By Tim Maverick, Commodities Correspondent, Wall Street Daily
The U.S. electric grid is a marvel…
More than 3,200 utilities come together to make up the grid, selling more than $400 billion of electricity annually. The electricity mainly comes from fossil fuels, which is distributed over 2.7 million miles of power lines.
Regulators set rates based on how much power users consume, giving electric utilities seemingly sure and safe returns.
The Changing World
As early as 2013, the CEO of wholesale power company NRG Energy (NRG), David Crane, warned that a combination of new technologies, like solar and cheap natural gas; deregulation; and government policies were converging to threaten the current system.
Even the trade group for investor-owned utilities, the Edison Electric Institute, warned that electric utilities may be facing a “death spiral.”
The Institute compares the position of electric utilities today to that of the airline and telecommunications industries in the late 1970s. Both industries made drastic changes and are unrecognizable today when compared to their original form.
These days, the problem is simply that Americans are using less electricity.
This breaks the century-old pattern of electric usage matching the strength of the economy.
Electric retail sales rose about 2% annually in the period from 1982 to 2007. But since then, sales have actually edged down about 0.2% annually.
The reason behind the drop is two-fold.
First, new technologies have made American appliances and gadgets much more energy efficient.
The second reason has to do with the rise of personal solar-power systems. As the technology becomes more affordable to the masses, more people are taking advantage of the ability to produce their own energy… and even selling the excess energy back to utilities. This leads to no electric bills for solar-power system owners, and sometimes even a small profit.
Sounds like a good thing, right?
Well, it’s bad news for utilities that rely on the income from electricity sales.
As the CEO of American Electric Power (AEP), Nick Akins told The Wall Street Journal last year, “It’s a new world for us.”
You see, the problem is that income from electricity sales is desperately needed to maintain reliable service, including the rising cost of maintaining transmission and distribution of power – the electricity business is the country’s most capital-intensive industry.
Steven Piper, an energy analyst for SNL Energy, told The Wall Street Journal that electric utilities need to raise their sales volume by 1% annually, on average, just to maintain their current system.
With that no longer happening, electric utilities are in search of an answer…
No Definite Solution in Sight
In order to stay afloat in this new environment, utilities have tried raising rates.
According to the U.S. Energy Information Administration, average residential electricity prices have jumped 39% since 2004 to $0.125 per kilowatt hour.
But it’s a catch-22 situation for utilities. Higher rates have only encouraged the American consumer to use even less power, exacerbating the situation.
So some utilities across the nation are trying a different tact: charging customers a fixed fee just for the right to access their electricity, along with a smaller fee based on usage.
This makes economic sense. The Edison Electric Institute says it costs utilities from $40 to $60 to service each home.
But as you can imagine, the idea of a fixed fee has caused an uproar among cost-conscious consumers. State regulators have been reluctant to approve such fees, or if they do, it’s such a small fee that doesn’t cover utilities’ cost to maintain their system.
Another solution some companies, like NRG Energy, are trying is to simply embrace change. They’re becoming involved in energy-efficiency programs and solar power projects, where they can make money from being investors or serving as managers.
The final solution for the electric utility industry is likely a combination of getting a small, monthly fixed fee from consumers and earning money from embracing new energy solutions.
Let’s hope the utilities get their act together and are able to maintain our country’s electric grid system.
The CEO of Dominion Resources (D), Tom Farrell, said to The Wall Street Journal that it would be unconscionable to allow our trillion-dollar grid system to decay. He added, “You can’t run a country on solar panels.”Courtesy Tim Maverick for Wall Street Daily (EconMatters article archive Here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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