US energy: Off the grid
“When you’ve had a monopoly for a hundred years, and you’ve never seen change, change may seem like death to you.” – Lyndon Rive, chief executive of SolarCity
Ivanpah solar electric generating system in the Mojave desert, which opened last year to provide power to California
At 255-257 Pearl Street in lower Manhattan, there is only a discreet bronze plaque to honour one of the world’s most historic sites: the first commercial centralised power station. Thomas Edison opened his first plant here in 1882 to serve New York’s financial district, and the global spread of electrification, with all the enormous changes that has brought, has mostly followed his model. Until now.
Spurred by falling costs and government incentives, US homes and businesses are producing more of their own power, a trend that threatens the business model of centralised generation that has dominated the industry, in the US and the world, for 130 years.
A paper for the Edison Electric Institute, the US industry association, has warned that electricity utilities were facing “disruptive challenges” comparable to the way the fixed-line telephone industry was shaken up by mobile. The utilities worry that as more businesses and households use solar, wind and other sources to generate their own power, they will lose customers and revenues, while still bearing the costs of running the grid. The utilities would then have to charge higher rates, losing more customers, worsening their position further. In the industry, they call it the “death spiral”.
So far, investors have generally shrugged off the threat from people producing their own power, which is known as distributed generation. The S&P 500 US utilities index has risen by a third since that EEI paper was published in 2013. The market share taken by distributed generation is small. But utility executives increasingly see it as a threat to the industry’s future.
“Up until recently, the industry thought there was no way it could happen to us,” says Leo Denault, chief executive of New Orleans-based utility Entergy. “The utility business model is still the cheapest, most reliable way to supply power. But now other things are being required of the system, and we don’t control those.”
It may not be a death spiral, says Lyndon Rive, chief executive of SolarCity, a solar company, but it is a “change spiral”. He adds: “When you’ve had a monopoly for a hundred years, and you’ve never seen change, change may seem like death to you.”
European utilities have already been battered by weak demand and the EU’s support for renewable energy, and they have lost hundreds of billions of euros in market capitalisation. US utilities are likely to have to make radical changes if they are to avoid a similar fate.
To understand the revolution sweeping through the US electricity industry, look at the Brooklyn branch of Whole Foods, the upmarket grocery chain. The lighting in its car park is powered by renewable energy, from solar panels on the roofs of the carports and wind turbines on the lampposts, with batteries to store enough power for five days of still, overcast weather. The store is the acme of trendy retailing, with vinyl albums next to the whetstone for sharpening knives, but brand image is not the main rationale for the investment, says Nick Blitterswyk, chief executive of Urban Green Energy, the company that provided the system. Whole Foods has saved about 20 per cent of the cost of connecting the lights up to the local grid, he says, and is getting what every customer wants: “Cheaper electricity without any sacrifice.”