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Is danger ahead for utility companies?

At one time telephone companies had monopolies providing landline telephones. Deregulation meant that telephone companies were split up, people could choose which company to get service from, and telephone companies lost their monopoly. Later, cell phones further disrupted the landline telephone company model.

Could monopoly power companies be the next business model to be disrupted by new technology? Could energy conservation, more energy efficient appliances, and alternative energy make it more difficult for the electric companies to maintain their monopoly? A report from the Edison Electric Institute (EEI) in January 2013, “Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business” describes the threat of new technologies to the standard utility company’s business model where they make power and sell it to captive consumers with prices and profits protected by state public service commissions.

“Recent technological and economic changes are expected to challenge and transform the electric utility industry,” the EEI report by Peter Kind states. “These changes (or “disruptive challenges”) arise due to a convergence of factors, including: falling costs of distributed generation and other distributed energy resources (DER); an enhanced focus on development of new DER technologies; increasing customer, regulatory, and political interest in demandside management technologies (DSM); government programs to incentivize selected technologies; the declining price of natural gas; slowing economic growth trends; and rising electricity prices in certain areas of the country. Taken together, these factors are potential ‘game changers’ to the U.S. electric utility industry, and are likely to dramatically impact customers, employees, investors, and the availability of capital to fund future investment.”

power_lines_webWhile few people expect a quick decline for a giant industry that is so deeply embedded in the economic, social and political systems of the U.S., clearly the field is changing particularly for projects that must be paid back over a period of decades. Kind recommends the industry and its stakeholders proactively assess the impacts and alternatives available to address disruptive challenges in a timely manner.

“The financial risks created by disruptive challenges include declining utility revenues, increasing costs, and lower profitability potential, particularly over the long-term,” Kind said.

Dr. Pete Walley, director of long-range planning for the Mississippi Institutes of Higher Learning, said the EEI report seeks to give the electric utility investor an early warning that potential, significant changes in the industry’s business growth model are in progress.

“In addition, the paper is encouraging the electric utility industry to become more proactive in revising state and federal policies to better align the financial interests of customers and investors and to develop strategies and policies that reduce the risk to customer disruptions and allow a utility to add values and additional services (i.e., increase revenue opportunities) to customers,” Walley said.

A recent McKinsey & Company article, “Energy = Innovation: 10 disruptive technologies,” observed that “the world is approaching a tipping point in the development of energy technologies that could generate increases in energy productivity on a scale not seen since the Industrial Revolution… History shows that innovations in technology can cause dramatic increases in productivity, transforming industries and setting whole societies on new paths to growth.”

“What really is driving these disruptive technologies are several basic economic principles — customers will save significant dollars annually and geographic areas will be able to improve economic growth, both enjoying economic benefits while not further degrading the environment,” Walley said.

But Walley doesn’t see large electric utilities taking a big hit in profitability in the near term.

“In short, the existing electric utility business model is robust and very capable at adapting to new technologies and competitive forces,” Walley said. “In my opinion, the industry is unlikely in the short to medium term to disappoint its investors. While cost of service is certainly a concern to customers, reliability and accessibility are as or more important to many customers, both household and commercial. As much as many people would like to see distributed energy resources, significant advances in new technologies must occur for that to happen.”

Mississippi Power Company is the smallest of the subsidiaries of Southern Company, which is one of the largest investor-owned utilities in the country. Southern Company announced in April it was taking a $540-million loss to cover cost overruns on the Kemper coal-gasification plant, which has been controversial because the price tag of at least $3.42 billion ($1 billion more than initially estimated) is far more than natural gas generation would have cost. Southern Company said the Kemper plant reduced first-quarter earnings to $81 million, or 9 cents per share, from $368 million, or 42 cents per share, in the first quarter of 2012.

Electricity rates for Mississippi Power Company customers have increased 15 percent as a result of the Kemper plant, and a three percent rate hike has been approved to go into effect in 2014.

Southern Company CEO Tom Fanning told investors the company is disappointed in the Kemper situation. “We’ve got our heads down,” he said.

But the Kemper plant could end up being a positive for the state and investors, said Amoi S. Geter, manager, media relations/executive communications, Mississippi Power Company.

“Through its commitment to energy innovation, Southern Company — the parent company of Mississippi Power — has found a way forward for coal in America,” Geter said. “Along with key partners, Southern Company has developed transport integrated gasification (TRIG), a 21st-century coal technology that uses an abundant, low-cost fuel, lignite, to generate electricity with efficient operations and reduced emissions. Mississippi Power is now incorporating this technology into the Kemper County energy facility. The plant will capture at least 65 percent of the carbon dioxide (CO2).”

Geter said through the capture of carbon dioxide, the facility will play a vital role in reducing Mississippi’s and America’s use of foreign oil by helping to expand the nation’s energy supply. He said carbon dioxide will be used in enhanced oil recovery and is expected to yield an additional two million barrels of Mississippi oil per year.

“With an emphasis on providing customer value, Mississippi Power is strategically investing in a diverse mix of generation resources and demonstrating the company’s decades-long commitment to energy innovation, all in an effort to deliver clean, safe, reliable and affordable power to customers, both now and in the future,” Geter said.

One of the game changes afoot is that natural prices have gone down far more that anyone predicted due to enhanced gas drilling recovery from a process known as “fracking.” Would Mississippi Power have made the decision to bank on coal gasification if it had known at the time about the plummeting natural gas prices? And utilities that have invested in solar and wind power possibly could be asking a similar question. Are their investments competitive in the new environment of low natural gas prices?

“I don’t think anyone in the industry foresaw the decline in natural gas prices that resulted from the huge increases in supply as a result of an equally disruptive technology, fracking,” Walley said. “Only time will tell if the new natural gas supplies are indeed as large as they have been estimated. If the supply is real and the U.S. does not allow significant export of the natural gas to other countries (Japan especially), then non-fossil electric generation is in for some very tough competition.”

 

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About Becky Gillette

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