Electric Utilities – An Industry In Transition

The recent merger of Duke Energy and Progress Energy represents yet another turning point for the electric utility sector, with significant implications for public health and the environment.  Duke’s six-state footprint – Florida, Indiana, Kentucky, Ohio, North Carolina and South Carolina – offers it an opportunity to lead the way on clean energy deployment.  The question is: Will the new Duke Energy – now the largest utility in the country – harness its size and scale to accelerate investments in energy efficiency and renewable energy, or stay anchored to the past?  EDF’s partnerships with Wal-Mart, FedEx and McDonalds have shown that when large companies are motivated, they are a powerful force for change.  But change doesn’t come easily.  It requires vision, leadership and a constant willingness to innovate.

This is true not just for Duke Energy, but for electric utilities around the country.  Over the past two years, four of the five largest investor-owned utilities have experienced a merger or change in the CEO role – AEP, Duke, Exelon and Southern Co.  The steps taken by these companies and their leadership will have a profound impact on our antiquated electric utility grid, human health and the environment.  The most visionary utility companies will do three things exceedingly well: 

1.       Get out ahead of environmental regulation

In 2002, Duke Energy supported efforts to tackle power plant pollution in North Carolina by supporting the “Clean Smokestacks Act.”  Xcel Energy followed a similar model in Colorado and endorsed the “Clean Air Clean Jobs Act.”  These landmark laws significantly accelerated clean-up of the dirtiest power plants in those two states and made it possible for the utilities to recover the costs of their investments.  It also enabled Duke and Excel to take early steps to modernize their fleets and prepare for future federal clean air requirements.  As a result of early actions, both companies are well-positioned for EPA’s recent Clean Air Rules – unlike the utility giant AEP, which continues to delay critical human health protections.  The world’s most successful companies skate to where the puck is headed, not to where it is, and are more competitive as a result.

2.       Treat efficiency and smart grid investments as new revenue centers, not side projects

The fact is that most electric utilities still see energy efficiency investments as side projects separate from their core business – generating power.  Without state building codes or energy efficiency standards in place, utility investment in energy efficiency remains low.  The reason is simple.  Even in states with decoupled rate structures in place, building nuclear plants is more profitable than energy efficiency projects.  Large generating plants require a large investment with a guaranteed rate of return over a long project lifetime.  In comparison, energy efficiency projects are generally small, often have an uncertain return and a short project life.  EDF is working with leading energy companies and regulators to craft new incentive models that make efficiency investments attractive, but utility companies must be willing to fundamentally alter their business models.      

3.       See competition as opportunity

Even in highly regulated markets, new market entrants and competitors are beginning to change the face of utilities with strong monopoly power.  The costs of solar panels have dropped by over a third in the past few years, making solar energy cost competitive with retail electricity prices in many parts of the country.  Companies like SolarCity are even financing and then leasing solar systems to home owners, enabling cash-strapped customers to reduce their dependence on the grid.  Hundreds of companies now exist to help all kinds of customers reduce their energy bills and dependence on electric utilities.  (I should know – I just insulated my attic and crawl space – and am already benefitting from lower electric bills.) 

Utility companies that help bring energy efficiency and renewable energy to market can retain ownership of environmental attributes (like renewable energy credits) and earn new revenue streams.  Otherwise, those benefits are likely to go to third parties or customers.  Smart utilities recognize the threat that this small, yet growing base of companies provides to their business model, and aim to bring technologies and services to market faster than new competitors.  Rather than trying to delay the inevitable, savvy utility leaders make their companies part of the solution – and profit from doing so.  Companies like San Antonio’s CPS Energy are making this idea a reality through partnerships with a wide range of service providers.

The next generation of electric utilities and their leaders must run their businesses differently than their predecessors or risk being left behind.  Just like the once monopoly-oriented telecom industry, those companies that are willing to adapt and transition to this new energy paradigm will prosper and be well rewarded.