ELECTRIC TRANSFORMER: Greenhouse gas regulations and a push for alternative energy sources are transforming the electricity business.
© iStockphoto.com / Thomas Trötscher

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.