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The Calm Before the Storm

In February, we wrote in our Sun Day blog about the “Waves of Disruption” sweeping over the electric utility sector.  Those waves look as if they are gaining strength.

Last month, the Energy Law Journal published an in-depth article by Arizona State University Professor Elizabeth Graffy and Steve Kihm of the Energy Center of Wisconsin, detailing the disruptive competition that a surge in rooftop solar installations have caused the electric utility industry.  The article, “Does Disruptive Competition Mean A Death Spiral for Electric Utilities?,” not only examines the challenges utilities face from the rapid increase in rooftop solar systems, but more importantly – the challenges emerging in the regulatory arena that oversees electricity generation and distribution.

The authors are quick to point out that the electric utility sector has served public interests for more than a century, and during this time society has come to depend upon them for the delivery of abundant and affordable energy. Utilities have become an integral part of the American way of life. And in return for agreeing to government regulation and universal service, utilities were granted service territory protection and certain protections from regular competition.

Today, this social contract and the utility status quo is at risk from changing policy goals and innovation in the energy field that is accelerating faster than anticipated just a few years ago.  Regulators increasingly have to walk a tight-rope to maintain stability in an electricity sector in which utilities are no longer the only player.

The dilemma -- if regulators increase rates in order to maintain utility profitability -- they risk undermining utility customer loyalty. Higher rates could drive more customers to alternatives such as solar -- resulting in declining loads and revenues. On the other hand – imposing new fees on solar homeowners might stall the growth in rooftop solar that would be at odds with public sentiment and state and national policy goals. Higher solar fees could also back-fire by encouraging solar customers to abandon the grid or provide the incentive for entrepreneurs to devise new technologies and business models that help customers sever that connection altogether.

It is a tight-rope walk that appears to be lacking a safety net beneath.

“Protecting the utilities from the effects of competition is not the public policy goal behind regulation,” Graffy and Kihm propose in their article.

“The origin of utilities as centralized, regulated monopolies corresponded to societal needs and goals at the time, not to some absolute definition of how things should or must be.”

The authors suggest that while there may be legal precedent to protecting utilities, it can only go so far.

Instead of “doubling down” on the status quo, Graffy and Kihm warn that all signs are pointing to the reality that utilities must change.

“The key to surviving the unique demands of disruptive competition is to execute a well-timed shift toward the customer with a strategy of value creation, which requires developing new products or services that better meet customer preferences, rather than becoming entrenched in a regulatory battle over cost recovery.”

While cost recovery allows a utility to recapture prudent costs incurred building a system to meet customer demand --  Graffy and Kihm point out it also has harmful side-effects.

“A singular focus on cost recovery, while understandable in a historic regulatory context, undermines natural strategic assets and encourages a non-innovating culture at a time when both are most needed to navigate uncertainties.”

In the end, Graffy and Kihm write that “the electric utility as an institutional form has not exhausted its relevance.” But, the question remains whether “they will embrace change, or be changed by others in the market who embrace it first and more firmly.”

Jim Arwood
Communications Director
Arizona Solar Center

Question: What role should utilities play in the emerging rooftop solar sector?

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