A national push to curb greenhouse gas emissions and promote clean energy technologies is creating an unusual business challenge for electric utilities.

Success means selling less of their product.

"What other business do you see in the U.S. economy where you expect a company that has a good business model to spend and to invest a lot of money to use less of their product?" said Larry Makovich, vice president at IHS Cambridge Energy Research Associates Inc., an energy consulting firm.

And that's not all. Policy proposals being promoted by congressional Democrats are also pushing utilities to use renewable sources of electricity and thus downsize the companies' traditional assets. Instead of focusing on 1,000-megawatt power plants, utilities must consider -- among other things -- how to encourage property owners to install rooftop solar panels, incorporate electric vehicles onto the grid or turn down water heaters.

The recession has provided a peek at the financial future that utilities face. With electricity demand drastically reduced, revenues for most power companies were down in the last six months. Plus, the Brattle Group released an economic forecast report last year showing the industry facing up to $2 trillion in investment needs by 2030.

What does the future hold for utility companies, most of which are conservative and traditional? It is adapt or fail, said Amory Lovins, co-founder and chairman of the Rocky Mountain Institute, a longtime champion of energy efficiency and conservation. The new energy paradigm, he said, is "turning the utility inside out."

"Practically every assumption they grew up with is turning on its head," Lovins said. "I think smart, big utilities will do fine, but dumb, big utilities will do badly. They won't even be around. This sector faces the most numerous, diverse and severe changes I know."

David Owens, executive vice president of business operations at the Edison Electric Institute (EEI), the policy arm of investor-owned utilities, said utilities are ready to embrace change, but the path forward is not clear yet.

"The utility will not be a passive entity as it is today," Owens said. "Folks believe a utility exists to sell kilowatt-hours; that is not going to be the model of the future. The model of the future is 'Let me look at how I can improve efficiency, how I can reduce greenhouse gas emissions.' That is what the utility is going to be focused on."

But there are no business models yet for how utilities can make that happen, Owens said, even though several companies are already experimenting with new ways to make money. For example, some utilities are testing ownership of distributed generation and giving customers more options in how they manage their electricity.

"I would say we are in a period of potential transformation," Owens said. "But it is an opportunity for the energy industry."

A 1930s business model
For about 75 years, there has been one major business model for utilities.

The companies have moved power from large central generating stations to homes and businesses. In return, the state regulators approved rates allowing utilities to recover "prudently" incurred costs. If electricity demand was expected to rise, the companies built more supply.

The costs of building the power-supply infrastructure were divided among expected customers through a rate structure, and the price of electricity was set.

So if a utility's customer base expanded or customers used more electricity then expected, it was to the benefit of a company's bottom line. But if customers used less electricity than expected, utilities failed to recover their capital costs, let alone secure money for profits or to invest in future projects.

Opening the industry to market competition has changed the ownership of electricity generation and transmission. But the distribution and retail side -- which affects customers -- has not changed much.

6 Comments

1. 1. jerryd 10:50 PM 9/10/09

   
   There are plenty of ways for utilities to do the future. Those who won't change will die, sold to someone who can.
   
   Facts are much home RE will soon be cheaper than utility power as one will pay under $10k for a lifetime of energy costs and will come standard on many new homes.
   
   The tech is easy and already here. Ev's will be a big part of it by charging at night on cheap power and supplying it to the grid in the day, peak loads.
   
   Generation will be far more eff. Instead of the 35% eff today in many plants, it will go to 55-70% eff cutting ever increasing fuel costs.

   Reply | Report Abuse | Link to this

2. 2. Soccerdad 09:41 AM 9/11/09

   This transformation has been going on for some time. It's not as dramatic as the article suggests. More like incremental change. They will still be operating large centralized plants and selling kwh well into the future. Things wont' change that much. Economics will dictate.

   Reply | Report Abuse | Link to this

3. 3. David M. Clemen 01:08 PM 9/11/09

   Jerryd
   
   I'd like to know where you get the efficiency values of 55 - 70% for home generation. Wind power's maximum efficiency is the Betz coefficient (most energy that can be extracted from wind), and is 59.3%. Solar cells have a "maximum" efficiency of 20%.
   
   The centralized plant efficiencies of 35% that you state pertain only to coal fired plants. Combined cycle gas turbine plants can have efficiencies in the 60% range; hydroelectric plants have efficiencies in the 85 to 90% range.
   
   So, once again, what sources can you reference that state residential efficiencies will be in the 55 - 70% range.

   Reply | Report Abuse | Link to this

4. 4. JDoddsGW 01:48 PM 9/11/09

   GRAVITY, not CO2, causes Global Warming and Cooling.
   The air has EXCESS CO2. When the sun/solar insolation goes down at night then the amount of the GreenHouse Effect (CO2's delay by catch AND release, not trapping, of photons transported to space,) goes down, thus leaving EXCESS CO2 in the air. When the sun comes up, then more energy transport happens, the GreenHouse Effect (GHE) increases, more CO2 gets used., the temperature goes up. BUT it is the amount of outgoing energy that dictates how much of a GHE there is. The amount of CO2 is irrelevant as long as there is excess. Given that ALL the available (CO2 specific wavelength) energy is already transported by the CO2, then there is NO more available for the so called feedback processes in the global warming models. The excess CO2 must be there to transport energy when it is very hot ,such as summer, or the 49C/120F temperatures during the 2009 Australian bushfires (@385ppm CO2), or the world record 58C (Libya in 1922 -@280 ppm CO2).. So if hypothetically all the CO2 is used up at 58C then there is at least 40% excess today at the world average temperature of 16C/67F according to the Stefan-Boltzmann Law of Physics. Contrary to the IPCC CO2 models, adding more excess CO2 to the air can't cause warming unless you add extra energy. Limiting CO2 emissions by Cap & Trade just removes excess CO2. It will NOT change the temperature.
   
   The real cause of global warming and cooling is the variable gravity/energy from planetary eccentricity as shown in "John Dodds Wobble Theory of Global Warming" (free summary, & full copy available at www.scribd.com).. The forces of gravity cause Earth rotation and winds and tides (moon or lunar gravity) and ocean and liquid core currents and friction and heat. The energy from Gravity is NOT addressed in the GCMs. Gravity also causes the magnetic field by the rotation of liquid core ions through a gravity field. Wind & tide power IS gravity power- where else does the energy come from? The variations in gravity are shown to correlate to the measured ice core temperatures for thousands of years, and to the 60 year cooling/warming cycles from 1880 to 1940 to 1998/9 and to the future 2028 temperature bottom and the 2058 temperature peak. Gravity explains warming AND cooling and is predictable. There will be a gravity spike on Earth in Oct 2010, due to the proximity of Venus and Jupiter. Adding the variable forces and energy of gravity to the Milankovitch Eccentricity (Timing) Theory allows it to overcome it's major deficiency of insufficient solar energy variation to explain ice ages. Gravity explains why the temperature can go up from 1970 through 1998, when the sole source of energy in IPCC models, solar insolation, was essentially constant. Gravity, which is much stronger than sunlight, supplies variable energy to drive warming and cooling. CO2 doesn't.
   
   
   John Dodds

   Reply | Report Abuse | Link to this

5. 5. rockjohny in reply to JDoddsGW 01:57 AM 9/13/09

   thanks for that 911 on the gravity involvement...I thought the article would broach the Cap & Trade issue, which seems to me to be a Hook & Crook way to allow utilities to raise their rates with that convenient excuse for a tax, which i'm sure if inacted, the market would provide some means to lever themselves against their own position by some sort of 'CO2 Credit' derivatives, which the big players would use to squash the little utilities and take them over. What a LOAD!
   
   And if CO2 was the culprate, they've already gone past the tipping point...so why create additional fiscal hardship on the common folk with a new tax??
   
   Hard to imagine this whole Cap & Trade wasn't cooked up with the help of the Fat Cats of Wallstreet.
   

   Reply | Report Abuse | Link to this

6. 6. Pensatulla in reply to JDoddsGW 07:05 AM 9/19/09

   I kept womdering when I was going to learn something new on SciAm. Thanks Dodds.

   Reply | Report Abuse | Link to this