I recently read an article that summarized the views of “Energy Darwinism – the evolution of the energy industry," a new report from the investment banking arm of Citibank. The report argues that consumers are now taking advantage of technologies that have progressed faster and further than anyone expected.
The rapid advancements in technologies related to energy efficiency and distributed generation coupled with the fact that fossil generation is on an upward cost trend, will be the ultimate demise of the industry the report argues. The report goes on to claim that the utility industry as we know it will crumble rapidly. In fact, the report cites that history tells us that fuel sources have rapidly changed, much more rapid than anyone predicted.
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It is hard to argue that fossil fuels such as coal, oil and gas will indefinitely continue to be the world’s major source of energy. The laws of physics and math tell us that if we continue to consume at the rate we are consuming energy today, these fossil fuel supplies will be exhausted. These fuels will always be present in the earth as long as there is life and carbon present, but just not in the abundance we have seen over the past century, and certainly not as accessible.
But, the basic question of the report is not whether fossil fuels, nuclear power generation or renewables will be the dominant energy source into the future. The report simply argues that utilities as we know them will die a more rapid death than anyone expects.
One key point is missing from the analysis of the summary I read, and that deals with the fundamental reason utilities exist in the first place. Utilities were created to provide reliable, safe and abundant energy. Three key words in this sentence are reliable, safe and abundant…of course this energy must be offered to consumers at a reasonable price.
In the US and most of the developed world, the ubiquitous, safe, uninterrupted and reliable supply of energy is largely taken for granted. Nearly all people in developed countries get as much electricity as they want anytime, all the time, and only rarely have service interruptions. And the cost of this service is so reasonable, nothing has threatened to replace this service since its inception…how many other products or services can make this same claim?
The fundamental issue with electricity is that it has become the one input to modern society that we just can’t live without. If people only needed electricity intermittently, or would be happy with power being delivered only when it was available, then utilities would be more concerned. But, this is not the case.
Modern man desires electricity whenever, wherever and in any quantity he desires. As long as the price is reasonable and the power is available and abundant, there is little threat to the utility industry. While today’s distributed generation sources such as solar panels and battery storage devices will certainly begin to threaten the utilities existing business model, until such time that these power sources are performing to the same level of near 100% reliability at a comparable cost, there will still be demand for centrally located power supplies from utilities to fill the gaps of intermittency.
Distributed generation will eventually become the norm rather than the rule. However, based upon current prices of utility generated power as compared to projections in battery and distributed generation technology, we are at least 25-30 years away from any real shift in the “balance of power”.
It is important to note that there will likely be areas where this change will take place faster than others. In areas where distributed sources such as solar are more viable, (i.e. southern California) utilities will have the opportunity to adapt to the marketplace.
The biggest challenge they will face in these areas will be to rid themselves of the handcuffs they currently have from regulators. Regulators impose strict obligations for utilities to serve all, yet restrict many of the competitive initiatives utilities could undertake. Cooperation between regulators and utilities will ultimately serve society better than a combative relationship. Allowing utilities to get into the business of distributed generation (i.e. selling rooftop solar to consumers), promoting electric vehicles, and offering other value added services without restrictions will enable utilities to diversify their business. The benefits of such a model would not only benefit utilities, but as well local economies and society at large.