The Utility Death Spiral

by Jake Crown

The term “Utility Death Spiral” was coined by Lane Sharman, the Executive Director of San Diego Energy District, as when “a utility loses customer revenue from self-generation of electricity from solar or wind or some other technology, it stimulates the utility to raise rates for other customers so as to preserve its revenue base.”

The Utility Death Spiral is a scary prospect for the companies concerned. As more customers defect from the grid, demand for electricity decreases. Constant fixed costs inevitably force utilities to raise prices, which in turn encourages more people to leave the grid. With falling solar and storage costs, partial grid defection (which has the same net-effect) is on the rise.

The notion that the utilities of today must reinvent themselves or face extinction probably seems a tad dramatic given some of America’s oldest utilities are approaching their 200th birthdays. Con Edison, for example, has its 200th birthday in 2023. PG&E was founded 114 years ago and is currently in bankruptcy. 

Two Key Accelerators Enable Defection

The Shift Toward Renewables

US Renewable Electricity Generation has Doubled Since 2008 with 90% of new capacity gains coming from wind and solar. Renewables now represent ~18% of Net Electricity Generation in the US (EIA.gov) and post-2035, McKinsey estimates renewables will account for more than 50% of the global power supply. 

In this same decade, US solar generation increased from 2 million MWh to 96 million in 2018. Solar generation accounted for 2.3% of electricity generation in 2018. Solar generation is generally categorized as small-scale (customer-sited or rooftop) solar installations or utility-scale installations. In 2018, 69% of solar generation, or 67 million MWh, was utility-scale solar (EIA.Gov).

In the last decade, over 50% of US Wind and Solar capacity gains were driven by state mandates, especially renewable portfolio standards (2019 Deloitte Report: Renewable Energy). Local governments also adopt standards that are more aggressive than states. For example, mayors of over 200 communities in the US have formalized goals to reach 100% renewable energy community wide no later than 2035 (Deloitte 2019). 

Government incentives, through renewable portfolio standards, tax credits, subsidies, and so on, have played an overwhelming role in driving down the costs of these technologies. Today, more than two-thirds of the global population live in countries where solar or wind are the cheapest source of new electricity generation. By 2030, new wind and solar installations will become cheaper than running existing coal or gas plants almost everywhere (Bloomberg New Energy Outlook 2019). 

This explosion of intermittent resources will create powerful demand for balancing solutions, particularly batteries. 

The Electrification of Transportation

For the last 50 years, the transportation sector has represented around 27% of total US Energy Consumption. Today, Electricity represents less than 0.5% of the energy used by the transportation sector (EIA.gov). 

In September 2018, the US Auto industry rolled out its 1 millionth plug-in electric car onto American streets. With all forms of electric vehicles (commercial included) reaching cost parity with conventional fuel vehicles by 2030, there will be an estimated 18.7 million electric vehicles will be roaming US streets (EEI.org). By 2050, McKinsey predicts that every car, truck, or semi-truck on the road will be electric. 

The Global Auto Industry has recognized this shift and is investing heavily in R&D. This investment and the associated demand for battery technology has helped drive a decrease of 84% in associated battery prices since 2010 (Bloomberg New Energy Outlook 2019). 

Multiplicative Effects

Falling Storage Prices

Battery prices are already down 84% since 2010. Bloomberg predicts that the levelized cost of storage will fall from $187 MWh to $67 MWh, or by 64% by 2040. Critically this battery capacity will be increasingly used to minimize system peaks. By 2030, 75% of battery capacity will be used to minimize peaks, up from 17% in 2020. 

Falling Solar Prices

Solar modules have decreased by 89% in price since 2010 and are estimated to decline an additional 34% through 2030 (Bloomberg New Energy Outlook 2019). Bloomberg estimates the Levelized Cost of Energy of photovoltaic falls 63% by 2050, to around $25MWh. 

Consumer PV makes up 11% of the total installed generating capacity in 2050. Businesses and households invest $1.9 trillion in behind-the-meter PV and batteries over the next 30 years, of which $50 B per year is on small scale PV systems.

AI Optimizations and Smart Homes

Companies like Nest and Verdigris have built huge businesses by using AI to run appliances during low cost times to save customers money. For buildings equipped with solar and storage, STEM (and many others) use AI to optimize when batteries are charged, when solar is used, or when a mix is most appropriate. 

These energy savings tips optimize for the individual, not the collective. While they do minimize system peaks, they ultimately empower solar + storage to be radically more effective. This in turn, increases partial grid defection perpetuating concerns for the Utility Death Spiral. 

Peer to Peer Sharing

Blockchain has enabled emerging-companies to mitigate the primary concerns of peer to peer energy sharing. Its inherent transparency, computational efficiency, and decentralized nature enable communities to confidently share energy with one-another. 

Recently, the Brooklyn Microgrid project was launched. Powered by blockchain and custom smart-meters, this community is able to collectively share their solar and storage resources. Because they’re using their own proprietary smart meters and existing infrastructure, there’s nothing (within reason) existing providers can do to stop it. 

Other Blockchain projects are being tested throughout the world with the largest taking place in Germany. As solar + storage becomes increasingly economical as stand-alone systems, peer to peer sharing will continue to emerge as a key threat to utilities. 

The Trouble With Forecasting

30 Years ago, the first web browser was invented and most scoffed at predictions that cast the internet as a force that would change the world. 

In this report, we’ve cited Bloomberg, McKinsey, Deloitte, and others all make forecasts on 30 year timeframes. Precise predictions shouldn’t be given much weight, as we really have no way of predicting the state of technology in 2050. 

The pace of technological progress is accelerating which makes the next 30 years even harder to predict. Precise predictions for the future are only useful as data points to be considered as part of a broader picture. Broad predictions over 30 years are often equally useful. 

Given this uncertainty, utilities should recognize the monumental challenge of being in an industry that has traditionally invested in assets with 30 year useful lives. Utilities need to embrace innovation and master a process of exploring new technologies, launching new initiatives, and scaling successful projects. 

To drive this point home, take two developments that have hit the news this year:

University researchers created carbon nano-tubes that absorb excess heat in photovoltaic solar modules, boosting efficiency to 80% (Most commercial panels have efficiencies of 11 – 22%). 

In any conventional silicon-based solar cell, there is an absolute limit on overall efficiency based on the fact that each photon of light can only knock loose a single electron, even if that photon carried twice the energy needed to do so. MIT researchers successfully knocked two electrons loose in their lab this year, essentially doubling the absolute limit of PV solar efficiency.

We’re not saying either of these technologies will be the one that shapes the world 30 years from now. After all, both of these technologies are extremely expensive and only exists in labs. But the most disruptive innovations often come from unforeseen places, and if utilities place all their eggs in traditional 30 year baskets, they’ll inevitably be in for a rude awakening. 

So What’s Next?

Great, so our industry is facing a death spiral that could reach a tipping point at any time due to a breakthrough in solar, storage, or business model innovation. To make things worse, the stakeholders of the auto industry are pouring money into batteries, governments around the world are mandating renewables (solar), and billions of venture capital dollars are financing new startups whose stated mission is to disrupt us. 

In the words of Benjamin Franklin, “Don’t put off until tomorrow what you can do today.” The utility of tomorrow must look beyond electricity as their core product. They must embrace new technologies and business models that come with. They must embrace data, AI, and a culture of innovation.