Rapid change undermines utilities

Advances in technology changing landscape for power producers

Is it all over for Ontario’s local electric utilities?

Everywhere, black clouds are piling up on the horizon, with financial analysts and industry experts warning of a time when utilities may no longer be needed — or at least, not as much.

And that attacks the core of the utilities’ business model, which assumes a monopoly on delivering electricity to homes and businesses in a given district.

Rapid technological change is undermining that premise, warns Dan McGillivray, executive director at Ryerson University’s Centre for Urban Energy.

He lists the items that are changing the landscape:

Mini-gas turbines that allow businesses or multi-unit residential buildings to generate electricity with natural gas; Plummeting costs of solar panels; Superefficient batteries that allow for much-increased energy storage, so that consumers can store power when it’s cheap (or free, in the case of solar and wind power) and use it later, when power off the grid is expensive;

Electric cars, whose batteries can be used to power homes if the car’s not needed.

“It gets to the point where you don’t have to look too far over the horizon where you see the ability for customers to just step away from the grid,” says McGillivray.

“That’s the classic death spiral for the utilities. First, they see revenues dropping with distributed generation. Then they see customers leaving the grid.”

The trouble is, those customers may not step away entirely from the grid, which they still want as backup.

And that leaves the utilities with their expensive network of wires and equipment, but with far less volume of business moving over it to support the expense. It is not just an academic theory. Earlier this year, Barclays downgraded the entire electric utility sector in the U.S.

“In the100-plus-year history of the electric utility industry, there has never before been a truly cost-competitive substitute available for grid power,” Barclays wrote.

“We believe that solar + storage could reconfigure the organization and regulation of the electric power business over the coming decade.”

A combination of solar and storage is already competitive with grid power in Hawaii, Barclays said, and the trend will only grow.

“California could follow in 2017, New York and Arizona in 2018, and many other states soon after.”

Barclays sees near-term credit risk for utilities where solar power is gaining traction. And it sees longterm risks “from a comprehensive reimagining of the role utilities play in providing electric power.”

It’s not necessarily all downhill for utilities, McGillivray points out. As electric cars catch on, they’ll increase demand for electricity — and probably for reliable power from the traditional grid.

But utilities themselves are keenly aware of the challenge posed by what’s known as “distributed generation.”

That means a landscape of numerous, small-scale producers of power competing with the traditional big generators — massive nuclear, hydroelectric and natural gas plants.

In many cases, the small-scale generators bypass the utilities’ networks, depriving them of revenue. Or they become both customers and competitors — buying power from utilities at times, and feeding it back into the grid at others. Some analysts describe them as “pro-sumers.”

But so what? Who really cares if utilities are at risk?

The answer: Just about anyone in Ontario.

The province’s biggest distribution utility is Hydro One — owned by Ontario citizens.

Its future is already in play, following the report of a panel headed by Ed Clark, which recommends detaching it from Hydro One’s transmission business of long-distance, high-voltage lines. Clark then wants to invite private investment in the distribution segment — the local wires that delver power directly to homes and businesses. It’s not just Hydro One. Many of the biggest local hydros are still owned solely or largely by municipal governments: Toronto Hydro, Ottawa Hydro, Horizon (Hamilton-St. Catharines), PowerStream (Markham-Vaughan-Barrie) and many others.

“Where was that revenue previously? It’s sitting at the Shell gas pump.” ANTHONY HAINES CHIEF EXECUTIVE TORONTO HYDRO

Collectively, the book value of Ontario’s distribution utilities was $38.8 billion in 2013, and they generated $624.6 million in net profit for their largely public shareholders.

But utilities aren’t all sitting back passively.

PowerStream’s Martin Rover says it’s futile to fight the tide.

“This is something that’s going to happen,” he said in an interview. “PowerStream sees this and says: How can we as a utility support our customers? Because fundamentally our responsibility is to be an energy services company for our customers and support them.”

To help understand what’s happening, PowerStream has invited the enemy into its tent.

The company has set up its own “micro-grid” at its head office. There’s a solar array, a mini-gas-turbine and several types of batteries.

The head office needs up to 400 kilowatts of power at peak times. The micro-grid can supply 50 kilowatts. At off-peak times, that may be more than the office needs — and the head office can sell power back into the grid.

The utility itself, Rovers acknowledges, has become a “pro-sumer.”

Moving back and forth between buying and selling, is not a simple process, says Rovers.

“To manage that flow of electricity between the micro-grids is going to require some very sophisticated hardware and software.”

“That’s where we see the new business opportunity. As customers look to generate their own power, we advise them on what kind of controls they need, and we help connect them to other micro-grids.

“That’s where we can potentially develop a new business model, connecting pro-sumers as our traditional business model of just shipping electricity potentially diminishes.”

Toronto Hydro’s chief executive Anthony Haines also sees a significant change in the business — but not necessarily for the worse.

Electric vehicles will drive much of the change, Haines says. They’ll steal market share from gasoline and diesel-powered vehicles, driving up demand for power from the utilities’ grids and boosting their revenue.

“It’s a fuel switching revenue,” he said. “Where was that revenue previously? It’s sitting at the Shell gas pump.”

He sees the electric vehicle owner’s home utility being the agent for billing electric vehicle owners as they travel and recharge in different utility areas — as cellphone companies do now.

“There’s going to be more transactions,” he said. “Maybe your business won’t simply be based on a return on capital invested. You’ve got transactions going back and forth. I can see margins associated with those transactions.”

Energy storage systems will also help utilities, he said. Electric grids now have to be overbuilt in order to handle peak volumes that occur only during certain times of day, and certain times of the year.

Storage systems — which allow customers to disconnect from the utility grid during times of peak traffic and peak pricing — will allow utilities to scale back their systems and reduce their costs, he said.

But it won’t be a free ride for util- ities, Haines acknowledges.

As management and transaction fees become an important form of revenue, other players will vie for it. Banks and telecom companies, may become partners — or competitors — for utilities.

Between fuel switching and the new fee-based revenue, the utility business will be different — but not necessarily endangered, he said.

“I don’t conclude that’s a death spiral. In fact, quite the contrary. It’s a new world and it’s competitive, and there’ll be winners and losers.”