Are Distributed Generation and Demand Side Management Trends Poised to Cause a Radical Transformation in the Electric Utility Industry?

The Utilities themselves may be starting to take the threat seriously.  A recent report prepared for the Edison Electric Institute by Peter Kind of Energy Infrastructure Advocates argues that technological and economic changes – led by falling costs of distributed generation (think primarily PV, but also storage, EVs and other distributed technologies) and increasing interest in demand side management technologies (think efficiency) –  are “game changers” that could lead to changes in the electric utility industry comparable to those experienced by the telecommunications industry beginning in the late 1970s.

Essentially, the report suggests that expansion of distributed generation and demand side management will reduce the demand for the services utilities provide, squeezing utilities’ revenues and profitability while imposing new costs to interconnect and service the new technologies, and requiring (under tariff structures in most states) that non-adopting customers bear the costs of otherwise lost revenues.  As this process speeds up, the report suggests that political opposition to the cross-subsidization is likely to mount, raising the possibility that utilities could be stuck with stranded costs and ultimately affecting utilities’ future cost of capital.  The report calls for utilities to develop proactive plans to address the coming challenges and specifically suggests eliminating cross-subsidies supporting distributed generation and energy efficiency.  (The report takes a dim view of “subsidy programs” such as tax incentives, renewable portfolio standards, and especially net metering, which it describes as shifting costs to non-adopters and creating an unlevel playing field.)

Much of the analysis here seems right, and it is refreshing to see the utility industry grappling with the idea that emerging technologies are likely to change the way end users obtain and use electricity and to do so soon.  But some of the recommendations seem to ignore the lessons that the rest of the report identifies.  The idea that the appropriate response to the coming technological change is to fight back against public policies that promote the acceleration of that change seems misguided.  If the change is coming, and presumably it is coming because new technologies will offer customers services or prices they find desirable, isn’t the more foresightful approach to think about how utilities can position themselves to offer new value opportunities to their customers rather than to simply look to slow down the coming transformation?  Nor do I think that policies like net metering, renewable portfolio standards, or energy efficiency incentives are likely to be abandoned, even where they may entail some cross-subsidization elements.  While such policies will continue to be refined on a state by state and regional basis, the broader policy rationales supporting such programs are firmly entrenched for the time being.

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