Is the End Near for Big, Centralized Investor-owned Utilities?

 public-powerby Mark Braly

The Davis City Council has reopened the question of a Davis-owned municipal electric utility at a time when the relevance of traditional investor-owned utility is being questioned throughout the country.

PG&E and almost all other investor-owned utilities are working from a business plan that is more than a century old, dating back to Edison.   The industry is resisting the need to come up with a business model that works with the new world of climate change and emerging low-cost clean energy technology.   The fundamentals of the industry are being questioned.  Is there any need for huge remote power generation stations that require long leaky transmission lines that are difficult to permit? Even when these big facilities capture solar or wind energy, they are environmentally controversial and hard to sell to regulators and the public

Investor-owned utilities have scarcely started to resolve these issues.  In the meantime, public power provided by locally owned utilities accounts for more than 20% of California’s electric power, generally at lower rates that those of private utilities.  Some, like the Sacramento Municipal Utility District, are innovative and advanced in their planning for a grid that accommodates renewable energy and efficiency and distributed, local sources of power.

A new report from the Rocky Mountain Institute energy think tank (download at http://www.rmi.org) sees the demise of the traditional utility model around the corner:

“Distributed electricity generation, especially solar PV, is rapidly spreading and getting much cheaper. Distributed electricity storage is doing the same, thanks largely to mass production of batteries for electric vehicles. Solar power is already starting to erode some utilities’ sales and revenues.

“But what happens when solar and battery technologies are brought together? Together they can make the electric grid optional for many customers—without compromising reliability and increasingly at prices cheaper than utility retail electricity. Equipped with a solar-plus-battery system, customers can take or leave traditional utility service with what amounts to a utility in a box.

“This utility in a box represents a fundamentally different challenge for utilities. Whereas other technologies, including solar PV and other distributed resources without storage, net metering, and energy efficiency still require some degree of grid dependence, solar-plus-batteries enable customers to cut the cord to their utility entirely.

“Notably, the point at which solar-plus-battery systems reach grid parity—already here in some areas and imminent in many others for millions of U.S. customers—is well within the 30-year planned economic life of central power plants and transmission infrastructure. Such parity and the customer defections it could trigger would strand those costly utility assets. Even before mass defection, a growing number of early adopters could trigger a spiral of falling sales and rising electricity prices that make defection via solar-plus-battery systems even more attractive and undermine utilities’ traditional business models.

“How soon could this happen?  (The RMI) analysis) shows when and where U.S. customers could choose to bypass their utility without incurring higher costs or decreased reliability. For California, the study showed that this could happen [in the] within a decade.   New market realities are creating a profoundly different competitive landscape as both utilities and their regulators are challenged to adapt. Utilities thus must be a part of helping to design new business, revenue, and regulatory models”

The Davis municipal utility is in an exploratory stage now.   When and how the city seizes the opportunity to make its energy future cleaner and more profitable is under study.  Local groups, such as the Valley Climate Action Center and the Coalition for Local Power, are urging that the city tap its abundance of local energy experts to move the study forward.  Stay tuned and keep and an open mind.

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26 Comments

  1. SouthofDavis

    Mark wrote:

    > In the meantime, public power provided by locally owned utilities
    > accounts for more than 20% of California’s electric power, generally
    > at lower rates that those of private utilities.

    I’ve asked this question before, but never got an answer:

    “Has any city in California started a locally owned utility in the last decade (or even last 20 years)?” and if so “How is it working?”

    We all know that SMUD and other locally owned utilities who have been around for a long time have great rates, but they bought their assets a long time ago. If the city of Davis pays “fair market value” for the assets of PG&E they will pay MORE for just the land east of downtown than SMUD paid for ALL the land they own many years ago.

    I’m no fan of PG&E and recently ran in to son of a former PG&E Chairman at a fundraiser in SF. The Dad did so well at PG&E that his son can spend most days having long lunches at the Bohemian Club before heading over to the PU Club to play dominos.

    While I am not happy that politically connected Republicans who are members of the Bohemian Club use their political connections to force us to pay PG&E (and SCE, and SDG&E) lots of money so they can make themselves and fellow Bohemian Club members who build power plants rich. I just don’t think things will be even better if we have politically connected Democrats (and Greens) who are members of the Sierra Club using their political connections to force us to pay a local utility so they can make themselves and their Sierra Club friends who sell solar stuff rich…

  2. Tia Will

    SouthofDavis

    For me the question is not which group of politicians are becoming rich, but rather which side of this debate is likely to provide a better outlook for the sustainability of our environment. While it is true that the “green technologies” are not yet far enough advanced to fully provide all of the power that we currently want, I also have no doubt that with sufficient investment and research in these areas, they will be our future. When will there ever be a more “cost effective time” to make investments in the technologies needed by our children and theirs than now ?
    It is important to remember that at the time the SMUD’s of the world were buying their assets, I am sure that they did not look “inexpensive” to them. But they had foresight and confidence and made the investment.
    This is what I believe that we should be doing now with the “green technologies”.

    And, my disclaimer, I have no financial interest in any green technology of which I am aware.

    1. SouthofDavis

      Tia wrote:

      > For me the question is not which group of politicians are becoming rich,
      > but rather which side of this debate is likely to provide a better outlook
      > for the sustainability of our environment.

      We need to remember that the world has ~7 Billion people and Davis has ~65K people (.00093%). Even if every person in Davis were to kill themselves tomorrow (and never use energy again) it will not change the outlook for the “sustainability of our environment”. Over the past 10 years just the US is growing by ~65K people EVERY WEEK. The people pushing this thing (and fighting this thing) care about making money. Once the government gives you control a monopoly you have a license to print money and you and your friends can get VERY VERY rich. The politically connected Bechtel family did very well building power plants and dams for PG&E (Google Bechtel Family Net Worth) and now a new group of politically connected businessmen (and women) want to hook up with a utility (and suck money from ratepayers who have no choice but to keep paying so they get rich)…

      > I also have no doubt that with sufficient investment and research
      > in these areas, they will be our future.

      I also believe in investing in alternative energy, but since both the risks and rewards of investing in new technology are very high I think we should leave the investing to the people that have “risk capital” to invest and not force EVERY person in a small town like Davis (most who are struggling to pay their bills every month without adding even more to credit card and/or student loan debt) to invest in new technology.

      > It is important to remember that at the time the SMUD’s of the world were
      > buying their assets, I am sure that they did not look “inexpensive” to them.
      > But they had foresight and confidence and made the investment.

      Adjusting for inflation real estate in California is WAY more expensive than it ever was. There was an article in the Enterprise today complaining about the high cost of ag land.
      http://www.davisenterprise.com/local-news/young-farmers-face-challenge-of-expensive-land/
      Over the past 100 years farm land has always been able to give a buyer a return on his investment (that is not true in most of California today) and homes have always sold for ~3x the average household income in the area (today in Davis were are at ~8x the average household income). The law says we need to pay “fair market value” to PG&E (not what FMV “should be”) so buying the assets right now is a bad idea (since things always revert to the mean and residential and ag land can not stay at such high values in relation to the value of crops and income of residents)…

      1. Tia Will

        SouthofDavis

        I agree with you that 65 K is a drop in the bucket ( or perhpas a molecule) when compared with the world population. What I think is missing from your analysis is the impact of leadership. There are many examples from many different areas of human endeavor where one individual and/or a small group of supporters have made a tremendous difference in the world.

        In the area of politics/military think of the impact of Hitler/Stalin/Osama bin Laden or on the pacificst side
        that of Gandhi or MLK.

        In the area of science/technology think Einstein/ Curie/ Pasteur or more recently Gates or Jobs.
        These are individuals whose vision, dedication, and work transformed the way we live.

        Now I am not saying that Davis will or should have this kind of impact upon the world. However, one of the major strengths of this community is our proximity to a major research university. This combined with a significant population who have as their vocation or avocation an interest in “green technologies” it would seem to me to be a good place for a dedicated “pioneer” to locate. I also do not share your somewhat cynical view that “The people pushing this thing (and fighting this thing) care about making money.” That may certainly be one motive. Another might be that some genuinely see moving in a direction that would give the city and its citizens more control over our future options as a good choice.
        I tend to be in this camp based on my preliminary read on this issue and I guarantee you that I have no vested economic interest.

  3. J.R.

    “Notably, the point at which solar-plus-battery systems reach grid parity—already here in some
    areas and imminent in many others for millions of U.S. customers—is well within the 30-year
    planned economic life of central power plants and transmission infrastructure. Such parity and
    the customer defections it could trigger would strand those costly utility assets. ”

    Hey, I have a great idea. Let’s get the city to buy the PG&E assets at an inflated market value just as these assets are becoming obsolete (according to the above analysis). What could go wrong?

    1. DavisBurns

      The electric infrastructure in Davis will not lose value unless the bottom falls out of the copper market and that’s not going to happen. Even if we generate 50% of our energy from rooftops we still need to distribute that electricity and we need to transmit the 50% from wherever it is generated.

  4. Frankly

    A recent Bureau of Labor Statistics report comparing private and public employee pay http://www.bls.gov/news.release/ecec.nr0.htm shows the following:

    – Total public hourly employment costs are 45% higher than in private industry ($42.89 vs. $29.63)

    – Public wages are 33% higher ($27.66 vs. $20.76)

    – Public benefits are 71% higher ($15.23 vs. $8.87)

    – Pension costs are 266% higher ($4.03 vs. $1.10)

    Sorry, but I am absolutely against any change from private to public operation of any business. It is clear that public run business ends up much more costly even if it initially pencils out.

    1. Tia Will

      Frankly

      An honest question. So does this discrepancy mean that public compensation is too high, or that private compensation is too low, or is the best practice somewhere in the middle? Also when considering ” best practice”, best for whom and who gets to decide what that best practice is ? And if you please, something a little more substantial than the “unseen hand of the market” since we both know that the “unseen hand” is actually the aggregate of millions of people making financial decisions, not some deity or superhero that will save us all view the “free market” which I am sure we are also both aware is anything but “free”.

      1. Frankly

        Tia – You are shifting to a social justice argument with this question. I am challenging the core justification that it will save us money. Here is evidence that we pay a lot more for public sector labor than we do private sector labor. And in this BLS data iwe are missing productivity comparisons, and for this too, the public sector labor falls short.

        As far as what is the optimum level of pay… I will say this. I trust the invisible hand of the free labor market more than I trust the iron ham fist of government to figure it out. Everywhere we have had major economic catastrophes in the last 40 years or more it has been within industries that the government got too involved setting policies and trying to manipulate the economy for reasons of social engineering or political advantage. Government over-meddling in energy, housing and finance have left a trail of economic carnage and destruction in those three industries. Now government is working hard to cause destruction in the health care industry too.

        1. Tia Will

          Frankly

          You are right. I did make an unwarranted shift in the conversation. I think we should leave our differences of opinion about the appropriate role of government and whether or not it is government, or individual decision making that has caused your afford mentioned messes to a more appropriate thread.

    1. Tia Will

      GI

      Agreed. And keep in mind that PG&E is behind much of what you read against this proposal. If we are going to “follow the money” we should be doing it for both sides.

      And I will also stand by my statement that many people will act on the basis of their passions and their best judgement whether or not there is any money in it for them at all.

      1. growth issue

        Ms. Will, as you stated above “Also when considering ” best practice”, best for whom and who gets to decide what that best practice is ?” Although you were talking about employee compensation that same line of thinking could apply to who decides best practice for our Davis energy needs, best for whom? And not just from an ecological standpoint, but financiial aspects too.

          1. growth issue

            LOL… Hey Don, so you can pick your left leaning climate alarmist sources like the Climate Action Team and the Rocky Mountain Institute and I’ll pick mine. But Don, can you refute that Steyer isn’t pouring $100 million into Democrat hands in return for them pushing a green agenda?

    2. DavisBurns

      A search of the Internet as this topic addressed by the Brookings Institute and the Wall Street journal among many others. There is also a lot of information about the vulnerability of the existing grid. A government report http://online.wsj.com/news/articles/SB10001424052702304020104579433670284061220
      Says an attack on 9 substations could take down the grid for 18 months! The industry is changing, how that will shake out is a matter of opinion. And who can finesse legislation that subsidizes their vision /pocketbook/industry control.

  5. Tia Will

    Once again, we are in agreement. And please, call me Tia.

    However, in the case of local decisions, I would venture an answer to “who gets to decide ?”. That would be up to the community, either speaking directly as voters in the case of initiatives or indirectly through our elected officials on the City Council. Would you have some other “deciders” in mind ?

  6. DavisBurns

    I think we need to plan for the future and that means creating a n electric utility that has some level of independence from our current vulnerable outdated national electric grid. We should have the ability to use the solar PV electricity generated in the city when the grid goes down. Currently, when the grid is down, the solar option is also down even though we are capable of generating electricity we have no way to use it. This seems like a serious deficiency. I checked out FEMA’s emergency guidelines. They have advice about how to survive a three day power outage but we know from unreliable Sandy and Katrina it can take more like 11 to. 23 days to restore power. While we don’t have hurricanes here we do have earthquakes, fires and disasters as yet unknown. Just because this is standard operating procedure to tolerate this failure to be able to use the resources available, I think we could do better.

  7. Pingback: The Electric Grid and the Requirements to Manage It Are Changing | .:Davis Vanguard:.

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