The “utility death spiral” sounds pretty scary, doesn’t it? It could be if you’re a utility company. In 2013, the Edison Electric Institute (EEI) released a report positing that an eroding revenue stream, declining profits, rising costs, and ever-weakening credit metrics would diminish the ability of electric utilities to survive in an increasingly off-the-grid world.
“Recent technological and economic changes are expected to challenge and transform the electric utility industry,” the report said. “These changes (or ‘disruptive challenges’) arise due to a convergence of factors, including: falling costs of distributed generation and other distributed energy resources. Taken together, these factors are potential ‘game changers’ to the U.S. electric utility industry.”
The report gave no indication as to when this “utility death spiral” would begin happening, and, to date, no major U.S. utility has gone defunct. Is the utility death spiral, then, simply a myth? Not necessarily.
In an article from 2015, William Pentland of Forbes argues that “the predicted casualties of the death spiral have turned out to be the victors and the predicted victors have turned out to be the casualties.” In this case, the “victors” are the utility companies and the “casualties” are the distributed renewable energy companies. SunEdison, for instance, a supposed “victor” in the report, had lost more than two-thirds of its market value in 2015.
While that may have been the case in America in 2015, utility companies in Europe have hit a bit of a bump in the road since the report was released. The German mega-utility RWE lost more than $3.8 billion in 2013 as it closed down numerous unprofitable fossil fuel plants. Similarly, in the same year, the Swedish utility company Vattenfall experienced $2.3 billion in losses due to a “fundamental structural change” in the electricity market. Clearly, as grid maintenance costs increase and the cost of renewable energy decreases, more customers have substantially reduced their energy consumption from the utility or moved entirely off the grid. According to the Wall Street Journal, 16 percent of German companies are now completely and entirely energy self-sufficient. This massive shift in the energy sector could spell the end of many utility companies.
But what about across the pond, here in America the beautiful? What has happened since 2015, when renewable energy was cited as a “casualty?” As it turns out, a lot – especially in California and Hawaii.
California has seen the most progress in this area. Because of its successful energy-efficiency policies and its policies supporting utility-scale solar and rooftop solar, the state has helped more than half a million customers go solar since 2007. As a result, utility companies there have seen the beginnings of a utility death spiral. California regulators predict that, by 2020, 85 percent of customers in the state will be using electricity from entities other than investor-owned utilities.
In Hawaii, electricity prices are far higher than anywhere else in the U.S. Naturally, this means that many customers have been making the switch to solar. However, because so many customers were installing solar, utilities have had to place restrictions that prevent some from even turning on their systems. So many Hawaiians saw the positives of solar that they were literally breaking the system. Nice.
Does Hawaii’s need to restrict solar mean that your state will have to do the same? Not at all. The main reason behind the restrictions stems from Hawaii’s isolated grid. Because there are no power lines linking Hawaii with the rest of the U.S., the utility has nowhere to discard excess solar power. Obviously, this is not an issue with continental states. Because of its isolation, Hawaii has had to rethink the way it does electricity, and we think the rest of the U.S. should be in on that too.
While the utility death spiral is, in fact, a real thing, there are some things that can be done to make the transition to solar as smooth as possible. For instance, good rate design and policies can protect consumers and utilities and help manage the transition without large disruptions in the market. Stay tuned for a future blog post where we will talk about these solutions in more detail.