, the largest machine in the world. These power companies sell $400 billion worth of electricity a year, mostly derived from burning fossil fuels in centralized stations and distributed over 2.7 million miles of power lines. Regulators set rates; utilities get guaranteed returns; investors get sure-thing dividends. It’s a model that hasn’t changed much since Thomas Edison invented the light bulb. And it’s doomed to obsolescence.

That’s the opinion of David Crane, chief executive officer of NRG Energy, a wholesale power company based in Princeton, N.J. What’s afoot is a confluence of green energy and computer technology, deregulation, cheap natural gas, and political pressure that, as Crane starkly frames it, poses “a mortal threat to the existing utility system.” He says that in about the time it has taken cell phones to supplant land lines in most U.S. homes, the grid will become increasingly irrelevant as customers move toward decentralized homegrown green energy. Rooftop solar, in particular, is turning tens of thousands of businesses and households into power producers. Such distributed generation, to use the industry’s term for power produced outside the grid, is certain to grow.

As Crane sees it, some utilities will get trapped in an economic death spiral as distributed generation eats into their regulated revenue stream and forces them to raise rates, thereby driving more customers off the grid. Some customers, particularly in the sunny West and high-cost Northeast, already realize that “they don’t need the power industry at all,” Crane says.

Crane prefers another analogy. Like the U.S. Postal Service, he says, “utilities will continue to serve the elderly or the less fortunate, but the rest of the population moves on.” And while his utility brethren may see the grid as “the one true monopoly, I’m working for the day the grid is diminished.”

Anthony Earley Jr., CEO of giant Pacific Gas & Electric, doesn’t share Crane’s timetable for the coming disruption—he thinks it’s further out—but he does agree about the seriousness of the threat.

Worldwide revenue from installation of solar power systems will climb to $112 billion a year in 2018, a rise of 44 percent, taking sales away from utilities, according to analysts at Navigant Research, which tracks worldwide clean-energy trends. “Certain regions in California, Arizona, and Hawaii are already feeling the pain,” says Karin Corfee, a managing director of Navigant’s energy practice. “We’ll see a different model emerge.”

After subsidies, solar power is competitive with grid power costs in large parts of those markets. Some areas in the Northeast will reach a similar “grid parity”—where residential solar is equal in cost to power from a utility—within three years; a majority of states could get there in 10 years or less, according to data from a variety of green energy and regulatory sources. A July report by Navigant says that by the end of 2020, solar photovoltaic-produced power will be competitive with retail electricity prices—without subsidies—“in a significant portion of the world.”

No industry as large, long-lived, powerful, and politically connected as the utility industry will simply roll over, disruptive technology or not. Wander into the annual meeting of the EEI, and you can get a sense of the push back. At this year’s event, held in June at the Marriott Marquis in San Francisco, some 950 utility executives, consultants, and support staff talk shop and offer arguments for why the grid will survive. Solar doesn’t work everywhere; it still doesn’t make economic sense in states that have low-cost coal power; microgrids aren’t foolproof. And someone has to pay for those wires used to sell solar power back to the grid.

The big complaint, though, is about subsidies. “I don’t characterize distributed generation in and of itself as a threat,” says Nick Akins, CEO of Columbus (Ohio)-based American Electric Power. “I characterize the regulatory scheme that supports it as a threat.”

For the energy sector and for all extractive industries, costs almost always go up. Given those trajectories, counterintuitively, the coming tussle between solar and conventional energy is not going to be a fair fight.”

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