Renewables ‘Sound Good’ but Should Take Backseat to Coal

FirstEnergy CEO Anthony Alexander traveled to Washington, D.C. this week to speak in front of the U.S. Chamber of Commerce about the challenges his utility is facing.

With electricity use flatlining and renewable energy eroding margins for traditional generators, Alexander was not there to call for more regulatory flexibility to help the utility industry embrace these technologies.

Instead, he called for a renewed focus on fossil fuels.

“We need to develop a national energy plan that will allow us to take advantage of our vast supply of domestically produced resources — both coal and natural gas — and our superior electric system to stimulate and support our economy,” he said in prepared statements.

Strong promotion of renewables, said Alexander, is a threat to the electric system.

“In the electric utility industry, energy efficiency, renewable power, distributed generation, microgrids, rooftop solar and demand reduction are examples of what ‘sounds good’ — and while they may all play some role in meeting the energy needs of customers, they are not substitutes for what has worked to sustain a reliable, affordable and environmentally responsible electric system.”

Alexander was simply defending his business against a regulatory environment he perceives as a threat. But some don’t think regulators are going far enough to prepare utilities for coming changes — essentially casting what could be an opportunity as a grave threat.

“They have their heads in the sand,” said cleantech investor Jigar Shah, speaking about investor-owned utilities on a panel at the Bloomberg New Energy Finance Summit in New York City earlier this week. Shah added that, to his knowledge, most vertically integrated utilities are not working with top-level consultants to figure out what the future of their business will be.

Shah worries that regulators, particularly at the state level where most of the action happens, might be incapable of moving fast enough in the next five years to allow utilities to innovate and offer new energy services. So far, utilities are not clamoring for the opening up of markets so they can better compete.

Regulation comes in many forms: EPA power plant rules, state renewable portfolio standards, and FERC’s Orders 745 and 755, among many others. State regulators are arguably the most important for helping utilities earn a rate of return while competing in the clean energy market. But there are few indicators they are moving to catch up with the pace of technology adoption.

“The change that’s coming is [going to move] faster than the regulation will move,” said Jill Anderson, chief of staff at New York Power Authority, during the BNEF Summit panel with Shah. “We don’t need the same regulatory process. We don’t have time for the comments on the comments on the comments. We are at a time when we need to be much more agile.”

Research backs the notion that the change is coming faster than most regulators and utilities anticipate. A recent report on grid defection from the Rocky Mountain Institute found that a considerable number of utility customers could see “favorable defection economics” within a decade. However, utilities will likely see significant revenue decay before customers start defecting.

“Energy efficiency is undermining the utility business model faster than distributed generation [is],” said Shah. “Jill [Anderson] can’t react fast enough because the regulatory problem doesn’t allow her to. That is a big problem, but it’s not my problem.”

There are a few bright spots. The panelists at BNEF spoke of storage mandates in California and action in Minnesota on the value-of-solar tariff as examples of smart regulation.

“If we do it the right way…customers, utilities and technology providers should [all] be able to benefit,” said Jon Creyts, managing director of Rocky Mountain Institute. Rate restructuring does not mean just addressing net metering for solar, but rather rethinking the value of electricity in broader terms of efficiency, resiliency and societal impacts.

Abigail Hopper, director of Maryland’s Energy Administration, is leading a task force on microgrids for her state, and is trying to move the needle on regulation. “I think there’s certainly an idea of opening a proceeding on utility 2.0 [in the Maryland public utility commission],” she said, although she cautioned that it wasn’t necessarily going to be taken up.

Creyts suggested that for the utility industry, it’s essentially still 1993. At that time, a heavily regulated AT&T was earning a steady but paltry rate of return. And then, after deregulation, AT&T earned a far greater rate of return. He sees a path forward for utilities that could be similar.

Shah disagreed with the idea that utilities would cannibalize their current business to embrace distributed resources. “When you think about what Verizon did to decimate its own business to move into mobile, no utility CEO in the U.S. will come even close to doing that to their business,” he said.

Some of the biggest calls for change have come from NRG Energy CEO David Crane. But he runs an independent power producer, not a vertically integrated utility. While NRG has diversified, it still owns 53,000 megawatts of generation, most of which is oil, coal and natural gas. “We need to pick up the pace more, and that is what we intend to do,” Crane recently wrote in a manifesto about becoming a consumer-centric energy company.

New York Power Authority, which also is not a vertically integrated utility but a state power organization, is far more nimble in its response to the change. “We have to demand more flexibility in our regulatory structure,” said NYPA’s Anderson. “We need to be more experimental and accept some failures.”

Granting that flexibility needs to become the goal of regulators, argued Creyts. “Everyone needs to get used to a different cost point, different market players and a different type of service. We can remake the utility model.”

Even though some states, such as New York and California, have responsive regulators who are taking action, Shah questioned whether the utility of the future would come fast enough for customers. “There are a lot of utilities where this will happen in less than a five-year period,” he said. “I hope and pray the people in those states aren’t negatively affected.”’

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