The Grid Optimization Blog

Postcards from the Edge - Is the Utility Industry in Big Trouble?

Europe has led the way replacing conventional generation with solar and wind. Environmentalists have rightfully high-fived their success. But now the chickens are coming home to roost and the European utility industry, which is needed to enable renewables to be integrated into the electric grid, is being seriously impacted, possibly fatally. Can all this happen in the US?

I've never seen our electric utility industry face so many challenges. Or at least get so many warnings of the gloom and doom to come.  Most of the concern centers around the impacts of renewable energy on grid stability and also the effect on the financial health of the industry. A few references to these issues were listed as part of the readers' poll . The topic drew plenty of good comments, more than usual.

But there's more.

 Merwin Brown, co-director of Electric Grid at the California Institute for Energy and Environment and a member of our Grid Optimization expert panel, flagged the article "How to Lose Half a Trillion Euros" in the October, 2013 edition of The Economist.

It's a startling article. Here are a few quotes (emphasis is mine):

"ON JUNE 16th something very peculiar happened in Germany’s electricity market. The wholesale price of electricity fell to minus €100 per megawatt hour (MWh). That is, generating companies were having to pay the managers of the grid to take their electricity."

"The trouble is that power plants using nuclear fuel or brown coal are designed to run full blast and cannot easily reduce production, whereas the extra energy from solar and wind power is free. So the burden of adjustment fell on gas-fired and hard-coal power plants, whose output plummeted to only about 10% of capacity."

"These events were a microcosm of the changes affecting all places where renewable sources of energy are becoming more important—Europe as a whole and Germany in particular. To environmentalists these changes are a story of triumph."

"For established utilities, though, this is a disaster. Their gas plants are being shouldered aside by renewable-energy sources. They are losing money on electricity generation. They worry that the growth of solar and wind power is destabilising the grid, and may lead to blackouts or brownouts. And they point out that you cannot run a normal business, in which customers pay for services according to how much they consume, if prices go negative. In short, they argue, the growth of renewable energy is undermining established utilities and replacing them with something less reliable and much more expensive."

Those are operational impacts. The economic decay of European utilities is even more troubling:

"The decline of Europe’s utilities has certainly been startling. At their peak in 2008, the top 20 energy utilities were worth roughly €1 trillion ($1.3 trillion). Now they are worth less than half that…"

"The rot has gone furthest in Germany, where electricity from renewable sources has grown fastest. The country’s biggest utility, E.ON, has seen its share price fall by three-quarters from the peak and its income from conventional power generation (fossil fuels and nuclear) fall by more than a third since 2010. At the second-largest utility, RWE, recurrent net income has also fallen by a third since 2010. As the company’s chief financial officer laments, “Conventional power generation, quite frankly, as a business unit, is fighting for its economic survival.

" …Renewables have not just put pressure on margins. They have transformed the established business model for utilities. Michael Liebreich, BNEF’s chief executive, compares them to telephone companies in the 1990s, or newspapers facing social media now: “It is an existential threat, he says."

Renewables a threat to the utility industry's very existence? We're going the way of CosmoGirl Magazine?

So after reading the Economist article several times (I always have to read Economist articles several times to understand them) I get my daily email of Utility Dive and see an article quoting FERC chairman Jon Wellinghoff discussing energy efficiency and renewables.

The October 16 Dive article states (emphasis mine:

"Wellinghoff stated that 'utilities need to work with [intelligent efficiency] companies' because ultimately, if we don't do that, we're going to have to have massive changes in our system. Wellinghoff paused for just a moment, seeming to savor his last words. 'Ultimately, utilities are going to have to adapt or die.'

"The audience chuckled.

Well I'm not chuckling. But I don't think we need to panic either. These are all postcards from the edge telling us that something ominous could happen to our industry if we don't prepare correctly for the future.

Fortunately we have a large test laboratory, California, that's facing many of the issues that Europe is struggling with, and some challenges that Wellinghoff is referring to. The rest of the country has a little more time. And, as usual, California is leading the way to technical solutions. For example see The Sun Will Shine Brighter with Smart Inverters  and Smart Inverters Worth the Cost.

The economics are another matter. Will the utility financial structure have to change to avoid the same value crash as happened to European utilities?

Dr. Matthew Cordaro, Trustee at Long Island Power Authority, and former Utility CEO and University Dean and member of our expert panel, (and one of the smartest guys I know) sees it this way:

"Challenges over the next 10 years or so should not measurably change how utilities plan for and recover costs, charge rates or make capital investments. This is not to say that considerable effort in exploring new ways of coping with a changing business environment should not continue, but be aware that the sky is not falling just yet."

 

Discuss this Blog Entry 6

Anonymous (not verified)
on Oct 17, 2013

I know little about the European situation, but in all fairness, here in America, the big utilities did not ask for nor support the change to renewable power sources at the consumer level. That's been pushed by and forced on them by the environmentalists. But even then, the big utilities brought this on themselves, to a degree, by not wanting to construct the new power plants needed to provide peak power demand, and instead, sought to implement "smart metering" so they could charge more for electricity in peak demand hours. This has rankled non-commercial and non-industrial customers to no end, first because they don't want to adapt their electricity usage to suit the utilities (who wants to be doing laundry at 2AM?), and second, they see this as ultimately a scam to force them to pay more for electric power, even as they use less and less. They've been down this road before, with gas and oil prices. Fool me once, shame on you. Fool me twice, shame on me. For me, a consumer living in an apartment, having no renewable power source to help me and no prospect of getting any, what I want to know is, when is all this newly available "free renewable energy" going to result in substantial electricity rate reductions for the consumer? Yes, I realize that buying and installing windmills and solar panels has an associated cost, but much of this infrastructure has been online for years now. When do we start seeing a return on the investment?

The trend in this era is that consumer income (wages and salaries) are stagnant, but the cost of everything we need to buy just keeps going up and up. The irresistable force has already started colliding with the immovable object. Something's going have to give, and in the not-too-distant future. I don't claim to have all the answers, but someone had better start coming up with some. Or the industry is indeed going to suffer for it.

Anonymous (not verified)
on Oct 18, 2013

I am a Utility planning engineer in South Africa and we are facing the same thing here. It makes you think, who is running the show anyway? It is certainly not the engineers.

Mike Parr (not verified)
on Oct 18, 2013

In response to the previous comments and as a way of "positioning myself" I am based in Europe, used to work for a UK DNO as a systems engineer and am heavily involved in renewables, storage and power networks.

The article is flawed since it fails to differentiate between companies that generate power, companies which own and operate networks in cities (as well as generation) called stadtwereke in Germany, TSOs and DNOs. Each faces somewhat different problems with the growth of renewables..

In the case of the generators in Germany (EON, RWE, Vattenfall etc) they own less than 7% of the renewables in Germany. This is a function of the investment choices they made (or did not make) in the time frame 2008 to the present. The fall in value of their shares is associated with this. The Economist article assumes that a) these companies are the ones that need to invest in future generation & networks b) these companies need a high share price to support this investment. This hypothesis falls over on the "inconvenient fact that Euro finance institutions are re-focusing their investments away from fossil fuel and to renewables.

Example (there are plenty of others): ING Commercial Banking (ING CB) is shifting its European focus from financing natural gas plants to financing renewable energy projects The value of ING’s portfolio in offshore wind projects ranged between 600 million to 1.5 billion euros. Besides Germany, ICN CB will focus on the Netherlands, Belgium and France for offshore wind projects totalling to 3GW.

There are other problems with the Economist article (clearly not written by a power engineer) "The trouble is that power plants using nuclear fuel or brown coal are designed to run full blast" Correct in the case of nuclear, wrong in the case of lignite stations. One of the boasts of the latest lignite plant near Aachen (built by Hitachi) is that it has considerable flexibility. But why let facts get in the way of a good Economist story. Incidentally, National Grid (UK) does not like nuclear for exactly that reason – lack of flexibility.

One area that the Euros have failed to address is demand response (this comment covers most EU member states including Germany) which is still in its infancy but has potential to address some (not all) of the problems of increasing levels of renewables and the intermittency problem that this brings. Cross border connections (which facilitate higher levels of renewables) are likewise lagging. However, in areas where demand response and high levels of cross border connections are well developed (Denmark) one also sees extremely high levels (90% - wind early October) of renewables meeting national demand. These inconvenient facts do not fit the Economist narrative and are thus omitted. Nevertheless, they point the way forward, and that route would appear to be one where the traditional generators are absent, through choice and circumstances. Evolution applies as much to companies as it does to people – the large generators have failed to adapt to changing circumstances the question is – are they given government socialism (help to survive) or allowed to slowly fade away. The Economist article seems to support the former, I (as a socialist) prefer the latter, market-based "solution", Funny that.

on Oct 18, 2013

Mike
Shoot me an email - I have some questions/comments.
Paul
Paul.Mauldin@Penton.com

on Oct 20, 2013

I'm not sure you can apply the European situation to the US. Germany may be slow in providing more transmission due to territorial disagreements but Europe already has far more interconnections per mile of transmission than the US. Also, the Denmark example is a tad misleading. Denmark has good winds being on the west coast (as is a lot of tiny Europe (compared to the US) and it has great connections to Norway's hydro power/pumped storage. The point is, if solar and wind are having negative impacts on the grid in Europe, they certainly will in the US.

So, although the Economist article may not apply completely to Europe - it certainly gives a heads up to the US, where we've been a bit complacent.

Anonymous (not verified)
on Oct 18, 2013

I totally agree with you!!!

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