Utilities: between a rock and a hard place

A tricky (but manageable) climate position

A heartfelt thank you and a warm welcome to those taking part in Climate Musings for all Shapes & Sizes.

If you like what you read, please click the “Subscribe now” button to get these Musings directly to your inbox and feel free to share with friends, family, and colleagues who might enjoy these Musings as well!

---

Now – let me put my measly followership at-risk by starting this next Musing with an unpopular opinion… utilities deserve a lot more gratitude and understanding than they are currently afforded.

Yes, yes, I know… California wildfires, Texas power grid failures, and ever-increasing power bills with grids that are not nearly as clean as they need to be… that deserves a thank you card??

Allow me to explain and discuss why this is relevant to a pragmatic optimist’s understanding of the climate problem.

Utilities: 101

Before we dive any deeper – let me offer a brief ‘101’ on how most US utilities work to ground the group’s understanding. Utilities are a bit more nuanced than they seem…

Structure

First, most utilities are regulated monopolies. This means that they exist through a symbiotic relationship with state-wide regulators. In return for being the only power lines that you can use (and avoiding redundancy in the process), they must agree with regulators on what investments they will make and how that translates to your monthly power bill.

Operations

The standard utility is operating transmission lines (think: big power lines in the country side), distribution lines (think: power lines above your house), generation assets (think: power plants), and a retail business (think: interfacing with customers). While there are exceptions to this setup, the interplay between these four business lines is important to understanding how utilities are impacted by climate change.

Earnings

Utilities are incentivized by deploying capital and keeping their customers happy. Through the regulated structure, utilities are allowed to earn ~8-10% return on the capital (think: infrastructure) they deploy, and simply get their money back on their operational expenses (think: maintenance). This means that generally, they would rather deploy more capital than less, which is good for the grid but not necessarily good for your wallet.

Customer rates

The “rate” ($/kWh generally) that you see every month on your bill is structured to provide the utility this agreed-upon earning structure. Every ~3 years, the utility and regulator agree on the capital and operational expenses needed for the next 3 year cycle, and set a customer rate to cover those costs and returns. The utility is then obligated to complete all of the work they said they would in the “rate case” agreement with the regulator. (note – this doesn’t always happen…) Rates are normally controlled to not increase more than ~3% annually — this ceiling ultimately limits the amount of investments and upkeep that the utility can take on in a given period (enter climate…)

So… why the rock and hard place?

First, the rock.

Working for, or at, a utility is a terribly thankless profession. Every minute we take for granted our immediate and reliable access to energy (a fortune that is not available for a large portion of the global population.)

The amount of planning, coordination, and effort that goes into making sure the lights turn on every time you hit the switch is tremendous, and I don’t once remember offering a ‘thanks’ for that effort (besides my bill of course…), only offering gripes when that energy is not delivered as promised.

Now… the hard place.

Climate change is only making this environment tougher. Let’s go piece by piece…

Transmission: grid-scale renewables are great at taking advantage of abundant natural resources and providing low emissions energy in return. The catch? Those resources are often far from population centers. This means that to take advantage of e.g., the great Nevada sun, we need to build big transmission lines to get that power where it needs to be… that costs money.

Distribution: electric vehicles – again, another great climate technology. However, they make for a tricky local power balance. When you turn on that at-home, high-power EV charger, a grid that was built and designed 80 years ago is expected to manage a local burst of high power demand. Managing this evolution is possible, but again, it takes investment and upgrades.

Generation: utilities operate with a long-term lens and planning cycle in-mind. Long range plans for investments and generation sources extend up to 10 years. Moreover, any investment decision resulting from that plan extends for an additional 20-40+ years (e.g., lifetime of a power plant). This means that when renewables decline in cost by 10x over a decade, it becomes difficult for a utility to both install new generation assets and leverage their existing assets without… you guessed it… costing money.

Retail: climate and technology are evolving a utility’s relationship with its customers. As one example, when a household installs solar on their property, instead of being a net energy user, they might become a net energy creator — selling power back to the grid. This does two things: (1) first, it makes for a tricky planning and coordination problem (think: California duck curve). (2) second, it indirectly drives the cost of power up for everyone else. When a utility plans its 3 year rate-case, then all of a sudden loses some of the demand it banked on… the rest of the customer base must pick up the tab.

Take all of the above, throw in intensifying weather patterns that only increase the burden of maintaining a reliable and safe power grid, and you’ve got a fun next 30 years for a utility executive…

The silver lining? “Electrifying everything” does mean growth for utilities! For years, utilities were worried about demand loss and “the death spiral”. The opposite is now happening — meaning there is a light at the end of the tunnel. However, this tunnel is one that must be navigated expertly so the ending is more railroad instead of a cliff…

So… what does a pragmatic climate optimist do with this?

1. Performance based incentives: Don’t get me wrong… utilities could be far more efficient at deploying and operating their assets. While the regulated monopoly structure makes sense, it can lead to a lack of urgency. Utilities need to do better. One exciting development that could help are performance-based rates. Under this structure, utilities are not only incentivized by deploying capital, but also being more efficient and reducing rates while maintaining reliability. These types of structures are starting to get deployed, but need to accelerate.

2. Embracing the transition: utilities must come to grips with the transition. A utility is incentivized to own the new renewables in its territory (remember: capital = returns), but that system can’t work if utilities aren’t able to transition their asset base efficiently. Not every utility can be NextEra (utility / renewable developer combo), so each needs to find its happy medium where it can deliver on its range of shareholder, customer, and climate commitments.

3. Consumer engagement: Lastly – I’d push you, the consumer, to become a more active participant in the system. Specifically, advocate for what you want and take a system-wide lens. For example: (a) If your utility has a green-power system… opt-in! (b) If your utility can connect you for free to a smart thermostat that helps them better manage demand… do it! (c) Lastly, while I am fully supportive of residential power installations… it is generally more cost-effective for your utility to install that solar system on the larger grid than for you to do it independently. So… just make sure that alongside installing residential solar, you are doing your part to advocate for utility-scale installations as well.

---

Now… don’t all go rush to Hallmark for thank you cards at once!

Until next time…