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Mar 31, 2014

Can energy utilities avoid same fate as telecom companies?

The fixed-line telephone business has lost nearly half its customers. What can energy utilities learn from that experience? Is there anything they can do to stop customers going solo?

When analysts look at the challenges facing the energy utility business and the emergence of solar and storage and other distributed technologies, the common refrain is that the utility business is about to face its “Kodak” moment. That’s the reference to Kodak’s inability to embrace the digital technology it had helped develop and its decision to put most of its eggs in the traditional film business.

But perhaps the best comparison of what awaits the utility business is what happened to fixed-line telephony with the introduction of wireless technology and mobile phones.

What can energy utilities learn from this? It is one of the aspects picked up by Morgan Stanley analysts in their report on the threat of solar and storage. The firm notes that those telecom companies that survived did so because they re-invented themselves. The industry was deregulated, incumbent local exchange carriers were forced to allow competitors to access their equipment, and to provide local and long distance service.

With the rise and fall of competition, the remaining wireline operators reconsolidated and now use their existing infrastructure to provide broadband to residential customers and various services to Enterprise customers. Grid operators and distribution networks in the electricity industry face a similar threat, as do retailers.

As the Morgan Stanley report notes, fixed-line (wireline in the tables) telephony revenues and usage have steadily declined since 2000, and copper wires could be fossilised (made redundant) by 2020 if carriers have their way …

The report notes that revenues have declined 20% since 2000 and usage has declined even further — 63% — since that date (note the increase in margins). By 2020, Morgan Stanley suggests more than 50% of US households will have a wireless-only service by 2017 …

This next graph shows how many households are connected to fixed-line telephony, how many rely on VOIP only, and how many have both. The comparison with the electricity grid, the link to the network, the installation of solar and the potential for storage to make that disconnection are striking …

Both telephone service providers and electric utilities offer products that in the US are deemed essential services, because their reliability remains a critical public interest. However, in an effort to exit the copper wire business — and escape the massive sunk costs of those investments — Morgan Stanley says telecom companies have formally requested regulatory relief from the Federal Communication Commission rule requiring them to provide local exchange service.

The FCC is still evaluating the proposal, and has allowed carriers to begin testing alternative technology. “As the telecom industry continues its transition to wireless and broadband, we believe electric utilities could suffer a similar fate if cost effective off-grid solutions materialise,” Morgan Stanley writes. And, according to their report, those off grid solutions are getting closer.

It’s interesting to note that this is becoming mainstream thinking in the US, even in Australia. David Crane, CEO of generation giant NRG, recently wondered why the US would continue with an electricity network of 120 million power poles. His insights into the new business paradigm are compulsory reading.

Even in Australia, utility executives privately admit that their business model is approaching its use-by date.They are just in the process of extracting as much profit as they can from the old paradigm, by using the power of incumbency, market dominance and regulatory fiat.

But how might they evolve and capture a profitable business under the new technology paradigm? Morgan Stanley gave this scenario, which is not dissimilar to what the CSIRO laid out in its future grid report:

“Utilities take steps to enhance the ability to integrate large amounts of renewables onto the grid. The idea would be to ensure solar customers stay on the grid and contribute to the cost of maintaining the grid, rather than lose solar customers to off-grid business models.”

That may work in US states where grid charges are relatively low and sun conditions are not as favourable as in the west/south-west. However, Morgan Stanley notes that in the sun-rich, higher rate western and south-west states (as is the case in Australia), grid charges are high, solar resources are excellent, and the penetration levels of solar could grow to be extremely high:

“A ‘tipping point’ would be reached in which remaining grid customers would have very high bills relative to solar customers, and the customer incentives to go fully off-grid could be high.”

The final word to Crane, and a piece he published on his company’s website this week:

“And for the customer, business or individual who simply wants nothing to do with the grid, the centralized control it represents and the inhibition of individual choice and restriction of personal freedom that is implicit in being ‘inter-tied’ to the grid, there is the post-grid future — a future that is driven by renewables, incorporating both energy storage and sophisticated localized automation to balance production and load.

“There will be systems that harness thermal and electric synergies and across not only clean energy, but also fresh water production, waste disposal and electrified transportation to create a virtuous circle of civil sustainability.”

Just like the mobile phone.

*This article was originally published at RenewEconomy

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5 thoughts on “Can energy utilities avoid same fate as telecom companies?

  1. Shaniq'ua Shardonn'ay

    “incumbent local exchange carriers were forced to allow competitors to access their equipment” Are you sure about that, I’m pretty sure I can’t get Optus to provide my phone line. I do use TPG but the actual phone line is still owned and operated by the Telstra monopoly, TPG just pays Telstra for the a service instead of me.

  2. John64

    “By 2020, Morgan Stanley suggests more than 50% of US households will have a wireless-only service by 2017”

    … and yet we’re building a National Broadband Network?

  3. Tyger Tyger

    Shaniqetc., as you say, Optus don’t “provide” the line; as GP says, Optus “access” the line. Where’s the problem? Agreed though on the Telstra monopoly. It stinks and it was a big mistake when telecommunications were de-regulated and Telstra was allowed to keep both network and a retail arm. They should be completely seperate entities. As things stand, Telstra is playing with a stacked deck.

    John64, he’s talking phones, not internet. And we’re building a (now severely compromised) NBN because:

    “- Physical limitations prevent practical wireless speeds from approaching those available over fibre-optic cables
    – There is insufficient radio spectrum to allow wireless to replace fixed networks
    – To even partially overcome the above limitations, we would need to build over 75,000 new mobile transmission towers across Australia
    – Wireless network connections are prohibitively expensive, typically being 3-4 times more expensive, for less data volume and at a much slower speed.”


  4. Bruce Graham

    It is a nice analogy, and it may well occur. For mobile telephony, the changes in the market occurred in the context of a service which people did not already have. (not just phones everywhere, but a phone number that followed the user around). It is no secret that penetration of PV has been much slower than, for instance, penetration of that other (computing) semiconductor technology. PV does not offer something that most people do not already have. It is purely (for most) a cost proposition in a commodity market.

    SO for the market to reach tipping point, electricity storage will need to become cost effective. Current technology (assuming no improvements)can only be extrapolated to around 10%-20% PV even in high sunlight places like Australia. That is not a high enough penetration to make distributed networks cost ineffective.

    Retail electricity in Australia costs around $0.30/kwh. Wholesale electricity ( ‘ex factory gate’) costs around $0.05/kwh, and PV can be had for around $0.15. So grid interconnected PV is only currently cost effective because the retail pricing structure winds distribution costs into the per unit cost of electricity purchased. Assuming PV penetration increases, a rational pricing response would be to increase the fixed network charge, and decrease the marginal usage fees.

    In terms of the structure of the PV manufacturing market: 0.5% of global generation is now PV. This has approximately doubled every 5 years since the 1970s. Growth requires money, skills, a supply chain, and faith in future profitability. Not all these things can be accelerated. It takes time to build new silicon refractories. Growth of the scale some envisage will require 100 fold increase in most of the supply chain, and a doubling in global mining of silicon. Doubling of production every 5 years remains a feasible expectation. Doubling every 5 years will bring the market up to present demand limits of 10-20% penetration in around 25 years. No doubt there will have been some technical improvements in that time,but it is much slower than advocates hope. The most important technical problems – in storage technology – continue to resist cost effective solutions.

    I am not saying that the market will not reach this tipping point. Only that there is a long bridge between ‘could’; and ‘will’.

  5. Aidan Stanger

    Going off grid when there’s a grid conveniently available doesn’t make sense and never will. You may well be able to generate it for less than you can buy it, but storage is already a bigger factor in the price than generation. The wholesale price of electricity fluctuates wildly, but grid storage does have the advantage of economies of scale. And even if you could store electricity cheaper than throh the grid, why limit it to your own consumption when you have capacity to spare?