This is the fifth installment of my article on why electric distribution cooperatives must be able to operate smart distribution grids with fiber optic networks: because of the advent of fundamental electric utility industry restructuring from technology to infrastructure to business models.

PART 5 – THE U.S. ELECTRIC UTILITY BUSINESS MODEL ERODES

The cost plus monopoly electric utility industry model began to erode after the 1973 OPEC oil embargo and resulting national energy crisis. Not only did favorable revenue growth and declining cost trends slow, they eventually reversed. The steady decline in costs and prices ended and per capita electricity consumption growth slowed, The cost plus monopoly began crumbling as new and emerging energy technologies, new market entrants and new business models began changing everything about planning, operating, and managing an electric utility business.

 

Conventional Utility Generation Economics Erode

After nearly a century of declining costs the economics of building and operating generation began to change. Economies of scale were offset by inflation, construction risk and delays and costly, efficiency-reducing environmental and safety requirements. Coincidentally, about the same time as the energy crisis, the historical improvement in efficiency of steam driven electric generation reached its theoretical limit at around 40%. As a result the retail price of electricity began a steady incline that continues today.

 

Growth in Energy Consumption and Utility Sales Slows

Growth in consumer energy consumption and corresponding utility sales began to slow in the 1950s due to market saturation. It slowed even more beginning in the late 1970s after the OPEC oil embargo. Consumers adopted conservation and energy efficiency measures.

 

Electric utility sales growth was also hit hard by a drop in the national industrial load which had historically accounted for about a third of all retail energy sales. Industrial customers implemented energy efficiency measures, on-site generation, and even relocated their facilities offshore. Commercial load growth also waned due to more aggressive conservation and energy efficiency measures as well as on-site conventional and renewable energy production.

Around the turn of the 21st century, per capita energy consumption and utility sales actually began to decline. In fact, in several of the past 15 years, the total annual consumption of electricity has been less than the previous year.

 

The Traditional Monopoly Erodes

The 1973 OPEC Oil Embargo and resulting energy crisis led to the National Energy Act of 1978, and, more specifically, the Public Utilities Regulatory Policy Act (PURPA) which was the beginning of the erosion of the utilities’ monopoly. This was driven largely by national security concerns, the idea being to reduce the use of imported oil for electric generation, transportation, HVAC, etc., in order to reduce the reliance on imports from countries who were intent on harming the US. Utilities were and still are required to allow non-utility customers to construct and operate unregulated cogeneration or renewable energy production, Utilities were required to purchase power end energy from them at “avoided costs”, that is, prices based upon the utilities’ cost of building their next fossil or nuclear fueled power plants. This caused explosive growth in deployment of non-utility cogeneration and renewable energy sources. PURPA generation facilities are still being deployed today.

 

Non-Utility Generation Owner/Operators Emerge

Also after the OPEC oil embargo a growing number of commercial and industrial customers began to construct and operate non-PURPA generation for reliability, sustainability, and/or economy. New non-utility entities (Independent Power Producers or IPPs) began to construct and operate generation and compete in wholesale power markets.

The Cost Plus Guarantee Ends.

At the same time, for the first time in history, federal and state regulatory authorities began to disallow recovery in rates of 100% of the costs of constructing new generation. This was in part due to cost overruns and delays, but also due to load growth being less than was predicted to justify building new generation. Federal and state regulatory authorities, deeming the construction and costs of newly constructed generation to be “imprudent”, denied applications to recover the full costs in rates to consumers.

 

Federal and state regulators even began to disallow the utilities’ full recovery of costs and profits for existing operations. In some cases this was because of a determination that the prices were simply non-competitive, a drastic change in the basis for price regulation. For the first time since the 1929 stock market crash, some utilities began to go bankrupt.

Competitive Wholesale Power Markets Prevail

By this time, permanent deregulation became the rule for most electric utilities in the form of competitive wholesale power markets. Utilities no longer used only their own generation to serve their customers. They began to sell their generation into the wholesale power market and buy from the market what they needed to meet their customers’ needs. This required real time or near real time pricing, not based on costs plus a profit but on the market. It didn’t take long for non-utility producers to arise. This included both those operating actual “bricks and mortar” generation and non-utility companies like Enernoc who aggregated virtual generation (i.e. consumer demand that could be curtailed during times that the grid would otherwise need additional generation).

 

These competitive wholesale markets foreshadowed competitive retail energy markets. During the 1990s many state legislatures and regulatory authorities initiated statewide retail competition. Electric consumers, from residential to commercial and industrial, could choose their power supplier based upon price or sustainability or other promotional benefits. At one point more than half of the states had retail choice. However, this experiment failed due to limited economic benefits and administrative difficulties. However, about the same time, a more profound and persistent precursor to reconstruction of the retail market began.

 

Smart Meters Foreshadow Smart Grid and Distributed Energy Resources

Another regulatory initiative led to the idea of a smart distribution grid. Legislators and regulators began to require utilities to offer time of use rates that were higher during peak load times and lower during off peak load times. The idea was to incentivize consumers to reduce their power demand and energy consumption to reduce the need for additional utility generation construction to meet peak demand and to reduce utilities’ use of carbon based fuels. This led to the development of retail meters that could keep track of electricity consumption by time of day. This was followed by automatic meter reading (AMR) and automated metering infrastructure (AMI) that made it possible for meters to be automatically read remotely. Competitive retail power markets were also a motivation for meters that could keep track of the retail transactions.

Dubbed “smart meters”, they were the first wave of what would become the concept of a “smart grid” which will be discussed in subsequent installments of this article.

 

The next installment of this article will focus on additional profound motivations for change in the electric utility industry: (1) growing public concern about climate change, (2) the practical economics of renewable energy resources versus conventional utility generation, and (3) erosion of the legacy electric grid infrastructure.