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Published on February 11th, 2014 | by Guest Contributor


Renewables’ Disruption Of The Utility Business Model Is A Good Thing

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February 11th, 2014 by

Originally published on Rocky Mountain Institute.
Amory B. Lovins.

Renewables are making headway in Europe and bringing a low-carbon electricity system to the forefront. Renewables were 69 percent of new capacity added in 2012 in Europe and 49 percent in the United States. Not surprisingly, this threatens utilities unwilling to let go of outmoded business models and fossil-fuel generation.

Laments for Europe’s money-losing electric utilities were featured in an October 2013 cover story in the Economist. It said Europe’s top 20 energy utilities have lost over half their 2008 value, or a half-billion Euros—more than Europe’s banks lost. Many utilities therefore want renewable competition slowed or stopped. Indeed, some European giants, like Germany’s E.ON and RWE, are in real trouble, and five of Europe’s top ten utilities have suffered credit downgrades. So have some U.S. utilities—most recently Jersey Central Power & Light and Potomac Electric Power Co.—from the likes of Fitch, Moody’s, Standard & Poor’s, Credit Suisse, and others.

Should old, long- and often still-subsidized oligopolies be bailed out or shielded from competition when they bet against innovation and lose? Those big European utilities were supposed, but failed, to prepare for renewables by reinvesting their hundreds of billions of Euros’ windfall from billing customers for the first decade’s tradable carbon emission credits they’d been given for free. Now they’re griping that disruptive technologies are upending their old models—just as innovators had warned them for the past few decades.

Disruptive technologies are meant to upset the status quo to bring worthwhile change. Should we have rejected mobile phones because they threatened to displace landline phones? Didn’t digital cameras make film cameras largely obsolete? Shouldn’t print newspapers have to invent new business models to confront the rise of the Internet?

Of course utility companies that refuse to let go of an archaic system are losing investors’ money. To be sure, some market reforms, like a well-designed, technology-neutral electric capacity market, could be worthwhile. But botched investment strategy should not be rewarded. Nor should shareholders be surprised that utility stocks no longer perform like bonds when twenty-first-century technology and speed collide with twentieth- and nineteenth-century institutions, rules, and cultures. Fortunately, those shareholders were already compensated for accepting well-known risks like new technologies, new environmental rules, and other regulatory and policy shifts—and they needn’t be paid twice.

Renewables Aren’t The Only Challenges To Incumbents

As the Economist acknowledges, those utilities’ financial crisis is due not only to renewables, which are often scapegoated for trends they reinforced but didn’t cause. Overinvestment in fossil-fueled generation would have weakened utilities’ finances anyway as the global economic slowdown damped electricity demand growth and the efficiency revolution began to reverse it—on both sides of the Atlantic. U.S. weather-adjusted electricity use per dollar of GDP fell 3.4 percent in 2012 alone. In many regions, efficiency is outpacing service growth, shrinking utilities’ revenues.

U.S. shale gas has also displaced much coal-fired generation (though efficiency displaced nearly twice as much in 2012). Unsold American coal flooded European markets, temporarily displacing higher-priced gas. Meanwhile, solar power took the utilities’ profitable afternoon-peak market and slashed its price premium. And since Germany, among others, gave renewables both full grid access and dispatch priority (logically, because they’re cheaper to run than any fueled generator), low loads coinciding with high renewable supplies sometimes make wholesale markets clear at negative prices. This further distresses utilities that must pay to keep their inflexible old plants running—much as they’d prefer to shift all the costs of adaptation to their new competitors. Their distress will rise as renewables keep getting cheaper and as old contracts to sell electricity at well above today’s prices expire.

Renewables Are Advantageous

The Economist article stated, “The growth of renewable energy is undermining established utilities and replacing them with something less reliable and much more expensive.” Undermining stubborn established utilities? Yes, to achieve important public benefits. But shifting to less reliable and much more expensive generators? Hardly.

Well-stoked fears of grid instability and unreliability due to renewable power are as widespread as evidence for them is unfindable. In the Central European grid, where pervasive electricity trading helps operators choreograph the ever-shifting mix of renewable and nonrenewable supplies, German electricity (23 percent renewable in 2012) and Denmark (41 percent) are the most reliable in Europe—about ten times better than in the United States (whose 2012 electricity was 6.6 percent hydro and 5.3 percent other renewables). Even on the edge of the European grid, Spain (48 percent in the first half of 2013) and Portugal (70 percent) kept their lights on just fine. This experience might help the puzzled Economist writer who claimed, “No one really knows what will happen when renewables reach 35 percent of the [German] market, as government policy requires in 2020.” Answer: probably nothing except lower emissions and lower prices.

The “much more expensive” claim, too, evaporates on scrutiny. In the U.S., new Midwestern windpower now sells at a 25-year fixed nominal price (thus a declining real price) as low as $22/MWh, and new Western solar power at below $70, both net of subsidies generally less than nonrenewables get. In many states, wind and solar beat efficient new gas-fired power plants. In countries like Brazil and Chile, unsubsidized wind and solar power routinely win power auctions. In Europe too, they have a strong business case; cloudy Germany has installed 35 GW of photovoltaics but hasn’t subsidized them since 2004. The Economist agrees that German solar power now costs less than residential tariffs (which are half taxes), and less than the feed-in tariff it still receives (because it still costs more than wholesale prices)—so solar power could keep growing even without the tariff.

“Much more expensive” is a more apt description for much nonrenewable generation, especially as the misdesigned European carbon market gets repaired so emissions are no longer nearly free. Exhibit A is the Hinkley Point nuclear plant that the British government wants 84-percent-state-owned Électricité de France to build, supposedly with part-Chinese financing, to generate 7 percent of U.K. electricity. To get ÉDF to agree, the British government had to offer a 35-year inflation-adjusted fixed power price twice today’s wholesale market level, plus a 65-percent loan guarantee, plus other concessions, many still secret.

Even if this extravagance survives EU scrutiny as “illegal state aid,” the project may not win private construction financing. Investors may reason that nuclear electricity costing seven times the unsubsidized Midwestern-U.S. windpower price (the U.K. has Europe’s best wind resources) or 3–4 times the unsubsidized western-U.S. solar price, both falling, is so ridiculous that a subsequent U.K. government could wriggle out of the deal, putting private capital at risk—or simply that forcing the market to absorb so much extraordinarily costly electricity could prove unworkable. If the British government let all options compete at transparent prices, it could find such cheap efficiency, demand response, renewables, and cogeneration that this year alone in America, five old operating nuclear plants have been terminated as uneconomic just to run, even though their high capital cost was paid off long ago. New reactors’ capital costs are so prohibitive that eight years of 100-plus-percent construction subsidies have failed to make them privately financeable, and nine proposed new units were also terminated this year.

Calls for more nuclear power have largely abated in Europe, where flagship nuclear projects in Finland and France are at least twofold over their budgeted cost and time. Nuclear diehards still pull most policy levers in France, but its national utility isn’t charging enough to cover its nuclear repair costs, is about a trillion Euros underfunded for decommissioning its aging reactor fleet, can’t afford to replace it, and needs to consider what to do instead. Hint: renewables leader Germany, moving off nuclear and beyond coal, is the only consistent net exporter of electricity to three-fourths-nuclear-powered France.

Renewables Are Winning

Utilities’ dwindling profitability is the flip side of renewables’ benefits to customers. As renewables burgeoned, Germany’s wholesale electricity prices fell nearly 60 percent in the past five years. This enriched many German industries—thousands of which also shifted billions of Euros’ annual costs to German households via tripled exemptions from paying grid fees and renewable surcharges. (Only 15 percent of the German renewables surcharge is actually households’ share of premium prices for renewables, mostly for old contracts at higher prices; the other 85 percent reflects falling wholesale prices and industrial exemptions.) But the wholesale price drops are reaching most German households too in 2014, stabilizing their bills.

Moreover, German citizens can choose to microinvest as little as $600 in renewables, locking in a stable and attractive return for 20 years. Most German renewable capacity—investments largely spurned by big utilities—was bought instead by citizens, communities, or cooperatives. And Germany’s 382,000+ new renewable jobs, welfare relief, corporate and export earnings, tax revenues, and wholesale price drops yield not just long-term but current macroeconomic net benefits to the national economy.

The Need For New Business Models

Rather than lament that traditional utilities aren’t the low-risk investments they once seemed, and asking how we can protect their profits, we should be seeking to help progressive utilities and disruptive upstarts shape a new electricity system powered increasingly by clean, distributed renewables, doing exactly what they were meant to do: provide reliable, resilient, safe, clean power at moderate prices. That is the way the world market is trending.

Not only Germany but also in two more of the world’s top four economies—China and Japan, as well as India—non-hydro renewables now outproduce nuclear power. In 2012, China’s windfarms outproduced its nuclear plants (the world’s most aggressive program), and coal plants were run less: China added more generation from non-hydro renewables than from nuclear plus fossil sources. In the first ten months of 2013, 54 percent of China’s capacity additions were renewable (a third of those non-hydro). The coal-fired fraction of China’s electricity could drop by two percentage points in 2013 alone. Globally, in each of the years 2011, 2012, and probably 2013, renewables won a quarter-trillion dollars of private investment and added over 80 billion watts of capacity. Solar additions are now overtaking windpower’s, scaling even faster than cellphones.

To adapt to these epochal shifts in both supply and demand, electricity providers everywhere, not just in Europe, need new business, revenue, and regulatory models, being developed in efforts like RMI’s e-Lab industry forum. For example, buildings using zero net electricity (an increasingly widespread practice) pay zero net revenue to utilities selling electricity by the kWh. That requires a different revenue model—perhaps like the Fort Collins (Colorado) municipal utilities’ proposed new approach, where the utility can provide a range of services and investments on the customer side of the meter, helping the customer navigate efficiency and distributed generation investments while providing low-cost finance and on-bill repayment. This e-Lab-aided innovation may offer a sound and scalable path beyond net metering, which breaks at scale.

An 80-percent-renewable, half-distributed, nearly decarbonized, highly resilient U.S. grid could cost virtually the same as business as usual, but could best manage its risks—security, technology, finance, climate, health, fuel, and water—and, uniquely, prevent cascading blackouts. Such transformative benefits justify transitional growing pains—not protection for incumbents already paid to accept the known competitive risks they got wrong.

Clinging to and investing in antiquated business models should be neither rewarded nor celebrated. After all, it’s not as if their authors didn’t know big changes were coming. Ordering new coal plants in the face of renewable mandates and emerging carbon trading is akin to buying up carriage-makers just as automobiles began to relieve London’s horse-manure crisis.

Image courtesy of Shutterstock.

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  • Johnny Storm

    “Disruptive technologies are meant to upset the status quo to bring worthwhile change. Should we have rejected mobile phones because they threatened to displace landline phones? Didn’t digital cameras make film cameras largely obsolete? Shouldn’t print newspapers have to invent new business models to confront the rise of the Internet?”

    These examples you cite are examples of one technology replacing another because it is a complete replacement and cost-effective improvement for the device it replaces. But non-dispatchable wind and solar cannot replace dispatchable gas coal and nuclear. When the utilities go under, out go the lights. It is just that simple.

    Further, cell phones and digital cameras did not require mandates and subsidies to disrupt the market. They did it the old fashioned way: they were more capable and competitively priced.

    • Bob_Wallace

      Nuclear has the same problem as wind and solar. Nuclear can not be turned on and off at will. Restart time is too high.

      In order to have high nuclear penetration it is necessary to provide storage, shifting supply to demand.

      Gas is dispatchable generation. It is in a separate category from nuclear/wind/solar. One that eventually will likely eventually be filled by storage.

      It will almost certainly come down to cost. Cheap wind and solar will likely dominate the grid. NG will likely suffer a carbon price as we get more concerned about climate change. And that will speed the growth of storage to replace NG.

    • Altair IV

      That’s pretty much a complete lie. “Dispatchability” per se isn’t a problem. All that’s *really* required are 1) a supply of energy large enough and reliable enough to meet our needs, and 2) some way to get that supply from where and when it’s generated to where and when it’s used.

      Solar and wind, while being intensely variable on a small scale, are actually quite stable and dependable when combined in large distributed systems, and each alone is more than capable of handling #1 (estimated solar potential is hundreds of times higher than the entire world’s energy consumption, and wind potential is in the thousands). They work even better in tandem, since wind tends to generate when solar is weak and vice-versa. I’d be willing to bet that at least 60% of all our energy needs could be supplied by just these two sources, even if we did nothing else. Or heck, we could even just overbuild capacity until we reached whatever percentage we wanted. And let’s not forget all the other renewable sources as well; hydro, tidal, geothermal, biofuels, etc., which will get thrown into the mix when available.

      As for #2, that will easily be taken care of by a simple combination of storage technologies (for time shifting), and smart grids and long-distance transmission (for space shifting), along with a bit of active demand control. Which exact combinations will be used are not yet clearly known, but it will evolve into a stable system eventually. When needs must, ways will be found.

      So to summarize, while it’s probably true that solar or wind alone probably couldn’t do the job, it’s fortunate that nobody is trying to do that. What’s coming instead is a integrated, distributed system of multiple technologies, where the weaknesses of any one are more than balanced by the strengths of the others.

      Finally, a brief word about subsidies. One of the most important functions of a government is to take care of the infrastructure needs of the populace. This sometimes requires the (duly elected) representatives to make decisions and place bets on new technologies, ones that they believe will ultimately be of benefit to the community. Indeed, there’s hardly a modern technology out there that hasn’t benefited from government funding in some form or another sometime in its development. Subsidies for new tech are not just handouts, but investments in our future.

      (Oh, but if you really think we should end subsidies for renewables, that’s fine by me. But only if we also remove all subsidies for fossil fuel/nuclear too (which as stable, mature technologies really don’t deserve them) , so we can see them truly compete on a level playing field.)

      • Doug Cutler

        60% from tandem wind and solar in a smart grid . . . what happens if we include baseload hydro in that calculation?

        • Altair IV

          To be perfectly honest, there’s no calculation there. It’s just my personal wild-ass guess, which unfortunately didn’t come through in writing as clearly as I’d hoped (I’m not really a numbers kind of guy, I tend to look more at the conceptual big picture). But I would bet pretty confidently on it. Both solar and wind are much more stable in large scale than most people realize, and they complement each other so well, that if we had equal amounts of both built to the point where the nameplate capacity equaled demand, then I believe the real production average would almost never dip below that.

          The overbuilding I mentioned would just involve continuing to increase the supply until the average variability always equals or exceeds the total demand. We’d be throwing away lots of useful energy most of the time if we did, and it would probably be economically prohibitive, but it is a choice. I’m not going to give a guess on what the size of such a system would be, except to again bet that it would probably be smaller than most people expect.

          But to address your question specifically, certainly the more, and more varied the input sources, the higher the average performance will be. In general, the larger and more diverse a distributed system is, the more stable and reliable it is.

          • Bob_Wallace

            Overbuilding is a perfectly acceptable way of increasing ‘hours of availability’.

            If we start with wind that’s selling for 5 cents/kWh and “throw away”/curtail 10% the cost rises to ~5.5 cents for the remaining 90%. That is probably cheaper than building storage to move that 10% to other hours.

            We curtail other generation all the time. We have a lot of natural gas capacity. NG plants are curtailed 75% of the time.

          • Doug Cutler

            I knew you were dealing in ball park estimates. I was just suggesting if you add hydro and its baseload capabilities to the mix of wind and solar the hypothetical percentage for total renewables in a smart grid goes up.

            But then I also wonder what investment is required to sufficiently bolster the existing grid or if unpopular new transmission lines are required? I also wonder what the economic contest would look like between beefing up the grid or bringing in grid storage which can be more localized. Grid storage sector is still developing so I guess we have to wait a little while on that.

            Overbuilding is also a hypothetical but we wouldn’t necessarily recommend it since future costs, especially for solar, could wind up much cheaper than today.

      • Johnny Storm

        ” Or heck, we could even just overbuild capacity until we reached whatever percentage we wanted.”

        Got an LCOE on that? Is any price too high to pay?

        • Bob_Wallace

          There’s a crossover point at which overbuilding gives way to storage.

          Where that point is will be a factor of local conditions and the changing costs of wind, solar and storage. Right now utility scale solar is around $2/watt but it’s on the way to $1/watt. Storage is somewhere in the 5 cent to 10 cent per kWh (even higher for some technologies) but there are technologies which could take the price lower.

          And there are other things that will factor in. Solar panels mounted facing east or west produce only 80% of south-facing panels. But they extend the ‘solar day’ providing electricity for the regular pre- and post-solar hour day. Installing E/W facing panels would be another form of overbuilding but would make financial sense due to time of production.

    • SecularAnimist

      Johnny Storm wrote: “Further, cell phones and digital cameras did not require mandates and subsidies to disrupt the market.”

      Unlike fossil fuels, which even after a century of government subsidies STILL require hundreds of billions of dollars per year in subsidies to maintain their death-grip on our energy supply — not to mention, of course, the “externalized” cost of the massive environmental and public health damage they cause, which amounts to many billions more.

      If you want wind and solar to compete on a level playing field with fossil fuels, then the meager and unreliable subsidies and incentives that are now being given to wind and solar are FAR LESS than what is needed.

      Eliminate ALL subsidies for fossil fuels, and give wind and solar a few decades of billions of dollars per year in support to catch up with what’s been lavished on fossil fuels for a century, and then you’ll have something close to a level playing field.

  • Johnny Storm “Significantly, the study shows that the combination of a long economic crisis, deregulation in the gas and electricity markets and the EU’s Climate and Energy Package’s role in promoting rapid renewable energy expansion has led to very disturbed European gas and electricity markets. This unstable situation poses a potential threat to the future energy supply security of the region in both the short and long term.”

    • Bob_Wallace

      Clearly renewables are “disrupting” traditional energy markets.

      That’s what happens when we transition from one technology to another. The old way gets disrupted.

      In no way is the European energy supply threatened. The only thing threatened is investment in fossil fuel and nuclear energy.

  • No way

    Are you kidding me? “cloudy Germany has installed 35 GW of photovoltaics but hasn’t subsidized them since 2004″
    The german economy is on it’s knees and one big reason being the subsidies to solar power by paying a fixed price that is higher than the market price on electricity to people who have solar and put it into the national grid. The fixed price has at longer periods of time been more than four times the market price.
    The government promised these extreme subsidies for 20 years from the time of installation but will probably have to break that promise waaay before those 20 years are up because they can’t afford it.

    • Bob_Wallace

      German retail customers are currently paying some extra due to the solar FiT. Retail customers are paying an extra 5.3 cents per kWh for their electricity. But since electricity use is lower in Germany they pay about the same per month total for electricity as we do in the US.

      But that does not tell the entire story about electricity in Germany.

      Since Germany started adding renewables to their grid the wholesale cost of electricity has dropped 50%. Industrial electricity costs have been dropping and are now below the EU27 average.

      The German economy is growing at modest rates. Perhaps you need to change your information (misinformation) source if you have been led to believe that the German economy is on its knees.

      Here’s a hint. The German coal industry (like many other coal industries) is deeply worried. You might want to take a look at where the misinformation you have comes from. I’d bet is has coal dust on it.

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