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The Beginning of the End for Electric Utilities’ Traditional Business Model

Due to a variety of factors, the traditional business model for investor-owned electric utilities, such as TXU or Reliant Energy, is in trouble.

Columns appearing on the service and this webpage represent the views of the authors, not of The University of Texas at Austin.

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Due to a variety of factors, the traditional business model for the nation’s investor-owned electric utilities, such as TXU or Reliant Energy, is in trouble. Deep trouble.

In fact, these factors – led by a rapid movement away from the decades-old system of generating electricity from large, centralized power plants and distributing it to customers over an interconnected grid – is rapidly giving way to a new, decentralized structure that features varying types of distributed energy resources (DERs), most notably rooftop solar.

In utility parlance, distributed generation technologies are “disruptive.” Along with the growth in energy efficiency measures and other technologies, DERs have significantly slowed electric load growth and – though it may not be recognized as such quite yet – could ultimately sound a death knell for utilities that have historically made money based on the volume of electricity they sell.

Put another way, utilities may soon face a future in which they will have trouble recovering fixed costs and making a profit.

It remains to be seen how utilities will react to these developments, and how the changing landscape will pan out for consumers. But we all have an interest in a stable model that keeps the lights

If a local distribution company goes bankrupt, customers would no longer be able to switch electricity providers, even in areas that allow competition.

And, since there are only one set of poles and wires, the utility bankruptcies could mean the government would have to take over to ensure the continued operation of the grid.

In response to these developments, several states including New York and California are looking at alternative business models as a way to incentivize and integrate distributed resources into the grid. Nonprofits such as the Rocky Mountain Institute and Lawrence Berkeley National Labs also have speculated on what future electric business models could look like.

Some experts have suggested that the “platform” business model, which creates value by facilitating exchanges between two or more groups, should be applied to the electric industry. Supporters of such a model envision the electric grid evolving into a platform on which DERs – including roof-top solar, energy storage, electric vehicle batteries, energy efficiency products and other services – bring in new revenue to the utility.

So far, however, most new products such as the Nest thermostat save customers money but reduce utilities’ revenue.

This spring semester, I co-taught a course with Dr. Fred Beach that delved into these issues. The graduate-level class, funded by the Energy Institute at The University of Texas at Austin, required students to examine six new and proposed business models and draft a report summarizing their findings. Their report is a part of a comprehensive study coordinated by the Energy Institute, the “Full Cost of Electricity.”

Students analyzed each of the models to examine how they recovered fixed costs, made a profit, incentivized DERs, engaged customers, and other issues.

The report found that although many of the new models appear to be effective in promoting DERs, utilities probably would struggle in a high-DER scenario.

Specifically, the students found that most of the cost-cutting benefits would be achieved as DER spread, but once the deployment of additional roof-top solar, energy storage and other energy resources reached a saturation point, they would no longer benefit the electric grid (while still providing savings to customers who implemented them) and become a cost burden for utilities to integrate.

In the end, the students found that the loss of revenue ultimately could lead utilities to revert to a standard cost of service model to recover costs.

Their report also concluded that when roof-top solar and other DERs achieve mass deployment, conventional electric utilities may find that nonprofit business models such as electric co-ops, municipal utilities or nonprofit corporations have the most stable futures. In any case, their future profit potential is very limited in the face of expanding, customer-owned distributed resources.

As for operation of the electric distribution grid, the students’ research suggests that an independent system operator such as the Electric Reliability Council of Texas may be a more efficient way to operate the grid on a local level.

Roger Duncan is a research fellow with the Energy Institute at The University of Texas at Austin. He formerly served as general manager of Austin Energy, the city’s municipal utility.

A version of this op-ed appeared in the Austin American Statesman.

To view more op-eds from Texas Perspectives, click here.

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Texas Perspectives is a wire-style service produced by The University of Texas at Austin that is intended to provide media outlets with meaningful and thoughtful opinion columns (op-eds) on a variety of topics and current events. Authors are faculty members and staffers at UT Austin who work with University Communications to craft columns that adhere to journalistic best practices and Associated Press style guidelines. The University of Texas at Austin offers these opinion articles for publication at no charge. Columns appearing on the service and this webpage represent the views of the authors, not of The University of Texas at Austin.

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